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principles of finance

Questions and Answers of Principles Of Finance

4. Black River Investments. Jennifer Magnussen, a currency trader for Chicago-based Black River Investments, uses the futures quotes (shown at the bottom of the page) on the British pound to specu-
3. Amber McClain. Amber McClain, the currency speculator we met earlier in the chapter, now sells eight June futures contracts for 500,000 pesos at the closing price quoted in Exhibit 8.1.a. What is
2. Paulo's Puts. Paulo writes a put option on Japanese yen with a strike price of $0.008000/ (125.00/$) at a premium of 0.0080 cents per yen and with an expi- ration date six month from now. The
8. Buying a European Option. You have the same information as in Question 6, except that the pricing is for a European option. What is different?
7. The Option Cost. What happens to the premium you paid for the option in Question 6 in the event you decide to let the option expire unexercised? What happens to this amount in the event you decide
6. Call Contract Elements. You read that exchange- traded American call options on pounds sterling having a strike price of 1.460 and a maturity of next March are now quoted at 3.67. What does this
5. Puts and Calls. What is the basic difference between a put on British pounds sterling and a call on ster- ling?
3. Futures Terminology. Explain the meaning and probable significance for international business of the following contract specifications:a. Specific-sized contractb. Standard method of stating
2. Trading Location for Futures. Check The Wall Street Journal to find where in the United States foreign exchange future contracts are traded.
1. Options versus Futures. Explain the difference between foreign currency options and futures and when either might be used most appropriately.
8. Suggest regulatory and management reforms that might prevent a future debacle of the type that bankrupted Barings.? Nicholas Leeson was a rogue trader who reduced the value of the venerable Baring
7. Why did the attempt by the Bank of England to organize a bailout for Barings fail? Nicholas Leeson was a rogue trader who reduced the value of the venerable Baring Brothers & Co (BB&Co) Bank from
6. Why was Barings Bank willing to transfer large cash sums to Barings Futures Singapore? Nicholas Leeson was a rogue trader who reduced the value of the venerable Baring Brothers & Co (BB&Co) Bank
5. Why did none of the regulatory authorities in Singapore, Japan, and the United Kingdom discover the true use of the error account? Nicholas Leeson was a rogue trader who reduced the value of the
4. Why did Barings and its auditors not discover that the error account was used by Leeson for unauthorized trading?Nicholas Leeson was a rogue trader who reduced the value of the venerable Baring
3. Why did Nick Leeson establish a bogus error account (88888) when a legitimate account (99002) already existed? Nicholas Leeson was a rogue trader who reduced the value of the venerable Baring
2. What went wrong that caused his strategy to fail? Nicholas Leeson was a rogue trader who reduced the value of the venerable Baring Brothers & Co (BB&Co) Bank from roughly $500 million dollars to
1. What was Nick Leeson's strategy to earn trading profits on derivatives? Nicholas Leeson was a rogue trader who reduced the value of the venerable Baring Brothers & Co (BB&Co) Bank from roughly
2. SEC Edgar Files. In order to analyze an individual firm's operating exposure more carefully, it is neces- sary to have more detailed information available than in the normal annual report. Choose
1. Operating Exposure: Recent Examples. Using the following major periodicals as starting points, find a current example of a firm with a substantial operat- ing exposure problem. To aid in your
10. Risk-Sharing at Harley Davidson. Harley-Davidson (U.S.) reportedly uses risk-sharing agreements with its own foreign subsidiaries and with independent foreign distributors. Because these foreign
9. Dzell Printers, Inc. (B). Assume the same facts as in Dzell Printers (A). DP also believes that if it main- tains the same price in Brazilian reais as a perma- nent policy, volume will increase at
8. Dzell Printers, Inc. (A). Dzell Printers, Inc. (DP) of the United States exports computer printers to Brazil, whose currency, the reais (symbol R$) has been trading at R$3.40/US$. Exports to
7. Trident Europe: Case 5. Trident Europe (see Exhibit 10.3) finds that domestic costs increase in proportion to the drop in value of the euro because of local inflation and a rise in the cost of
6. Trident Europe: Case 4. Trident Europe (see Exhibit 10.3) decides not to change its domestic price of 12.80 per unit within Europe, but to raise its export price (in euros) from 12.80 per unit to
