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Week 6 Homework Content

• Week6HomeworkChapter101.TransactionversusEconomicExposure.Compareandcontrasttransactionexposureandeconomicexposure.WhywouldanMNCconsiderexaminingonlyitsnetcashflowsineachcurrencywhenassessingitstransactionexposure?
• 5.CurrencyEffectsonCashFlows.Howshouldappreciationofafirmshomecurrencygenerallyaffectitscashinflows?Howshoulddepreciationofafirmshomecurrencygenerallyaffectitscashoutflows?
• 16.MeasuringChangesinEconomicExposure.ToyotaMotorCorp.measuresthesensitivityofitsexportstotheyenexchangerate(relativetotheU.S.dollar).Explainhowregressionanalysiscouldbeusedforsuchatask.IdentifytheexpectedsignoftheregressioncoefficientifToyotaprimarilyexportstotheUnitedStates.IfToyotaestablishedplantsintheUnitedStates,howmighttheregressioncoefficientontheexchangeratevariablechange?
• 21.TransactionExposure.VegasCorp.isaU.S.firmthatexportsmostofitsproductstoCanada.IthistoricallyinvoiceditsproductsinCanadiandollarstoaccommodatetheimporters.However,itwasadverselyaffectedwhentheCanadiandollarweakenedagainsttheU.S.dollar.SinceVegasdidnothedge,itsCanadiandollarreceivableswereconvertedintoarelativelysmallamountofU.S.dollars.Afterafewmoreyearsofcontinualconcernaboutpossibleexchangeratemovements,VegascalleditscustomersandrequestedthattheypayforfutureorderswithU.S.dollarsinsteadofCanadiandollars.Atthistime,theCanadiandollarwasvaluedat$.81.Thecustomersdecidedtooblige,sincethenumberofCanadiandollarstobeconvertedintoU.S.dollarswhenimportingthegoodsfromVegaswasstillslightlysmallerthanthenumberofCanadiandollarsthatwouldbeneededtobuytheproductfromaCanadianmanufacturer.Basedonthissituation,hastransactionexposurechangedforVegasCorp.?Haseconomicexposurechanged?Explain.
• Ch.116.HedgingwithForwardContracts.ExplainhowaU.S.corporationcouldhedgenetreceivablesinMalaysianringgitwithaforwardcontract.ExplainhowaU.S.corporationcouldhedgepayablesinCanadiandollarswithaforwardcontract.
• 25.PotentialEffectsiftheUnitedKingdomAdoptedtheEuro.TheU.K.stillhasitsowncurrency,thepound.Thepoundsinterestratehashistoricallybeenhigherthantheeurosinterestrate.TheU.K.hasconsideredadoptingtheeuroasitscurrency.Therehavebeenmanyargumentsaboutwhetheritshoulddoso.UseyourknowledgeandintuitiontodiscussthelikelyeffectsiftheUnitedKingdomadoptstheeuro.Foreachofthe10statementsbelow,inserteitherINCREASEorDECREASEandcompletethestatementbyaddingaclearshortexplanation(perhapsonetothreesentences)ofwhytheU.K.sadoptionoftheeurowouldhavethateffect.Tohelpyounarrowyourfocus,followtheseguidelines.Assumethatthepoundismorevolatilethantheeuro.Donotbaseyouransweronwhetherthepoundwouldhavebeenstrongerthantheeurointhefuture.Also,donotbaseyouransweronanunusualchangeineconomicgrowthintheU.K.orintheeurozoneiftheeuroisadopted.
• Chapter12
• 5.ExchangeRateEffectsonEarnings.ExplainhowaU.S.basedMNC'sconsolidatedearningsareaffectedwhenforeigncurrenciesdepreciate.
• 10.ComparingDegreesofTranslationExposure.NelsonCo.isaU.S.firmwithannualexportsalestoSingaporeofaboutS$800million.ItsmaincompetitorisMezCo.,alsobasedintheUnitedStates,withasubsidiaryinSingaporethatgeneratesaboutS$800millioninannualsales.Anyearningsgeneratedbythesubsidiaryarereinvestedtosupportitsoperations.Basedontheinformationprovided,whichfirmissubjecttoahigherdegreeoftranslationexposure?Explain.
• 12.AssessingEconomicExposure.AlaskaInc.planstocreateandfinanceasubsidiaryinMexicothatproducescomputercomponentsatalowcostandexportsthemtoothercountries.Ithasnootherinternationalbusiness.ThesubsidiarywillproducecomputersandexportthemtoCaribbeanislandsandwillinvoicetheproductsinU.S.dollars.Thevaluesofthecurrenciesintheislandsareexpectedtoremainverystableagainstthedollar.Thesubsidiarywillpaywages,rent,andotheroperatingcostsinMexicanpesos.Thesubsidiarywillremitearningsmonthlytotheparent.a.WouldAlaskascashflowsbefavorablyorunfavorablyaffectediftheMexicanpesodepreciatesovertime?b.AssumethatAlaskaconsiderspartialfinancingofthissubsidiarywithpesoloansfromMexicanbanksinsteadofprovidingallthefinancingwithitsownfunds.Wouldthisalternativeformoffinancingincrease,decrease,orhavenoeffectonthedegreetowhichAlaskaisexposedtoexchangeratemovementsofthepeso?
• 13.HedgingContinualExposure.Considerthiscommonreal-worlddilemmabymanyfirmsthatrelyonexporting.ClearlakeInc.producesitsproductsinitsfactoryinTexas,andexportsmostoftheproductstoMexicoeachmonth.Theexportsaredenominatedinpesos.ClearlakeInc.recognizesthathedgingonamonthlybasisdoesnotreallyprotectagainstlong-termmovementsinexchangerates.Italsorecognizesthatitcouldeliminateitstransactionexposurebydenominatingtheexportsindollars,butthatitstillwouldhaveeconomicexposure(becauseMexicanconsumerswouldreducedemandifthepesoweakened).ClearlakeInc.doesnotknowhowmanypesositwillreceiveinthefuture,soitwouldhavedifficultyevenifalong-termhedgingmethodwereavailable.HowcanClearlakerealisticallydealwiththisdilemmaandreduceitsexposureoverthelong-term?[Thereisnoperfectsolution,butintherealworld,thererarelyareperfectsolutions.]

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