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business
international financial management

Questions and Answers of International Financial Management

Draw the PPP graph and explain to a purchasing manager the significance of being on, above or below the line.
Explain why the PPP formula might not work in practice.
What is meant by the real exchange rate?
If a foreign interest rate is lower than the home rate, then PPP predicts that the foreign currency will appreciate, so why not invest in that currency and make a profit?
The efficient market says that you cannot consistently profit from speculating on currencies, yet PPP states that the movement of a currency is predictable depending on the inflation differences.
What is meant by a commodity currency and why is it significant in understanding currency behaviour?
Explain to an investment manager in your own words what is meant by the international Fisher effect (IFE).
What is the link if any of IFE with PPP?
Draw the IFE line (ih – if) on the vertical axis and ef on the horizontal axis and explain to an investment manager the significance of being on, above or below the line.
What is the difference between covered interest rate arbitrage and IFE, sometimes termed uncovered interest rate arbitrage?
Using a graph as in Exhibit 9.3, i.e. ef as the horizontal axis and ih – if as the vertical axis, go to tradingeconomics.com/currencies and tradingeconomics.com/bonds and click on ‘USDINR’
Why should an MNC be concerned with exchange rate movements? Examine the arguments from a shareholder, creditor, investor and director perspective.
What are the three types of exposure? For each type, describe an MNC for which that type of exposure would be important.
WER plc purchases two main types of currency to pay for imports, the US dollar and the euro. (Hint: you are expected to have access to the internet and Excel.)a Go to the Bank of England exchange
Not convinced by the normal distribution assumption, create a frequency bar chart of the daily exchange rates for the GBPEUR and GBPUSD exchange rates from the downloaded data.a What do you notice
a How could the model in Question 4 be extended to cover three or more currencies?b How would exposure to a larger range of currencies affect exposure to exchange rate changes?
Consider the exposure to exchange rate volatility for the following scenarios:a Costs in two foreign currencies that are highly correlated.b Costs and revenues in the same foreign currency.c A
Download the daily exchange rate from the Bank of England site.a Calculate the daily percentage change in the exchange rate (decimal, i.e. 0.1 not 10 per cent).b Rank the changes from positive down
How might you as a finance director ask directors to choose a suitable VAR calculation? How might the measure differ between applications?
What is economic exposure?
Describe scenarios with:a high economic exposure b low economic exposure.
A management accountant for WER plc is seeking to create scenarios to assess economic exposure. What factors are relevant for sales of a 10 per cent increase in the value of foreign currencies for
What is translation exposure?a How would an MNC holding large foreign assets be affected by an appreciation of the home (reporting)currency?b How would holding a large portion of shares affect the
What is the significance of a foreign exchange surplus or deficit in the accounts?
What are the dangers of using past data to assess future exchange rate risk? (Hint: the peso effect.)
How might a company assess exchange rate risk without looking at past data? (Hint: look on the internet with the terms ‘exchange rate predictions news’.)
The current USDGBP rate is 1.3535 at uk.investing.com/currencies/gbp-usd-forward-rates and the one-year forward quote is 40.83 (referred to as spots being 240.83 3 1/10,000 5 0.004083.a What is the
Looking at the forward quote on the website in Question 1, you notice that the ‘spots’ are increasingly negative for longer forward quotes. Why is this the case?
