Questions and Answers of Management And Control Of Foreign

3. On December 31, 1994, Archimedes SA, the Mexican afflliate of a U.S.manufacturing company, has the Peso (Ps)-denominated balance sheet shown in table 10.3. The current exchange rate is Ps5 =
2. The Dutch subsidiary of Firestone Company has a net exposure (exposed assets in excess of exposed liabilities) of 50,000,000 Dutch guilders (DG) on July 1, 1993. Because of a buoyant balance of
2, 1996, the prevailing spot exchange rate is SPta,$(O) = 121.34.(a) Measure the translation exposure in Pta terms that will be outstanding by December 31, 1995. Assume that all accounts, except for
1. The U.S. MNC Pax Americana Inc. is concerned by the anticipated impact of the Spanish peseta (Pta) devaluation upon its net consolidated earnings as well as on the net worth of its Spanish
4. What solutions to the U S. dollar-denominated debt problem have not been considered? What would a normal private-sector firm do to solve a similar exposure problem?
3. What is the logic of increasing the proportion of short-term debt in BC Hydro's debt portfolio at the risk of mismatching the maturity of assets and liabilities?
2. It is often stated that sound financial management practices are achieved by focusing on cash-flow issues, and not on legal, tax, or accounting-based concerns. How does this statement apply to the
1. Discuss the pros and cons of each of the following potential solutions to BC Hydro's interest rate and exchange rate exposures:(a) purchase a series of forward contracts(b) participate in a
5. Dual Currency Bonds. In 1985, R.J. Reynolds was considering a 25-billion yen debenture to be issued at 101.50% of par. The five-year, annual coupon bond would pay an interest rate of 7 3/4 %
4. On May 11, 1995, Conoco-Norway, a subsidiary of Houston-based Conoco, christened the world's first floating oil-production platform built from concrete, which will also be the world's largest
3. On August 28, 1990, IBM International Finance NV-the Dutch Antillesbased international finance subsidiary of IBM Corporation-issued four 100 million dollar equivalent tranches of Eurobonds
2. On December 1, 1970, the European Monetary Unit (EMU) was first used as a contractual device for the denomination of a bond issue floated by the European Coal and Steel Community. The value of the
1. Moulinex, a French multinational manufacturer of kitchen appliances, is considering financing a plant expansion in Germany with Euro-Deutsche marks(DM). The bond issue would be a five-year
4. Assuming that the invoice would continue to be denominated in lira, should Whirlpool be prepared to hedge its exposure through forward contracts?Should the cost of such forward contracts be
3. Develop an alternative contracting scheme that would better serve the interests of Whirlpool.
2. Should Whirlpool subscribe to a currency forecasting service such as the one provided by Wharton Econometric Forecasting Associates, and how much should Whirlpool be prepared to pay for it?
1. Evaluate the current contracting scheme in view of the actual price/exchange rate for me last 18 months.
4. Assuming that the invoice would continue to be denominated in lira,should Whirlpool be prepared to hedge its exposure through forward contracts?Should the cost of such forward contracts be
3. Develop an alternative contracting scheme that would better serve the interests of Whirlpool.
2. Should Whirlpool subscribe to a currency forecasting service such as the one provided by Wharton Econometric Forecasting Associates, and how much should Whirlpool be prepared to pay for it?
1. Evaluate the current contracting scheme in view of the actual price/exchange rate for me last 18 months.
7. Referring to the bidding illustration in section III, consider the scenario of a dollar devaluation to SFF.S(tc) = 4.97 on June 1, 1992 and a forward rate of FFF.S(tc + 90) = 5.01. What is the FF
6. On August 3, 1983, Merck, the giant U.S.-based pharmaceutical company, reached an agreement with Banyu for the friendly acquisition of 50 %of Banyu's stock for $313.5 million at a price of ¥670
5. Referring to box 8.1, discuss alternative hedging strategies that were available to Heinz Ruhnan. Sketch the risk-profile curves of each strategy.Would you advise the use of a forward
4. Metalgesselschaft, a leading German metal processor, has scheduled a supply of 20,000 metric tons of copper for August 10, 1995. On May 10, 1995, copper is quoted at 1,725 pounds sterling (£) per
3. Zanussi, the Italian manufacturer of household appliances, is exporting dishwashers to France and extending 180 days credit to the French wholesale importer. The exports proceeds are denominated
2. On February 15, 1996, a French exporter expects export proceeds of 1 million pounds sterling to be paid on August 15, 1996.Financing of the export transaction can be arranged in three ways:
1. The U.S. sales subsidiary of a Japanese television set manufacturer is contractually committed to paying a flxed lump sum of money (royalties payments) to its parent on December 31 of each year.
