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multinational business finance

Questions and Answers of Multinational Business Finance

Unexpected Exchange Rate Changes. Explain why exchange rate uncertainty does not expose firms to exchange risk.
Static versus Dynamic. Why is static risk insurable while dynamic risk is not insurable?
Operating versus Financing Cash Flows. According to financial theory, which is more important to the value of the firm, financing or operating cash flows?
Economic Exposure. Economic exposure is highest for MNEs with multiple foreign currency operations.Is economic exposure confined to MNEs or does it involve local firms as well?
Strategic Exposure. Operating or strategic exposure has become a concern of long-term corporate strategy.Which level of management is responsible for mitigating and managing strategic exposure?
Managing Operating Exposure. The key to managing operating exposure at the strategic level is for management to recognize a disequilibrium in parity conditions when it occurs and to be pre-positioned
Managerial Strategic Roles. What are the diversification strategies and financing policies that the management of the firm adopts to mitigate transaction and operating exposure?
Proactive Management. Operating exposures can be partially managed by adopting operating or financing policies that offset anticipated foreign exchange exposures.What are four of the most commonly
Currency Switching. Explain how currency switching can offset long-term exposure to a foreign currency.
Currency Risk Sharing. Explain why suppliers are ready to get into currency risk sharing deals with MNEs. How do such deals impact the financial position of both parties?
Back-to-Back Loans. Back-to-back loans have caused many of the banking crises in emerging economies in the 1990s. What guarantees can firms obtain in order to use this type of foreign exchange hedge?
Currency Swaps. Do currency swaps always hedge against foreign exchange exposure? What other precautions are needed for effective hedging?
Hedging the Unhedgeable. How do some firms attempt to hedge their long-term operation exposure with contractual hedges? What assumptions do they make in order to justify contractual hedging of their
Momul Tea Plantations and Factory, Inc. Momul Tea Plantations and Factory, Inc. is located in Kericho, Kenya. The Momul family has been cultivating, processing, and exporting high-quality tea
Fashion T-Shirt Co. Fashion T-Shirt Co. is a T-shirt company based in Manchester, U.K., that imports cotton yarn from Mayada Expo, its life-long supplier, based in Cairo, Egypt. The agreement is for
Lux Expo (A). Lux Expo is a British manufacturer of luxury cars that exports its luxury sports cars to several Chinese car dealers. The annual sales volume is 50,000 units at the yuan (CNY)
Lux Expo (B). Assume the same facts as in Problem 3. Also assume that the pound costs will not change.Suppose that the financial management believes that the sales volume will increase at 20% per
MacLoren Automotive. MacLoren Automotive manufactures British sports cars, a number of which are exported to New Zealand for payment in pounds sterling.The distributor sells the sports cars in New
Ganado Germany—All Domestic Competitors. Using the Ganado Germany analysis in Exhibits 12.5 and 12.6 where the euro depreciates, how would prices, costs, and volumes change if Ganado Germany was
Ganado Germany—All Foreign Competitors. Ganado Germany is now competing in a number of international(export) markets, growth markets, in which most of its competitors are foreign. Now how would you
Rolls-Royce Turbine Engines. Rolls-Royce is struggling with its pricing strategy with a number of its major customers in Continental Europe, particularly Airbus. Since Rolls-Royce is a British
Rococo, Inc. France (A). Rococo, Inc. of France exports leather couches to Turkey, whose currency, the lira (TRY), has been trading at TRY2.97/€. Exports to Turkey are currently 40,000 couches per
Rococo, Inc. France (B). Assume the same facts as in Problem 9. Rococo also believes that if it maintains the same price in Turkish lira as a permanent policy, volume will increase at 10% per annum
Operating Exposure: Recent Examples. Using the following major periodicals as starting points, find a current example of a firm with a substantial operating exposure problem. To aid in your search,
SEC Edgar Files. To analyze an individual firm’s operating exposure more carefully, it is necessary to have more detailed information available than in the normal annual report. Choose a specific
China’s voracious consumer appetites are already reaching into every corner of Indonesia. The increasing weight of China in every market is a global trend, but growing Chinese, as well as Indian,
Foreign Exchange Exposure. Define the three types of foreign exchange exposure.
Currency Exposure and Contracting. Which of the three currency exposures relate to cash flows already contracted for, and which of the exposures do not?
Currency Risk. Define currency risk.
Hedging. What is a hedge? How does that differ from speculation?
Value of the Firm. What—according to financial theory—is the value of a firm?
Cash Flow Variability. How does currency hedging theoretically change the expected cash flows of the firm?
