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business
multinational business finance

Questions and Answers of Multinational Business Finance

Is a strong currency good or bad for the domestic economy?
What are the methods available to an emerging market economy if it elects to adopt a pegged exchange rate system? What is the ideal system if it needs to manage inflation and economic growth?
Hedging (I) There are several schools of thought regarding hedging and its impact on the value of the firm. One school argues that, if the owners of the firm wish to hedge, they can do so in their
Default risk Consider the following basic data on a one-year Ecuadorian Brady Bond (dollar denominated sovereign obligation). It has a face value of \($100\) payable at maturity, but no coupon.
Stock options as executive compensation You were hired by Sparkle.com, a telecommunications company, last year (exactly a year ago today). The company agreed to pay you £12,000 annual salary plus an
Hedging (II) Martha Exporter, Miami Baking Ltd, exports her delicious Martha’s Brownies to the United Kingdom and has accounts receivables in pounds sterling of £100,000 in 90 days. Basic data: US
Balance sheet hedging Gateaux Antoinette, SA, a subsidiary of Antoinette Cakes Inc., New York, had cash of €100,000 and accounts receivable of €100,000 each on its books (or €200,000 in total)
Your European subsidiary has cash and accounts receivable of 100 and 300 euros respectively, and accounts payable and short-term debt of 100 and 200 euros respectively. US headquarters re-measures
The time value of money Consider the following cash flows from today (year zero) to year 3 in pounds sterling:Your interest rate (or discount rate) in pounds is 10 percent. a Compute the net present
The equilibrium exchange rate Consider the following quantity of dollars demanded and supplied daily in millions as a function of the dollar’s peso price, S:a. Solve for the equilibrium exchange
Intervention in the foreign exchange market Argentina pegged its currency, the peso, to the US dollar at a rate of 1 to 1 from April 1991 to November 2001. Under the rules of the currency board, the
The bid–ask spread (I) In Table 3.14, consider the bid and ask spot quotations in dollars per pound (\($/£),\) i.e. in American terms:a. Compute the bid and quotations in European terms, i.e. in
The bid–ask spread (II) Consider the spot quotations in pounds per dollar (£/\($)\) and dollars per pound (\($/£)\) in Table 3.15: a. Compute the bid quotations in American and European
Points quotations In Table 3.16, consider the spot quotations in dollars per pound (\($/£)\) and the forward quotations in basis points (1/10,000). On the basis of the points quotations in Table
Interest rate parity Consider Figure 3.29, which indicates (approximately) the difference between interest rates in the United States and the UK, Rus Ruk on a one-year T-bill (i.e. a two-year bill
Purchasing power parity You are given the data in Table 3.17 on prices in local currency in the United States, Mexico, and England.a. What are the rates of currency exchange suggested by the absolute
1.1 Globalization Risks for MNEs. Was globalization responsible for the slowdown of MNE business dur- ing the financial crisis of 2008?
1.2 MNEs and Operation in Global Markets. What are the factors that affect the decisions of multinational enterprises to operate in global markets?
1.3 Eurocurrencies and Eurocurrency Markets. What are the major eurocurrencies? What is meant by a Eurocurrency market?
1.4 Fragility of the Global Financial Marketplace. How has the global financial crisis exposed the fragility of assets and institutions of the global system?
1.5 MNEs and LIBOR. Most MNEs either take loans in eurocurrencies or issue eurobonds with a floating coupon rate tied to the LIBOR. Explain how MNES were affected by the LIBOR scandal.
1.6 Post-LIBOR Scandal. Why do you think the UK government has resolved against the total elimina- tion of LIBOR benchmarks after the scandal?
1.7 Limitations of Comparative Advantage. The key to understanding most theories is what they say and what they don't. Name four or five key limitations to the theory of comparative advantage.
1.8 International Financial Management. What is differ- ent about international financial management?
1.9 Aidan's Globalization. After reading the chapter's description of Aidan's globalization process, how would you explain the distinctions between interna- tional, multinational, and global
1.10 Aidan, the MNE. At what point in the globalization process did Aidan become a multinational enter- prise (MNE)?
1.11 Market Conditions. The decisions of MNEs to move to new markets invariably take advantage of both market imperfections and market efficiencies. Explain.
1.12 Why Go. Why do firms become multinational?
1.13 Investment Motives of Firms. What is the differ- ence between proactive and defensive investment motives?
1.14 Aidan's Phases. What are the main phases that Aidan passed through as it evolved into a truly global firm? What are the advantages and disadvan- tages of each?
1.15 Financial Globalization. Explain the twin agency problems. How do the twin agency problems limit financial globalization?