5. Does Vulkan's foreign exchange risk-management objective make sense?From what perspective?
4. Do you agree or disagree with the analysis presented by Ms. Ronningen?Does her analysis make sense? Why or why not?
3. Regardless of your responses to questions 1 and 2, assume now that VUK is not subject to exchange risk. Should Vulkan repay its pound debts? Should VUK repay its pound loans and replace them with
2. Should Vulkan refund the pound debt it used for the acquisition of BMC and replace it with dollar ftnancing? Why or why not? What criteria are you using to reach your decision?
1. Is VUK exposed to exchange risk? What is the basis for your conclusion?What is its economic rationale? Explain your answers and present your analysis in detail.
3. If you were to advise the Mexican government on how to compare bids denominated in different currencies, what would your advice be?
2. Can Euclides match the Swiss-German bid without changing its dollar price? How?
1. In view of the dollar-mark exchange rate, how can you explain the discrepancy between the U. S. and the Swiss-German bids?
15, the Swiss franc is revalued by 15% vis-a-vis the French and Belgian franc.However, because of earlier booking, the SF revaluation cannot be passed through before January 1, 1995.(a) Assuming that
2. Kuoni, a leading Swiss tour operator, sells package tours to Sri Lanka for French, Belgian, and Swiss tourists. On January 1, 1996, Kuoni sent its printed catalog to French, Belgian, and Swiss
1. Consider again the case of the French subsidiary of Textron Inc. On October 1, 1969, the Deutsche mark is revalued from FF1.70 to FF1.80 to DMI.Assess the impact of the DM revaluation on the
3. On December 31, 1994, Archimedes SA, the Mexican affiliate of a U.S.manufacturing company, has the Peso (Ps)-denominated balance sheet as shown below. The current exchange rate is Ps 5 = $1.Table
2. Referring to the information provided in problem I, consider the transaction exposures of Zigzag's French and Swiss affiliates, which, as of January I, 1996, have incurred the following one-year
1. Zigzag, a leading U.S. manufacturer of sewing machines, was committed to the following international trade and fmancing transactions as of January 1, 1996: (a) exports of 500 industrial sewing
3. On January 1, 1996, you are promoted to the position of general manager of the Indian Tiger Mutual Fund which manages approximately $125 million of equity investment on the Bombay Stock Exchange.
2. In early 1996, Allis-Chambers, one of the leading worldwide manufacturers of crawler tractors and wheel loaders, was considering starting an assembly operation in Spain. As part of the feasibility
1. In early 1994, Carborundum, a worldwide manufacturer of abrasives and filtration systems, was considering setting up a manufacturing subsidiary in Mexico. Encouraged by the enactment of NAFTA,
1. Evaluate the track record of Wharton Econometrics Forecasting Associates in forecasting the Italian lira over the period June, 1984-May, 1985.Would you subscribe to the service based on this
5. With reference to the NSPIKLM currency swap discussed in section IV of this chapter:(a) What is the implied forward exchange rate used throughout the life of the swap for exchanging cash flows?(b)
4. Assuming (1) that you can buy a sterling call with strike price of $1.50 for 3 cents, (2) that you can sell a sterling put at the same strike price for 4 cents,(3) that the prevailing forward rate
3. Writing a Strangle: assuming that Allied-Lyons would write a strangle as a speculative strategy, rather than a straddle as in problem 1, would you consider it to be more (less) speculative?
