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international financial management

Questions and Answers of International Financial Management

Timing the Hedge Red River Co. (a U.S. firm)purchases imports that have a price of 400,000 Singapore dollars, and it has to pay for the imports in 90 days. It will use a 90-day forward contract to
Long-Term Hedging with Forward Contracts Tampa Co. will build airplanes and export them to Mexico for delivery in 3 years. The total payment to be received in 3 years for these exports is 900 million
Overhedging Denver Co. is about to order supplies from Canada that are denominated in Canadian dollars (C$). It has no other transactions in Canada and will not have any other transactions in the
Hedging Decision Chicago Co. expects to receive 5 million euros in 1 year from exports. It can use any one of the following strategies to deal with the exchange rate risk. Estimate the dollar cash
Forecasting Cash Flows and Hedging Decision Virginia Co. has a subsidiary in Hong Kong and in Thailand. Assume that the Hong Kong dollar is pegged at $.13 per Hong Kong dollar and it will remain
Forecasting from Regression Analysis and Hedging You apply a regression model to annual data in which the annual percentage change in the British pound is the dependent variable, and INF (defined as
Forecasting with IFE and Hedging Assume that Calumet Co. will receive 10 million pesos in15 months.It does not have a relationship with a bank at this time and, therefore, cannot obtain a forward
Hedging Decision You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14 percent. The nominal annual interest rate in the United States is 3 percent. You expect that
Hedging with Forward versus Option Contracts As treasurer of Tempe Corp., you are confronted with the following problem. Assume the 1-year forward rate of the British pound is $1.59.You plan to
Exposure to September 11 If you were a U.S. importer of products from Europe, explain whether the September 11, 2001, terrorist attacks on the United States would have caused you to hedge your
Comparison of Techniques for Hedging Payables SMU Corp. has future receivables of 4 million New Zealand dollars (NZ$) in 1 year. It must decide whether to use options or a money market hedge to hedge
Comparison of Techniques for Hedging Receivablesa. Assume that Carbondale Co. expects to receive S$500,000 in 1 year. The existing spot rate of the Singapore dollar is $.60. The 1-year forward rate
Hedging during the Asian Crisis Describe how the Asian crisis could have reduced the cash flows of a U.S. firm that exported products (denominated in U.S.dollars) to Asian countries. How could a U.S.
Long-Term Hedging Since Obisbo, Inc., conducts much business in Japan, it is likely to have cash flows in yen that will periodically be remitted by its Japanese subsidiary to the U.S. parent. What
The Long-Term Hedge Dilemma St. Louis, Inc., which relies on exporting, denominates its exports in pesos and receives pesos every month.It expects the peso to weaken over time. St. Louis recognizes
Forward Hedging Wedco Technology of New Jersey exports plastics products to Europe. Wedco decided to price its exports in dollars. Telematics International, Inc. (of Florida), exports computer net
Hedging Payables with Currency Options Malibu, Inc., is a U.S. company that imports British goods. It plans to use call options to hedge payables of 100,000 pounds in 90 days. Three call options are
Continuous Hedging Cornell Co. purchases computer chips denominated in euros on a monthly basis from a Dutch supplier. To hedge its exchange rate risk, this U.S. firm negotiates a 3-month forward
Forward Hedging Explain how a Malaysian firm can use the forward market to hedge periodic purchases of U.S. goods denominated in U.S. dollars.Explain how a French firm can use forward contracts to
Forward versus Options Hedge on Receivables You are an exporter of goods to the United Kingdom, and you believe that today’s forward rate of the British pound substantially underestimates the
Forward versus Options Hedge on Payables If you are a U.S. importer of Mexican goods and you believe that today’s forward rate of the peso is a very accurate estimate of the future spot rate, do
Real Cost of Hedging Would Montana Co.’s real cost of hedging Japanese yen receivables have been positive, negative, or about zero on average over a period in which the dollar weakened
Implications of IRP for Hedging If interest rate parity exists, would a forward hedge be more favorable, the same as, or less favorable than a money market hedge on euro payables? Explain.