ASD plc takes out a forward contract to buy local currency with a foreign local bank and then wants to cancel the contract. The bank points out a no cancellation clause.a What action can ASD take to
ASD plc has agreed to paid roughly the equivalent of £120,000 in a local currency at the spot rate in one month’s time. Explain how a non-deliverable forward between ASD and its home bank can be
FGH plc buys a futures contract on the Chicago Mercantile Exchange (CME) for country Klankia dollars (KAD) with six days to go until maturity for KADGBP 0.80, the spot rate is KADGBP 0.77. Over the
SDF plc sells a futures contract on Klankian dollars (KAD) with eight days to go before maturity for KADGBP 0.80.The closing prices over those eight days is as follows:a Explain why daily settlement
a What is meant by the futures market being in contango and backwardation?b What is the significance of basis risk?c Explain why contango and backwardation do not significantly affect daily
SCD plc is seeking to lend Brazilian real to its Brazilian subsidiary for repayment in UK pounds in one year’s time.Outline how a swap arrangement might be used to eliminate exchange rate
SCD plc sells a high percentage of its output in euros yet its costs (purchases, salaries and interest payments) are in UK pounds.a Explain why SCD is exposed to exchange rate changes.b Explain how a
The following represents premiums on dollar options on the UK pound:a What is meant by a call option and a put option? For both calls and puts devise simple scenarios whereby it would be advantageous
If the current spot is GBPUSD 1.235, calculate from the table in Question 10:a The intrinsic and time elements and explain what they represent.b Explain the relative size of the time elements in the
SFG Corp. (a US MNC) is seeking to purchase a large March call at $1.3:a Outline the circumstances that would explain SFG’s need for a call option.b SFG finds the premium to be too expensive. Using
From the table in Question 10, a speculator is convinced that the UK pound is overvalued and is seeking to profit by writing a January call at $1.2.a Explain how writing a call will profit from a
SFG Corp. negotiates a deal with its bank such that, in March, if the UK pound goes above a certain level, the bank will compensate SFG for the difference, and in return, if the rate goes below a
The trading department of FGH Bank plc has experienced some large losses recently and is looking for a relatively safe investment in the currency market.a From the table in Question 10 devise
Agency problems of MNCs.a Explain the agency problem of MNCs.b Why might agency costs be larger for an MNC than for a purely domestic firm?
Benefits and risks of international business. As an overall review of this chapter, identify possible reasons for growth in international business. Then, list the various disadvantages that may
Motives of an MNC. Describe constraints that interfere with an MNC’s objectives.
Centralization and agency costs. Would the agency problem be more pronounced for an MNC which has its parent company make most major decisions for its foreign subsidiaries, or for an MNC which uses a
Methods used to conduct international business. Durve Ltd desires to penetrate a foreign market with either a licensing agreement with a foreign firm or by acquiring a foreign firm. Explain the
International business methods. Snyder GmbH, a German firm that sells high-quality golf clubs in Europe, wants to expand further by selling the same golf clubs in Brazil.a Describe the trade-offs
Impact of regulatory risk. Assess how regulatory risk can be taken into account in investment decisions.
How has the internet affected a firm’s ability to trade internationally?
International joint venture. Scottish and Newcastle Breweries (a real UK company) have joint ventures with United Breweries in India, Chongquin (the fifth largest brewer in China) and Baltic
Impact of Eastern European growth. The managers of VGood Corp. (a US fictitious company) recently had a meeting to discuss new opportunities in Europe as a result of the recent integration among
Valuation of an MNC. Turnip plc (a UK fictitious company), based in Birmingham, considers several international opportunities in Europe that could affect the value of its firm. The valuation is
Valuation of Carrefour’s international business. In addition to all of its stores in France, Carrefour (a real French company) has 24 hypermarkets in Argentina, 85 in Brazil, 27 in Mexico, 41 in
Assessing direct foreign investment trends. The website address of the Bureau of Economic Analysis is www.bea.gov. For UK data refer to www.ons.gov.uk/search?q=pink+book or search for ‘Pink Book’
Select a firm from the top ten firms from a European country (exclude financial institutions; a list may be found at www.forbes.com/lists/ – choose the country option for selection). Go to the
a What are the main elements of the current account?b In which account would you enter the transfer of income home by foreign workers?c In which account would royalties appear?
What are the arguments for and against the view that a deficit on the current account is a sign of a weak economy?
In what sense is the balance of payments an account, yet not an account?
What are the main components of the balance of payments and how do they balance?
What is meant by portfolio and real investment and where do they occur in the balance of payments?
How is it that the balance of payments balances when the foreign currency units to the reported currency is changing every day?
Does the balance of payments balance, and if not, why not?
Search for ‘Balance of Payments Analytic Presentation by Country’ online and select the US.a For the most recent year comment on the meaning of the balances (note that for more detail on the
Repeat the exercise in Question 8 for Germany and compare the two balances of payments.
Outline the nature and governance of trade disputes.
How do government actions affect the balance of payments and what are the motives of governments with respect to the balance of payments?
Explain how the Marshall Lerner conditions establish that a devaluation will not necessarily ‘improve’ the balance of payments (i.e. reduce a deficit).