2. Assuming that Allied-Lyons was relying on a straddle strategy (refer to box 3.2 for background information), explain graphically and numerically under what conditions Allied-Lyons could have
1. Show graphically that writing a covered put option amounts to writing a naked call option.
9. Monsieur Dassault, the treasurer of Renault-Finance S.A.-the Genevabased international finance subsidiary of the French automobile manufacturer-was intrigued by the apparently high yield offered
8. Using recent spot exchange rate quotations of the five component currencies (as available in the Wall Street Journal), compute the French franc value of one Special Drawing Right (SDR). Hint:
7. Assume that U.S.-based potential arbitragers do not hold cash, but dollar-denominated securities. Covered investment in sterling-denominated securities then requires the execution of four
4, section II), show how you can speculate through forward Germania. Assuming that the opportunity cost of funds to Marathon Co. is 10% annually, what is the maximum percentage margin requirement
6. In late December of 1995, the treasurer of Marathon Company, a U.S.-based multinational publishing house, had been giving serious consideration to investing $50 million of cash balances in rapidly
5. Using the conceptual framework provided by the Modern theory, show geometrically how the Bank of Japan would prevent the spot exchange rate from appreciating through intervention in the forward
4. Explain how you could compute the forward rate of ECUs in dollar terms. Would you expect the actual forward rate to differ from the "no-profit"or "synthetic" forward rate? Compute the actual
3. The Brussels-based European treasury of Dow Chemical was considering short-term interest rate arbitrage opportunities between the French and German money market where annual interest rates were
2. On the eve of its long overdue devaluation (August 31, 1976), the Mexican peso (P) could be purchased or sold 90 days forward at P18 for $1, a considerable discount from the u.S. dollar
1. On September I, 1995, the treasurer of Volvo, the Swedish automotive manufacturer, is faced with the following investment dilemma: he could invest the 125 million Swedish crowns (SK) that will be
10. Shares of Telefonos Mexicanos (TELMEX) listed on the New York Stock Exchange fell from $60 to $48 when the Mexican peso (P) was devalued on December 19, 1994, from P3.44 to 6.05 = $1. As a trader
9. Over the years, a number of developing countries have maintained an advance deposit scheme for imports. Such systems typically require importers to deposit with the central bank a percentage of
9:00 a.m. a fixed rate at which it will buy or sell U.S. dollars throughout the trading day. No such commitments are made, however, against other major trading currencies.On August 9, 1990, the
8. The Central Bank of South Korea announces every business day at
7. Using the latest currency quotations from the Wall Street Journal, compute the U.S. dollar and Japanese yen value of one ECU as defmed in table 1.1.Assuming a sudden 15% devaluation of the FF
6. Show that if two currencies i andj independently maintain their exchange rate within a band of fluctuations defmed as ± 1 % around a par value vis-a-vis the U. S. dollar, their currencies i and j
5. Assuming that the pound is worth 9.80 French francs in Paris and 5.40 Swiss francs in Zurich, show how British arbitragers can make profits, given that the Swiss franc is worth 2 French
4. Reformulate the multilateral equilibrium condition introduced in section I.B., assuming that transaction costs represent 1116 of 1% of the amount transacted.