1.1 Rugby World Cup and the Japanese Yen. Steven McGregor had planned his trip to the Rugby World Cup in Japan for almost a year. He had budgeted- saved-17,000 for expenses while in Japan. But he had
1.2 Pokmon GO. Crystal Gomez, who lives in Mexico City (as noted in Global Finance in Practice 1.2 in the chapter), bought 100 Pokcoins for 17 Mexican pesos (Ps or MXN). Nintendo of Japan, one of the
1.3 Isaac Dez of Brazil. Isaac Dez Peris lives in Rio de Janeiro, Brazil. While attending school in Spain, he meets Juan Carlos Cordero from Guatemala. Over the summer holiday, Isaac decides to visit
1.4 Munich to Moscow. For your post-graduation cel- ebratory trip, you decide to travel from Munich, Germany, to Moscow, Russia. You leave Munich with 15,000 euros (EUR) in your wallet. Wanting to
1.5 Moscow to Tokyo. After spending a week in Moscow, you get an email from your friend in Japan. He can get you a very good deal on a plane ticket and wants you to meet him in Tokyo next week to
1.6 Mark Du Plessis in Johannesburg. Mark Du Plessis lives in Johannesburg, South Africa. He can buy a euro for R16.3700 (South African rand). At the same time, Richard Nolan, living in Paris, can
1.7 Mexico's Cada Seis Aos. Mexico was famous-or infamous-for many years for having two things every six years (cada seis aos in Spanish): a presi- dential election and a currency devaluation. This
1.8 Krisianto's Competing Job Offers. Krisianto, after an intensive post-graduation job search, has received job offers from three multinational companies. Each posi- tion is based in a different
1.9 Comparing Cheap Dates Around the World. Com- parison of prices or costs across different country and currency environments requires translation of the local currency into a single common cur-
1.10 Blundell Biotech. Blundell Biotech is a U.S.-based biotechnology company with operations and earn- ings in a number of foreign countries. The company's profits by subsidiary, in local currency
1.11 Peng Plasma Pricing. Peng Plasma is a privately held Chinese business. It specializes in the manufacture of plasma cutting torches. Over the past eight years, it has held the Chinese renminbi
1.12 Andreas Delon's Compensation. Andreas Delon is a French citizen who has been offered the position of CEO of LakePharma, a large French pharmaceuticals firm. LakePharma produces high-quality
1.13 Euro Virtual's Consolidated Earnings. Euro Vir- tual pays different tax rates for each of its country operations. a. What are its earnings per share in euros after deducting taxes? b. What is
1.14 Euro Virtual's EPS Sensitivity to Exchange Rates (A). On January 15, 2015 the Swiss National Bank (SNB) decided to unpeg the franc, which was fixed at CHF1.20/ since 2011. Suppose the SNB was to
1.15 Euro Virtual's EPS Sensitivity to Exchange Rates (B). Assume a major weather crisis hits Switzerland, reducing its agricultural and food industries and sub- sequently leading to a macroeconomic
1.16 Euro Virtual's EPS and Euro Appreciation/Depre- ciation. Since its introduction in 2003, the euro has been fluctuating against major global currencies. a. What is the impact of 15% appreciation
1.17 Euro Virtual's Global Taxation and Effective Tax Rate. All MNEs attempt to minimize their global tax liabilities. Return to the original set of baseline assumptions and answer the following
1.1 Global Financial Integrity. The field of international finance has always been one where the best and worst of economic behaviors may flourish. Explore the website of Global Financial Integrity,
1.2 International Capital Flows: Public and Private. Major multinational organizations attempt to track the relative movements and magnitudes of global capital investment. Using the following web
1.3 External Debt. The World Bank regularly com- piles and analyzes the external debt of all countries globally. As part of its annual publication on World Development Indicators (WDI), it provides
1.4 World Economic Outlook. The International Mone- tary Fund (IMF) regularly publishes its assessment of the prospects for the world economy. Choose a coun- try of interest and use the IMF's current
1.5 Financial Times Currency Global Macromaps. The Financial Times provides a very helpful real time global map of currency values and movements online. Use it to track the movements of currency.
List the MNC’s key stakeholders and describe their stake in the firm.
What is country risk? Describe several types of country risk.
What opportunities might MNCs enjoy that are not available locally?
What are the characteristics of a perfect financial market?
Describe the International Monetary Fund’s balance-of-payments accounting system.
What factors contribute to currency crises in countries that try to peg their exchange rates at artificially high levels?
Define liquidity.
What is the Eurocurrency market and what is its function?
How do Eurocurrency markets differ from internal credit markets?
What is the London Interbank Offer Rate (LIBOR)?
What are the Basel Accords? How have they affected commercial banks?
What is the difference between spot and forward currency markets?
Citigroup quotes Danish kroner as “DKK5.62/$ Bid and DKK5.87/$ Ask.”a. Which currency is Citigroup buying at the DKK5.62∕$ bid rate, and which currency is Citigroup selling at the DKK5.87∕$
You want to buy Swedish krona (SKr). Your bank quotes “SKr7.5050∕$ Bid and SKr7.5150∕$ Ask.” What would you pay in dollars if you bought SKr10,000,000 at the current spot rate?