Forward Hedge Would Oregon Co.’s real cost of hedging Australian dollar payables every 90 days have been positive, negative, or about zero on average over a period in which the dollar weakened
Hedging with Put Options As treasurer of Tucson Corp. (a U.S. exporter to New Zealand), you must decide how to hedge (if at all) future receivables of 250,000 New Zealand dollars 90 days from now.
Currency Diversification Explain how a firm can use currency diversification to reduce transaction exposure.
Cross-Hedging Explain how a firm can use crosshedging to reduce transaction exposure.
Leading and Lagging Under what conditions would Zona Co.’s subsidiary consider using a leading strategy to reduce transaction exposure? Under what conditions would Zona Co.’s subsidiary consider
Long-Term Hedging How can a firm hedge long-term currency positions? Elaborate on each method.
Currency Options Can Brooklyn Co. determine whether currency options will be more or less expensive than a forward hedge when considering both hedging techniques to cover net payables in euros?Why or
Currency Options Relate the use of currency options to hedging net payables and receivables.That is, when should currency puts be purchased, and when should currency calls be purchased? Why would
Forward versus Money Market Hedge on Receivables Assume the following information:180-day U.S. interest rate 8%180-day British interest rate 9%180-day forward rate of British pound $1.50 Spot rate of
Forward versus Money Market Hedge on Payables Assume the following information:90-day U.S. interest rate 4%90-day Malaysian interest rate 3%90-day forward rate of Malaysian ringgit $.400 Spot rate of
Forward Hedge Decision Kayla Co. imports products from Mexico, and it will make payment in pesos in 90 days. Interest rate parity holds. The prevailing interest rate in Mexico is very high, which
Real Cost of Hedging Payables Assume that Suffolk Co. negotiated a forward contract to purchase 200,000 British pounds in 90 days. The 90-day forward rate was $1.40 per British pound.The pounds to be
Benefits of Hedging If hedging is expected to be more costly than not hedging, why would a firm even consider hedging?
Real Cost of Hedging Payables Assume that Loras Corp. imported goods from New Zealand and needs 100,000 New Zealand dollars 180 days from now. It is trying to determine whether to hedge this
Hedging with Forward Contracts Explain how a U.S. corporation could hedge net receivables in Malaysian ringgit with a forward contract. Explain how a U.S. corporation could hedge payables in Canadian
Hedging with Futures Explain how a U.S.corporation could hedge net receivables in euros with futures contracts. Explain how a U.S. corporation could hedge net payables in Japanese yen with futures
Net Transaction Exposure Why should an MNC identify net exposure before hedging?
Money Market Hedge on Payables Assume that Vermont Co. has net payables of 200,000 Mexican pesos in 180 days. The Mexican interest rate is 7 percent over 180 days, and the spot rate of the Mexican
Money Market Hedge on Receivables Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot rate of the S$ is $.50, and the Singapore interest rate is 2
Hedging in General Explain the relationship between this chapter on hedging and the previous chapter on measuring exposure.