Arguments for Currency Hedging. Describe four arguments in favor of a firm pursuing an active currency risk management program.
Arguments against Currency Hedging. Describe six arguments against a firm pursuing an active currency risk management program.
Hedging versus Speculating. What is the difference between hedging and speculating?
Hedging with Forward Contracts. Explain how a Singaporean corporation could hedge a receivable in British pounds using a forward contract. What is the cost of such a forward market hedge?
Unperformed Contracts. Which contract is more likely not to be performed: a payment due from a customer in foreign currency (a currency exposure), or a forward contract with a bank to exchange the
Cash Balances. Why do foreign currency cash balances not cause transaction exposure?
Contractual Currency Hedges. What are the four main contractual instruments used to hedge transaction exposure?
Money Market Hedges. How does a money market hedge differ for an account receivable versus that of an account payable? Is it really a meaningful difference?
Balance Sheet Hedging. What is the difference between a balance sheet hedge, a financing hedge, and a money market hedge?
Forward versus Money Market Hedging. Theoretically, shouldn’t forward contract hedges and money market hedges have the same identical outcome?Don’t they both use the same three specific
Foreign Currency Option Premia. Why do many firms object to paying for foreign currency option hedges?Do firms pay for forward contract hedges? How do forwards and options differ if at all?
Decision Criteria. Ultimately, a treasurer must choose among alternative strategies to manage transaction exposure. Explain the two main decision criteria that must be used.
Risk Management Hedging Practices. According to surveys of corporate practices, which currency exposures do most firms regularly hedge?
Hedge Ratio. What is the hedge ratio? Why would the hedge ratio ever be less than one?
BioTron Medical, Inc. Brent Bush, CFO of a medical device distributor, BioTron Medical, Inc., was approached by a Japanese customer, Numata, with a proposal to pay cash (in yen) for its typical
Bobcat. Bobcat, a U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,800
P&G India. Procter and Gamble’s affiliate in India, P&G India, procures much of its toiletries product line from a Vietnamese company. Because of the shortage of working capital in India,
Vizor Pharmaceuticals. Vizor Pharmaceuticals, a U.S.-based multinational pharmaceutical company, is evaluating an export sale of its cholesterol-reduction drug with a prospective Indonesian
Embraer of Brazil. Embraer of Brazil is one of the two leading global manufacturers of regional jets(Bombardier of Canada is the other). Regional jets are smaller than the traditional civilian
Krystal. Krystal is a U.S.-based company that manufactures, sells, and installs water purification equipment.On April 11, the company sold a system to the City of Nagasaki, Japan, for installation in
Caribou River. Caribou River, Ltd., a Canadian manufacturer of raincoats, does not selectively hedge its transaction exposure. Instead, if the date of the transaction is known with certainty, all
Pupule Travel. Pupule Travel, a Honolulu, Hawaiibased 100% privately owned travel company, has signed an agreement to acquire a 50% ownership share of Taichung Travel, a Taiwan-based privately owned
Mattel Toys. Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars (Asia and the Americas) and one-third in euros (Europe).In September, Mattel delivers a large shipment of
Chronos Time Pieces. Chronos Time Pieces, a Bostonbased firm, exports watches to many countries, selling in local currencies to stores and distributors. Chronos prides itself on being financially
Farah Jeans. Farah Jeans of San Antonio, Texas, is completing a new assembly plant near Guatemala City.A final construction payment of Q8,400,000 is due in six months. (“Q” is the symbol for
Burton Manufacturing. Jason Stedman is the director of finance for Burton Manufacturing, a U.S.-based manufacturer of handheld computer systems for inventory management. Burton’s system combines a
Micca Metals, Inc. Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials that are used in a
Maria Gonzalez and Ganado. Ganado—the U.S.-based company discussed in this chapter—has concluded another large sale of telecommunications equipment to Regency (U.K.). Total payment of £3,000,000
Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands
Navarro’s Intra-Company Hedging. Navarro was a U.S.-based multinational company that manufactured and distributed specialty materials for soundproofing construction. It had recently established a
Korean Airlines. Korean Airlines (KAL) has just signed a contract with Boeing to purchase two new 747-400’s for a total of $60,000,000, with payment in two equal tranches. The first tranche of
Current Volatilities. You wish to price your own options, but you need current volatilities on the euro, British pound, and Japanese yen. Using the following Web sites, collect spot rates and
Hedging Objectives. All multinational companies will state the goals and objectives of their currency risk management activities in their annual reports. Beginning with the following firms, collect
Changing Translation Practices: FASB. The Financial Accounting Standards Board promulgates standard practices for the reporting of financial results by companies in the United States. It also,
McDonald’s Corporation (NYSE: MCD) is one of the world’s most well known and valuable brands. But as McDonald’s has grown and expanded globally, so have the investment risks associated with is
Translation. How do MNEs translate foreign currency into functional currency when consolidating their financial statements?