5. Morris Garage, Ltd. Morris Garage, Ltd., of Coventry, England, manufactures British style sports cars, a number of which are exported to New Zealand for payment in pounds sterling. The distrib-
4. Pucini's Risk-Sharing. Pucini Fashionwear, based in New York City, imports leather coats from Boselli Leather Goods, a reliable and longtime supplier, based in Buenos Aires, Argentina. Payment is
3. Newport Lifts (B). Assume the same facts as in Newport Lifts (A). Additionally, financial manage- ment believes that if it maintains the same yuan sales price, volume will increase at 12% per
2. Newport Lifts (A). Newport Lifts (USA) exports heavy crane equipment to several Chinese dock facilities. Sales are currently 10,000 units per year at the yuan equivalent of $24,000 each. The
1. Kona Macadamia Nuts. Kona Macadamia Nuts, based in Hilo, Hawaii, exports Macadamia nuts worldwide. The Japanese market is its biggest export market, with average annual sales invoiced in yen to
10. Subsidiary Borrowing from Parent. Newly estab lished foreign subsidiaries are often financed with debt supplied by the parent, perhaps because a new subsidiary has no financial credit record or
9. Paradox? The possibility of a gain or loss on operat- ing exposure offset by an opposite loss or gain on transaction exposure may appear contradictory. Explain why, when the currency in which a
8. Proactive Policies to Offset Foreign Exchange Exposure. A fine line exists between fully antici- pated exchange rate changes and possible-but-not- assured exchange rate changes. If management
7. Strategic Responses. What strategic responses can a multinational firm make to avoid loss from its oper- ating exposure?
6. Who Owns Whom? The Economist (December 1-7, 2001, p. 4 of "Survey" insert) reported on a French company that had a subsidiary in India. The Indian subsidiary in turn had its own subsidiary in
5. Macroeconomic Uncertainty. What is macro- economic uncertainty and how does it relate to meas- uring operating exposure?
4. Expected Exchange Rate Changes. Why do unex- pected exchange rate changes contribute to operat- ing exposure, but expected exchange rate changes do not?
3. Intracompany Cash Flows. What are the differences between operating cash flows and financial cash flows from parent to subsidiary or vice versa? List several cash flows in both categories and
2. Exposure Type Comparison. From a cash flow measurement perspective, what is the major differ- ence between losses from transaction exposure and from operating exposure?
1. By Any Other Name. Operating exposure has other names. What are they, and what do the words in these names suggest about the nature of operating exposure?
4. What measures would you recommend Toyota Europe take to resolve the continuing operating losses?It was January 2002, and Toyota Motor Europe Manufacturing (TMEM) had a problem. More specifically,
3. If you were Mr. Shuhei, how would you categorize your problems and solutions? What was a short-term and what was a long-term problem?It was January 2002, and Toyota Motor Europe Manufacturing
2. If Britain were to join the European Monetary Union, would the problem be resolved? How likely do you think it is that Britain will join?It was January 2002, and Toyota Motor Europe Manufacturing
1. Why do you think Toyota waited so long to move much of its manufacturing for European sales to Europe? It was January 2002, and Toyota Motor Europe Manufacturing (TMEM) had a problem. More
3. New Zealand Government Policy. The New Zealand government has specific policies and guide- lines for the management of transaction exposure. Visit the following Internet site to follow the
2. 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
1. Foreign Currency 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
17. Solar Turbines. On March 1, Solar Turbines, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12 megawatt compression turbine to Vollendam Dike Company of the Netherlands for 4,000,000,
12. Chronos Time Pieces. Chronos Time Pieces of Boston exports watches to many countries, selling in local currencies to stores and distributors. Chronos prides itself on being financially
5. 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
4. Warner Indonesia. Warner, the U.S.-based multina- tional pharmaceutical company, is evaluating an export sale of its cholesterol reduction drug with a prospective Indonesian distributor. The
1. Siam Cement. Siam Cement, the Bangkok-based cement manufacturer, suffered enormous losses with the coming of the Asian crisis in 1997. The company had been pursuing a very aggressive growth