What would an increase in the interest rates have on the balance of payments, potentially the economy and the value of the currency?
How might an MNC react to a devaluation in the currency of a country to which it exports?
The law of comparative advantage takes no account of ethical standards or sovereignty. Examine the arguments for and against this proposition.
The Treasurer in Problem 8 is considering selling foreign exchange futures contracts as an alternative to borrowing US dollars or selling the dollars in the forward foreign exchange market. Using the
A retail store sells its goods on credit. How should it estimate the cost of credit to its customers?
Under what circumstances is the decision to provide credit to a customer solely a financing decision?
Why is it difficult to define precisely the period of credit?
Under what circumstances should a firm accept a period of credit and reject a discount for early payment?
Under what circumstance is it possible for the provision of trade credit to be profitable to both parties?
Compute the average debtor collection period for a company with Accounts Receivable (Debtors) outstanding totaling €14,000 and annual sales of €132,000. If the maximum credit period granted by
A company forecasts sales totaling €100,000 for the next quarter assuming a 1% discount for payment within seven days. The maximum permitted credit period is 28 days, although some customers take
A company currently gives 28 days’ credit for all sales but experiences the repayments schedule listed in the second column below. The final column shows the forecast collections if the company
Customer X purchases €10,000 of goods from Company Y with the usual two months’ credit period. In addition, Y offers a 10% discount for immediate payment. Y is aware that X is a risky customer
Both the supplier and its customers are short of funds due to a severe credit squeeze imposed by the Government and the banks. In order to attract customers, however, the supplier considers offering
What factors make inventory control an important part of the production planning and control system?
Describe an effective means of planning and monitoring the aggregate investment in inventories.
What are the main costs of carrying stocks? How significant are they in total?
What are the principal categories of inventory carried by companies and what types of stock must be provided within each category?
What are the characteristics of the six basic inventory replenishment systems in use? In what circumstances is the use of each most appropriate?
Describe some of the problems arising in the operation of inventory control systems.
LMN Company manufactures Product Line A at the rate of 18,750 per month. The table below gives the quarterly sales forecast.Aggregate inventory for Product Line A at the beginning of the year was
Identify and label the following on the diagram below: (a) order quantity, (b) reorder level, (c) ordering lead time, and (d) safety stock. Stock Time
For the (s; S) stock control system, identify s and S on the diagram in Problem 8. How would you estimate the values of s and S?Data From Problem 8:-Identify and label the following on the diagram
The company manufactures stock especially for one industrial customer who regularly orders €1,000 worth (at marginal cost) at the end of each month. If the inventory carrying cost is 30% per year,
SMOOTHING Corporation’s Treasurer is trying to ascertain what proportion of the company’s borrowing should be floating rate debt. His immediate objective is to minimize the variance of the
SMOOTHING Corporation’s Treasurer finds that he should increase the existing proportion of the company’s floating rate interest payments. An interest rate swap appears to be a good way of doing
The Treasurer of Company X intends borrowing fixed rate one year from now. The particular loan is to have a one-year maturity. Unfortunately, interest rates on fixed rate loans could rise before
In April 2002, the Treasurer of Company X also intends to borrow euros in the London money market toward the end of June. The loan will have a three-month maturity ending in September. In the
On 16 April 2002, a German investor could invest in a two-year German Government bond yielding 4.19%. At the same time, she could invest in a comparable one-year US Government bond yielding 3.31%.
The rate of inflation in Country A is 10% and in Country B is 30%. The real rate of interest in Country A is 2% and in B is 5%. The spot rate of exchange is 1.5 units of B’s currency for each unit
On 16 April 2002, the US\($–euro\) exchange rate was \($0.8829/€.\) At the same time, the yen– US \($\) exchange rate was Y131.105/\($\). What yen–euro (Y/€) exchange rate would eliminate
A French company exporting to the USA expects \($1\) million from various customers in 30 days’ time. The company’s Treasurer seeks to eliminate the resulting exposure to changes in the
GLOBAL ENTERPRISE plc is an international manufacturing company domiciled within the EU. The company plans the Ventgo project for manufacturing in Anderia, a sovereign nation outside the euro zone.

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