Impact of Translation Exposure on Stock Valuation Spencer Co. is a U.S. firm that has a large subsidiary in Singapore that generates a large amount of earnings. Spencer’s stock is commonly valued
Assessing Exposure to Net Cash Flows Reese Co. will pay 1 million British pounds for materials imported from the U.K. in 1 month. Reese Co. sells some goods to Poland and will receive 3 million
Estimating Value at Risk Yazoo, Inc., is a U.S.firm that has substantial international business in Japan and has cash inflows in Japanese yen. The spot rate of the yen today is $.01. The yen exchange
Assessing Translation Exposure Quartz Co. has its entire operations in Miami, Florida, and is an exporter of products to eurozone countries. All of its earnings are derived from its exports. The
Assessing Transaction Exposure Zebra Co.is a U.S. firm that obtains products from a U.S.supplier and then exports them to Canadian firms.Its exports are denominated in U.S. dollars. Its main
Exposure to Cash Flows Lance Co. is a U.S.company that has exposure to the Swiss francs (SF) and Danish krone (DK). It has net inflows of SF100 million and net outflows of DK500 million. The present
PPP and Exposure Layton Co. (a U.S. firm)attempts to determine its economic exposure to movements in the Japanese yen by applying regression analysis to data over the last 36 quarters:SP ¼ b0 þ b1e
IFE and Exposure Assume that Maine Co.(a U.S. firm) measures its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters:SP ¼ b0 þ b1e
Exchange Rates and Market Share Harz Co.(a U.S. firm) has an arrangement with a Chinese company in which it purchases products from them every week at the prevailing spot rate, and then sells the
Exchange Rates and Market Share Minnesota Co. is a U.S. firm that exports computer parts to Japan. Its main competition is from firms that are based in Japan, which invoice their products in
Assessing Translation Exposure Assume the euro’s spot rate is presently equal to $1.00. All of the following firms are based in New York and are the same size. While these firms concentrate on
Interpreting Economic Exposure Spratt Co.(a U.S. firm) attempts to determine its economic exposure to movements in the British pound by applying regression analysis to data over the last 36
Cross-Currency Relationships The Hong Kong dollar (HK$) is presently pegged to the U.S. dollar and is expected to remain pegged. Some Hong Kong firms export products to Australia that are denominated
Assessing Translation Exposure Kanab Co. and Zion Co. are U.S. companies that engage in much business within the United States and are about the same size. They both conduct some international
Applying the Value-at-Risk Method You use today’s spot rate of the Brazilian real to forecast the spot rate of the real for 1 month ahead. Today’s spot rate is $.4558. Use the value-at-risk
Cash Flow Sensitivity to Exchange Rate Movements The Central Bank of Poland is about to engage in indirect intervention later today in which it will lower Poland’s interest rates substantially.This
Exposure of Net Cash Flows Each of the following U.S. firms is expected to generate $40 million in net cash flows (after including the estimated cash flows from international sales if there are any)
Assessing Currency Volatility Zemart is a U.S.firm that plans to establish international business in which it will export to Mexico (these exports will be denominated in pesos) and to Canada (these
Exposure to Pegged Currency System Assume that the Mexican peso and the Brazilian currency (the real) have depreciated against the U.S. dollar recently due to the high inflation rates in those
Assessing Exposure Washington Co. and Vermont Co. have no domestic business. They have similar dollar equivalent amount of international exporting business. Washington Co. exports all of its products
Exposure to Cash Flows Raton Co. is a U.S.company that has net inflows of 100 million Swiss francs and net outflows of 100 million British pounds. The present exchange rate of the Swiss franc is
Invoicing Policy to Reduce Exposure Celtic Co. is a U.S. firm that exports its products to England.It faces competition from many firms in England. Its price to customers in England has generally
Potential Effects if the United Kingdom Adopted the Euro The United Kingdom still has its own currency, the pound. The pound’s interest rate has historically been higher than the euro’s interest
Lagged Effects of Exchange Rate Movements Cornhusker Co. is an exporter of products to Singapore. It wants to know how its stock price is affected by changes in the Singapore dollar’s exchange
Changes in Economic Exposure The Walt Disney Company built an amusement park in France that opened in 1992. How do you think this project has affected Disney’s economic exposure to exchange rate
Measuring Economic Exposure Using the cost and revenue information shown for DeKalb, Inc., on the next page, determine how the costs, revenue, and cash flow items would be affected by three possible
Transaction Exposure Vegas Corp. is a U.S.firm that exports most of its products to Canada. It historically invoiced its products in Canadian dollars to accommodate the importers. However, it was
Using Regression Analysis to Measure Exposurea. How can a U.S. company use regression analysis to assess its economic exposure to fluctuations in the British pound?b. In using regression analysis to
Comparing Transaction and Economic Exposure Erie Co. has most of its business in the United States, except that it exports to Belgium. Its exports were invoiced in euros (Belgium’s currency)last
Speculating Based on Exposure During the Asian crisis in 1998, there were rumors that China would weaken its currency (the yuan) against the U.S. dollar and many European currencies. This caused
Impact of Exchange Rates on Earnings Cieplak, Inc., is a U.S.–based MNC that has expanded into Asia. Its U.S. parent exports to some Asian countries, with its exports denominated in the Asian
Measuring Changes in Economic Exposure Toyota Motor Corp. measures the sensitivity of its exports to the yen exchange rate (relative to the U.S.dollar). Explain how regression analysis could be used
PPP and Economic Exposure Boulder, Inc., exports chairs to Europe (invoiced in U.S. dollars) and competes against local European companies. If purchasing power parity exists, why would Boulder not
Economic Exposure Sooner Co. is a U.S.wholesale company that imports expensive highquality luggage and sells it to retail stores around the United States. Its main competitors also import
Economic Exposure Lubbock, Inc., produces furniture and has no international business. Its major competitors import most of their furniture from Brazil and then sell it out of retail stores in the
Economic Exposure Longhorn Co. produces hospital equipment. Most of its revenues are in the United States. About half of its expenses require outflows in Philippine pesos (to pay for Philippine
Transaction Exposure Aggie Co. produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice the products in U.S.