11. Risk Tolerance. What is risk tolerance? Can it be measured?
10. Natural versus Contractual Hedges. Explain the difference between a natural hedge and a contractual hedge. Give a hypothetical example of each.
9. Cash Balances. Why does the holding of foreign currency cash balances not lead to transaction exposure?
8. Creating Transaction Exposure. Identify and create a hypothetical example for each of the four causes of transaction exposure.
7. Investor Expectations. Proponents of the efficient market hypothesis argue that an MNE should not hedge because investors can hedge themselves if they do not like the foreign exchange risks
6. Cash Flow Variability. Exhibit 9.2 shows two normal distributions about a mean called expected value.a. What is the implication of the areas toward the center of the distributions where the hedged
5. Hedging. What is a hedge?
4. Tax Exposure. What is tax exposure and how does it relate to the triumvirate of transaction, operating, and translation exposure?
3. Translation versus Transaction Exposure. Is there a difference between translation exposure and trans- action exposure? Explain.
2. Exposure Types. Explain the differences among transaction, operating, and translation exposure.
1. Foreign Exchange Exposure. Give a general defini- tion of "foreign exchange exposure" as it relates to the operations of a multinational enterprise.
4. If you were Paul Young, what would you do?It was December 2003, and Paul Young, the financial con- troller of Xian-Janssen Pharmaceutical Ltd (XJP), was preparing for a meeting with the CEO of the
3. What is the relationship between actual spot exchange rate, the budgeted spot exchange rate, the forward rate, and the expectations for the Chinese subsidiary's financial results by the U.S.
2. Johnson & Johnson has roughly 200 foreign subsidiaries worldwide. It has always pursued a highly decentralized organizational structure, in which the individual units are responsible for much of
1. How significant an impact do foreign exchange gains and losses have on corporate performance at XJP? What is your opinion of how they structure and man- age their currency exposures?It was
6. Bloomberg Exchange Rates, Interest Rates, and Global Markets. The magnitude of market data can seem overwhelming on occasion. Use the following Bloomberg markets page to organize your mind and
5. OzForex Weekly Comment. The OzForex Foreign Exchange Services Web site provides a weekly com- mentary on major political and economic factors and events that move current markets. Using their Web
3. Mellon FX Forecast Update. One of the more inter- esting and complete economic and exchange rate forecasting newsletters is the Mellon Financial. Use Mellon's Web site to download the latest
2. Bank of Canada Exchange Rate Statistics. One of the most comprehensive and freely available Internet sites for exchange rate statistics and analy- sis is that maintained by the Bank of Canada. Use
1. Exchange Rate and Interest Rate Six Month Forecasts. Use the following independent source of forecasts for all key international data to view the outlook for the US$/E, /$, and $/ exchange rates.
15. Real Economic Activity and Misery. One of the common general measures of national economic health is sometimes referred to as the "misery index," the sum of the country's inflation rate and
14. Forward Rates. Using the spot rates and three- month market interest rates listed, calculate the three-month forward rates for the following exchange rates:a. Japanese yen/U.S. dollarb. Japanese
13. Implied Real interest Rates. Use the latest govern- ment bond rates and the forecast changes in con- sumer prices to forecast the real interest rates for the following:a. Australian dollarb.