S0 C$∕$ is quoted as “C$1.2340∕$ Bid and C$1.2350∕$ Ask.” The six-month forward rate F1 C$∕$ is quoted as “C$1.2382∕$ Bid and C$1.2397∕$ Ask.” Assume you reside in the United
Today’s spot rate is S0 $∕¥ = $0.009057355∕¥. The 90-day forward rate is F1 $∕¥ = $0.008772945∕¥.a. Calculate the forward premium on Japanese yen in basis points and as a percentage
In 1984, the number of German marks required to buy one U.S. dollar was 1.80. In 1987, the U.S. dollar was worth 2.00 marks. In 1992, the dollar was worth 1.50 marks. In 1997, the dollar was again
Describe locational, triangular, and covered interest arbitrage.
What does the international Fisher relation say about interest rate and inflation differentials?
What are real changes in exchange rates?
Are real exchange rates in equilibrium at all times?
Describe the behavior of real exchange rates.
Calculate the following cross exchange rates: a. If exchange rates are S¥∕$ = ¥200∕$ and S$∕SFr = $0.50∕SFr, what is the S¥∕SFr exchange rate?b. The dollar is trading at S¥∕$ =
As a percentage of an arbitrary starting amount, about how large would transaction costs have to be to make triangular arbitrage between the exchange rates SSFr∕$ = SFr1.7223∕$, S$∕¥ =
The Mexican peso is quoted in direct terms at “¥28.74/MXN bid and ¥28.77/MXN ask” in Tokyo. The yen is quoted in direct terms in Mexico City at “MXN0.0341600/¥ bid and MXN0.03420/¥
Industrial Bank of China is earning a nominal yuan return of 7.1 percent on a commercial loan. Expected inflation in CNY is 5 percent. What is the expected real return in yuan? (Be precise.)
A foreign exchange dealer in Tokyo provides the following quotes for spot exchange and 3-month forward exchange between the Malaysian ringgit (MR) and the U.S. dollar. a. In New York, 3-month U.S.
You can trade at the following prices: Is covered interest arbitrage worthwhile? If so, explain the steps and compute the profit based on an initial (time t = 0) transaction of $1 million. Calculate
Currency exchange rates and Eurocurrency interest rates are as follows: In what direction will covered interest arbitrage force the quoted rates to change? Explain the steps and compute the profit
Suppose that at time zero the spot rate equals the 90-day forward rate at S0 $∕S$ = F90 $∕S$ = $0.65∕S$. Assume that the spot rate increases by $0.0002/S$ each day over the ensuing 90 days. You
On September 11, a U.S.-based MNC with a customer in Singapore expects to receive S$3 million. The current spot exchange rate is $0.5950∕S$. The transfer will occur on December 10. The current S$
Snow White Manufacturing makes snowmobiles, some of which it sells to Japan for recreation in the wilderness of the northern islands. Snow White is expecting a payment of ¥9 million in six
Suppose Cotton Bolls does business with companies in Israel and Singapore. Cotton Bolls expects to pay 500,000 new Israeli shekels (ILS) and receive 125,000 Singapore dollars on the Friday before the
What are the differences between exchange-traded and over-the-counter currency options?
In what sense is a currency call option also a currency put option?
What are the six determinants of a currency option value?
Construct an option position (i.e., some combination of calls and/or puts) with the same risk profile (ΔCall$∕A$ versus ΔS$∕A$) as a forward contract to buy A$ at a forward price of F1 $∕A$ =
Suppose you believe that the market has underestimated the volatility of the yen-per-dollar exchange rate. You are not sure whether the dollar will rise or fall in value, only that it is likely to
Suppose the yen value of a dollar is ¥100/$ and that this exchange rate has an equal probability of moving to either ¥90.484∕$ or ¥110.517/$ in one period. To what continuously compounded rates
Suppose the spot rate is ¥105/$ and there is an equal chance that it will fall to ¥70.38∕$ or rise to ¥156.64∕$. To what continuously compounded rates of return do these changes correspond?
How are swaps related to forward contracts?
Little Prince (LP) has 100 million Brazilian reals (BRL) of 2-year fixed rate debt with a bond equivalent yield of 8.25 percent compounded semiannually. LP prefers floating rate BRL debt, and the
A swap bank quotes the following pricing schedule for a Polish zloty coupon (interest rate) swap. This schedule assumes nonamortizing debt and semiannual rates (sa). Quotes are against 6-month LIBOR
Consider the following swap pricing schedule for currency coupon swaps of yen and pounds. Deduct 5 bps if the bank is paying a fixed rate. Add 5 bps if the bank is receiving a fixed rate. All quotes
As VP Finance (Europe) at GE Capital, you manage GE’s European exposures to currency risk. GE’s light bulb plant in Poland generates Polish zloty (Z) after-tax operating cash inflows of Z10
Why use a freight shipper?
What is discounting, and how is it used in international trade?

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