Translation Exposure Consider a period in which the U.S. dollar weakens against the euro. How will this affect the reported earnings of a U.S.–based MNC with European subsidiaries? Consider a
Factors That Affect a Firm’s Translation Exposure What factors affect a firm’s degree of translation exposure? Explain how each factor influences translation exposure.
Measuring Economic Exposure Memphis Co.hires you as a consultant to assess its degree of economic exposure to exchange rate fluctuations. How would you handle this task? Be specific.
Exposure of Domestic Firms Why are the cash flows of a purely domestic firm exposed to exchange rate fluctuations?
Transaction Exposure Fischer, Inc., exports products from Florida to Europe. It obtains supplies and borrows funds locally. How would appreciation of the euro likely affect its net cash flows? Why?
Currency Effects on Cash Flows How should appreciation of a firm’s home currency generally affect its cash inflows? How should depreciation of a firm’s home currency generally affect its cash
Currency Correlations Kopetsky Co. has net receivables in several currencies that are highly correlated with each other. What does this imply about the firm’s overall degree of transaction
Factors That Affect a Firm’s Transaction Exposure What factors affect a firm’s degree of transaction exposure in a particular currency? For each factor, explain the desirable characteristics that
Assessing Transaction Exposure Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year. Danish krone inflows equal
Transaction versus Economic Exposure Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its “net” cash flows in each currency when assessing
Forward versus Spot Rate Forecast Assume that interest rate parity exists. The 1-year risk-free interest rate in the United States is 3 percent versus 16 percent in Singapore. You believe in
Forward versus Spot Rate Forecasts Assume that interest rate parity exists and it will continue to exist in the future. Kentucky Co. wants to forecast the value of the Japanese yen in 1 month. The
Forecast Errors from Forward Rates Assume that interest rate parity exists. One year ago, the spot rate of the euro was $1.40 and the spot rate of the Japanese yen was $.01. At that time, the 1-year
Deriving Forecasts from Forward Rates Assume that interest rate parity exists. Today the 1-year U.S. interest rate is equal to 8 percent, while Mexico’s 1-year interest rate is equal to 10
IRP, Expectations, and Forecast Error Assume that interest rate parity exists and it will continue to exist in the future. Assume that interest rates of the United States and the United Kingdom vary
Forecasting Based on the International Fisher Effect Purdue Co. (based in the United States)exports cable wire to Australian manufacturers. It invoices its product in U.S. dollars and will not change
IRP and Forecasting New York Co. has agreed to pay 10 million Australian dollars (A$) in 2 years for equipment that it is importing from Australia. The spot rate of the Australian dollar is $.60. The
Comparing Market-based Forecasts For all parts of this question, assume that interest rate parity exists, the prevailing 1-year U.S. nominal interest rate is low, and that you expect U.S. inflation
Selecting between Forecast Methods Bolivia currently has a nominal 1-year risk-free interest rate of 40 percent, which is primarily due to the high level of expected inflation. The U.S. nominal
Forecasting Latin American Currencies The value of each Latin American currency relative to the dollar is dictated by supply and demand conditions between that currency and the dollar. The values of

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