1. Cash Flows: Assume that Live Co. a Canadian company has expected cash inflows of CA$200,000 from domestic operations, AUD200,000 from Australian operations, and 150,000 Euros from Italian operations during the year 2018. Based on Scotiabank Foreign Exchange Forecasts: http://www.gbm.scotiabank.com/English/bns_econ/fxout.pdf

at the end of the year 2018:

a. What would it cost Live Co. to buy one Australian dollar on May 22, 2018? 1 Mark

b. At the end of the year 2018 what is it expected to cost Live Co. to buy one Euro? 1 Mark

c. When all currencies are converted, what is the total expected Canadian dollar cash inflows to Live Co. at the end of the year 2018? 3 Marks

d. If the Australian dollar and the Euro are worth 10% less than forecasted by Scotiabank at the end of 2018 what will be the actual CA dollar cash flows of Live Co? 3 Marks

e. How much would Live Co. lose due to such a variance in the expected value of these currencies? 2 Mark

10 Marks

2. Valuation of Dollar General's International Business. In addition to all of its stores in the U.S., Let's assume Dollar General, a retailer has 26 stores in Argentina, 302 stores in Brazil, 289 stores in Canada, 73 stores in China, 889 stores in Mexico, and 335 stores in the U.K. Consider the value of Dollar General as being composed of two parts, a U.S. part (due to business in the U.S.) and a non-U.S. part (due to business in other countries).

a) What are the 3 main elements used in determining the value of an MNC as per the model outlined on pages 14 to 20 of the textbook? Explain in detail using the 3 elements of the valuation model how you would step by step determine the net present value (in US dollars) of the non-U.S. part of the business. 10 Marks

b) List the name of each currency used in each country identified in this question about Dollar General.

How much does it cost Dollar General based on the latest spot price to purchase with the US Dollars exactly one unit of each currency used in each country listed in the question above? 6 Marks

Use info at: http://www.gbm.scotiabank.com/English/bns_econ/fxout.pdf

And, other sources if necessary

i. In the case of each currency state whether you believe the foreign currency will appreciate or depreciate relative to the US $ over the next 12 months. Give one reason why? 6 Marks

ii. What is the cost to purchase one share of Dollar General's stock in U.S. dollars? 2 Marks

iii. What is the cost to purchase one share of Dollar General's stock in Canadian dollars?

2 Marks

iv. Around the world interest rates are generally low. If over the next 12 months interest rates increase by 2 or 3% points in all markets around the world how will this change likely affect the value of the Dollar General stock traded on the on the New York Stock Exchange? Using the three elements in the MNC valuation formula, plus the behavior of consumers, and the behavior of investors to explain your answer. 6 Marks

v. Which exchange rate should Dollar General be most concerned about? Pick just one! State reasons why? 3 Marks

35 Marks

3. International Flow of Funds

a) What is the Balance of Payment? 2 Marks

b) What is the Balance of Trade? What causes a country to have a Balance of Trade deficit? Explain. 2 Marks

c) What are the components in the current account? If a country's home currency weakens, and this country is a major importer of merchandise, what will be the impact on the current account? Explain. 4 Marks

d) One of South Korea's primary competitors in exports is Japan, which produces and exports many of the same types of products to the same countries. When South Korea's export growth stalled, some South Korean firms suggested that South Korea's primary export problem was the weakness in the Japanese yen. Explain how would you interpret this statement? 5 Marks

13 Marks

4. MNC Cash Flows and Exchange Rate Risk. Asheville Co. is Canadian and has a subsidiary in Mexico that develops software for its parent. It rents a large facility in Mexico and hires many people in Mexico to work in the facility. Ashville Co. All operations are presently funded by Asheville's parent in Canada. All the software is sold to U.S. firms by Asheville's parent and invoiced in Canadian dollars.

a) If the Mexican peso and the U.S. dollar both appreciate against the Canadian dollar, does this have a favorable effect, unfavorable effect, or no effect on Asheville's value? Explain.

4 Marks

b) If Ashville needs to borrow peso from one month to another to meet payroll expenses until it converts some Canadian dollars to pesos, which international financial market is it likely to use? 2 Marks

c) In future, Asheville Co. plans to borrow funds which it will repay over 25 years, to build its own offices in Mexico to support its expansion of sales in the U.S., which international financial market is it likely to use? 2 Marks

d) If the Mexican interest rates are presently lower than U.S. interest rates, and Asheville obtain loans denominated in Mexican pesos in order to support its expansion in the U.S. Will the borrowing of pesos increase, decrease, or have no effect on Ashville Co.'s exposure to the risk that the exchange rate will change? Briefly explain. 4 Marks

12 Marks

5. Exposure of MNCs to Exchange Rate Movements. Arlington Co. expects to receive 10 million euros in each of the next 10 years. It will need to obtain 2 million Mexican pesos in each of the next 10 years. The euro exchange rate is presently valued at $1.08 and is expected to depreciate by 2 percent each year over time. The peso is valued at $0.13 and is expected to depreciate by 2 percent each year over time. State the valuation equation for an MNC. Do you think that the exchange rate movements will have a favorable or unfavorable effect on the MNC? Explain.

4 Marks

6. Bid/ask Spread. RBC's bid price for U.S. dollars is $1.095 and it's ask price is $1.130. What is the bid/ask percentage spread? 2 Marks

7. What is a derivative? Provide a definition. 2 Marks

8. List three types of currency derivatives used in the Forward Market. 3 Marks

9. Forward Contract. The Wolfpack Corporation is a U.S. exporter that invoices its exports to the United Kingdom in British pounds. If it expects that the pound will appreciate against the dollar in the future, should it hedge its exports with a forward contract? Explain.

4 Marks

10. Chapman Co. is a privately owned MNC in the Canada that plans to engage in an initial public offering (IPO) of stock, so that it can finance its international expansion. At the present time, world stock market conditions are very weak but are expected to improve. The Canadian market tends to be weak in periods when the other stock markets around the world are weak. A financial manager of Chapman Co. recommends that it wait until the world stock markets recover before it issues stock. Another manager believes that Chapman Co. could issue its stock now even if the price would be low, since its stock price should rise later once world stock markets recover. If Chapman is really trying to raise equity funds (cash) who is correct? Explain your answer by stating:

a) In stock markets, what is an IPO, and

b) why do companies issue IPO's.

c) What does the Canadian company Shopify Inc do?

5 Marks

11. Foreign Exchange. You live in the USA and just came back from Canada, where the Canadian dollar was worth $0.77. You still have C$300 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for $0.70 U.S. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for $0.07 U.S. per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C$300 for 2,750 pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Yes, or No? Explain. 4 Marks

12. What determines Exchange Rates?

a) What are the very basic laws that determine the value of a currency? 2 Marks

b) In equilibrium, what is the relationship between these two factors? 2 Marks

c) From the Canadian perspective (Canada as home country), draw a diagram showing the equilibrium price and the equilibrium quantity for the Mexican peso. Label the diagram. 4 Marks

13. Inflation Effects on Exchange Rates. Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the:

(a) U.S. demand for Canadian dollars,

(b) supply of Canadian dollars for sale, and

(c) equilibrium value of the Canadian dollar?

Explain in words and with a fully labeled demand and supply diagram of the market for Canadian dollars. 6 Marks

14. Interest Rate Effects on Exchange Rates. Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect the:

(a) U.S. demand for British pounds,

(b) supply of pounds for sale, and

(c) equilibrium value of the pound?

Explain in words and with a fully labeled demand and supply diagram of the market for British pounds. 6 Marks