12. International Fisher Forecasts. Using International Fisher, and that the latest government bond rates are the most appropriate interest rates for applying International Fisher, forecast the
10. Current Spot Rates. What are the current spot exchange rates for the following cross-rates?a. Japanese yen/U.S. dollarb. Japanese yen/Australian dollarc. Australian dollar/U.S. dollar
8. Ecuadorian Sucre. The Ecuadorian sucre (S) suf- fered from hyper-inflationary forces throughout 1999. Its value moved from S5,000/$ to $25,000/$. What was the percentage change in its value?
7. Thai Baht. The Thai baht (Bt) was devalued by the Thai government from B125/$ to Bt29/$ on July 2, 1997. What was the percentage devaluation of the baht?
6. Russian Ruble. The Russian ruble (R) traded at R6.25/$ on August 7, 1998. By September 10, 1998, its value had fallen to R20.00/S. What was the percent- age change in its value?
5. Seis Anos. Mexico was famous-or infamous-for many years in having two things every six years (seis anos in Spanish): a presidential election and a cur- rency devaluation. This was the case in
3. Turkish Lira. The Turkish lira (TL) was officially devalued by the Turkish government in February 2001 during a severe political and economic crisis. The Turkish government announced on February
2. Brazilian Reais. The Brazilian reais's (R$) value was R$1.21/$ on Monday January 11, 1999. Its value fell to R$1.43/$ on Friday January 15, 1999. What was the percentage change in its value?
13. Argentina's Crisis of 2001-2002. What were the main causes of Argentina's crisis of 2001-2002? What lessons were learned and what steps were taken to normalize Argentina's economy?
12. Thailand's Crisis of 1997. What were the main causes of Thailand's crisis of 1997? What lessons were learned and what steps were eventually taken to normalize Thailand's economy?
11. Foreign Direct Investment. Swings in foreign direct investment flows into and out of emerging markets contribute to exchange rate volatility. Describe one concrete historical example of this
10. Speculation. The emerging market crises of 1997-2002 were worsened because of rampant spec- ulation. Do speculators cause such crisis or do they simply respond to market signals of weakness? How
9. Infrastructure Strength. Explain why infrastructure strengths have helped to offset the large BOP deficits on current account in the United States.
8. Infrastructure Weakness. Infrastructure weakness was one of the causes of the emerging market crisis in Thailand in 1997. Define infrastructure weakness and explain how it could affect a country's
7. Cross-Rate Consistency in Forecasting. Explain the meaning of "cross-rate consistency" as used by MNEs. How do MNEs use a check of cross-rate con- sistency in practice?
6. Forecasting Services. Numerous exchange rate fore- casting services exist. Trident's CFO Maria Gonzalez is considering whether to subscribe to one of these services at a cost of $20,000 per year.
5. Technical Analysis. Explain how technical analysis can be used to forecast future spot exchange rates. How does technical analysis differ from the BOP and asset market approaches to forecasting?
4. Asset Market Approach to Forecasting. Explain how the asset market approach can be used to fore- cast future spot exchange rates. How does the asset market approach differ from the BOP approach to
3. Fundamental Equilibrium. What is meant by the term "fundamental equilibrium path" for a currency value? What is "noise"?
2. Exchange Rate Dynamics. What is meant by the term "overshooting"? What causes it and how is it corrected?
1. Term Forecasting. What are the major differences between short-term and long-term forecasts for the following:a. A fixed exchange rate?b. A floating exchange rate?
3. If you were Vesi, what would you conclude about the relative accuracy of JPMC's spot rate forecasts?Veselina (Vesi) Dinova was asked by her director at Teknekron (US) to review the exchange rate
2. Forecasting the future is obviously a daunting challenge. All things considered, how well do you think JPMC is doing?Veselina (Vesi) Dinova was asked by her director at Teknekron (US) to review
1. How would you actually go about calculating the statistical accuracy of these forecasts? Would Vesi have been better off using the current spot rate as the fore- cast of the future spot rate, go
4. Financial Times. The Financial Times, based in London-the global center of international finance, has a Web site that possesses a wealth of informa- tion. After going to the home page, go to the

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