Mitigation. How can a firm mitigate translation exposure?
Hedging against exposure. How do MNEs hedge against translation exposure and foreign exchange exposure?
Subsidiaries’ Functional Currencies. What would be the functional currency of a self-sustaining foreign subsidiary and an integrated foreign subsidiary?
Self-Sustaining Subsidiaries. Explain the two dimensions that determine the translation methods that the parent company uses for consolidating its financial statements.
Functional Currency. What are the factors involved in the determination of the functional currency of a firm?
Translation Methods. What are the two basic methods for translation used globally?
Current Versus Historical. One of the major differences between translation methods is which balance sheet components are translated at which exchange rates, current or historical. Why would
Translating Assets. What are the major differences in translating assets between the current rate method and the temporal method?
Translating Liabilities. What are the major differences in translating liabilities between the current rate method and the temporal method?
Selective Hedging. How do you evaluate the decision of an MNE to hedge its foreign currency receivables only when it believes that its domestic currency will strengthen?
Translation Exposure Management. What are the primary options firms have to manage translation exposure?
Changes in Translation Strategies. What are the various hedging transactions that are available to an MNE that is seeking to hedge the translation exposure of its foreign subsidiaries? Do you think
MNE Exposures. What are various risks facing MNEs and their subsidiaries?
Realization and Recognition. When would a multinational firm, if ever, realize and recognize the cumulative translation losses recorded over time associated with a subsidiary?
Tax Obligations. How does translation alter the global tax liabilities of a firm? If a multinational firm’s consolidated earnings increase as a result of consolidation and translation, what is the
Inflation and Hyperinflation. Should MNEs be worried about inflation and hyperinflation in countries where they operate? How can they hedge against inflation?
Forecasting. MNEs closely monitor forecasts about interest rates and inflation. How can MNEs profit from such future expectations?
Ganado Europe (A). Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from $1.2000/€to $0.9000/€ (rather than to
Ganado Europe (B). Using facts in the chapter for Ganado Europe, assume as in Problem 1 that the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from $1.2000/€ to $0.9000/€
Ganado Europe (C). Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from $1.2000/€ to$1.500/€. Calculate Ganado Europe’s
Ganado Europe (D). Using facts in the chapter for Ganado Europe, assume as in Problem 3 that the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from $1.2000/€ to $1.5000/€.
Italianica S.A. (A). Italiana S.A. is the Italian subsidiary of a British automobile spare parts company.The following is its balance sheet as at December 31, when the exchange rate between the euro
Italianica S.A. (B). Please refer to the same balance sheet as in Problem 5. Calculate Italianica’s contribution to its British parent’s translation loss if the exchange rate on December 31 is
Italiana S.A. (C). Calculate Italiana’s contribution to its parent’s translation gain/loss using the current rate method if the exchange rate on September 30 is €1.2/£.Assume that there are no
Bangkok Instruments, Ltd. (A). Bangkok Instruments, Ltd., the Thai subsidiary of a U.S. corporation, is a seismic instrument manufacturer. Bangkok Instruments manufactures instruments primarily for
Bangkok Instruments, Ltd. (B). Using the original data provided for Bangkok Instruments, assume that the Thai baht appreciated in value from B30/$ to B25/$between March 31 and April 1. Assuming no
Cairo Ingot, Ltd. Cairo Ingot, Ltd., is the Egyptian subsidiary of Trans-Mediterranean Aluminum, a British multinational that fashions automobile engine blocks from aluminum. Trans-Mediterranean’s
Foreign Source Income. If you are a citizen of the United States, and you receive income from outside the U.S.—foreign source income—how must you report this income? Use the following Internal
Translation in the United Kingdom. What are the current practices and procedures for translation of financial statements in the United Kingdom? Use the following Web site to start your
Changing Translation Practices: FASB. The Financial Accounting Standards Board (FASB) promulgates standard practices for the reporting of financial results by companies in the United States. It also,
Yearly Average Exchange Rates. When translating foreign currency values into U.S. dollar values for individual reporting purposes in the United States, which average exchange rates should you use?
U.S. Treasury Bill Auction Rates—March 2009. The interest yields on U.S. Treasury securities in early 2009 fell to very low levels as a result of the combined events surrounding the global

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