3. Work out problem 1 assuming that transaction costs represent 1/16 of 1 %of the amount transacted.
2. Assuming that transaction costs represent 1116 of 1 % of the amount transacted, what is the maximum/minimum dollar price of one Japanese yen that you would expect to prevail in New York, given
1. If the dollar price of one French franc is .2020 in N ew York City at the same time the French franc price of one dollar is 4.9898 in Paris, show how arbitragers could take advantage of the
Moulinex, a French multinational manufacturer of kitchen appliances, is considering financing a plant expansion in Germany with Euro-Deutsche marks(DM). The bond issue would be a five-year maturity
On December 1, 1970, the European Monetary Unit (EMU) was first used as a contractual device for the denomination of a bond issue floated by the European Coal and Steel Community. The value of the
On August 28, 1990, IBM International Finance NV-the Dutch Antillesbased international finance subsidiary of IBM Corporation-issued four 100 million dollar equivalent tranches of Eurobonds
On May 11, 1995, Conoco-Norway, a subsidiary of Houston-based Conoco, christened the world's first floating oil-production platform built from concrete, which will also be the world's largest
Dual Currency Bonds. In 1985, R.J. Reynolds was considering a 25-billion yen debenture to be issued at 101.50% of par. The five-year, annual coupon bond would pay an interest rate of 7 3/4 %
The U.S. MNC Pax Americana Inc. is concerned by the anticipated impact of the Spanish peseta (Pta) devaluation upon its net consolidated earnings as well as on the net worth of its Spanish affiliate
The Dutch subsidiary of Firestone Company has a net exposure (exposed assets in excess of exposed liabilities) of 50,000,000 Dutch guilders (DG) on July 1, 1993. Because of a buoyant balance of trade
On December 31, 1994, Archimedes SA, the Mexican afflliate of a U.S.manufacturing company, has the Peso (Ps)-denominated balance sheet shown in table 10.3. The current exchange rate is Ps5 = $1.(a)
If the dollar price of one French franc is .2020 in N ew York City at the same time the French franc price of one dollar is 4.9898 in Paris, show how arbitragers could take advantage of the
Assuming that transaction costs represent 1116 of 1 % of the amount transacted, what is the maximum/minimum dollar price of one Japanese yen that you would expect to prevail in New York, given that
Work out problem 1 assuming that transaction costs represent 1/16 of 1 %of the amount transacted.
Reformulate the multilateral equilibrium condition introduced in section I.B., assuming that transaction costs represent 1116 of 1% of the amount transacted.
Assuming that the pound is worth 9.80 French francs in Paris and 5.40 Swiss francs in Zurich, show how British arbitragers can make profits, given that the Swiss franc is worth 2 French francs.Work
Show that if two currencies i andj independently maintain their exchange rate within a band of fluctuations defmed as ± 1 % around a par value vis-a-vis the U. S. dollar, their currencies i and j
Using the latest currency quotations from the Wall Street Journal, compute the U.S. dollar and Japanese yen value of one ECU as defmed in table 1.1.Assuming a sudden 15% devaluation of the FF against
The Central Bank of South Korea announces every business day at 9:00 a.m. a fixed rate at which it will buy or sell U.S. dollars throughout the trading day. No such commitments are made, however,
Over the years, a number of developing countries have maintained an advance deposit scheme for imports. Such systems typically require importers to deposit with the central bank a percentage of the
Shares of Telefonos Mexicanos (TELMEX) listed on the New York Stock Exchange fell from $60 to $48 when the Mexican peso (P) was devalued on December 19, 1994, from P3.44 to 6.05 = $1. As a trader for
In early 1984, Hippocrates' export manager and deputy international treasurer, Mr. Albert Brill, was informed that accounts receivable with respect to shipments of pharmaceuticals to Venezuela were
On September I, 1995, the treasurer of Volvo, the Swedish automotive manufacturer, is faced with the following investment dilemma: he could invest the 125 million Swedish crowns (SK) that will be
On the eve of its long overdue devaluation (August 31, 1976), the Mexican peso (P) could be purchased or sold 90 days forward at P18 for $1, a considerable discount from the u.S. dollar standpoint.
The Brussels-based European treasury of Dow Chemical was considering short-term interest rate arbitrage opportunities between the French and German money market where annual interest rates were
Explain how you could compute the forward rate of ECUs in dollar terms. Would you expect the actual forward rate to differ from the "no-profit"or "synthetic" forward rate? Compute the actual
Using the conceptual framework provided by the Modern theory, show geometrically how the Bank of Japan would prevent the spot exchange rate from appreciating through intervention in the forward
In late December of 1995, the treasurer of Marathon Company, a U.S.-based multinational publishing house, had been giving serious consideration to investing $50 million of cash balances in rapidly
Assume that U.S.-based potential arbitragers do not hold cash, but dollar-denominated securities. Covered investment in sterling-denominated securities then requires the execution of four
Using recent spot exchange rate quotations of the five component currencies (as available in the Wall Street Journal), compute the French franc value of one Special Drawing Right (SDR). Hint: because
Monsieur Dassault, the treasurer of Renault-Finance S.A.-the Genevabased international finance subsidiary of the French automobile manufacturer-was intrigued by the apparently high yield offered by

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