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Week 10 Homework Solutions Ch. 19 Questions page 588-589 2. Export Financing a. Why would an exporter provide financing for an importer? b. Is there much risk in this activity? Explain. 4. ExportImport Bank a. What is the role today of the ExportImport Bank of the United States? b. Describe the Direct Loan Program administered by the Export Import Bank 8; Government Programs This chapter described many forms of government insurance and guarantee programs. What motivates a government to establish such programs? 11; Working Capital Guarantee Program Briefly describe the Working Capital Guarantee Program administered by the ExportImport Bank. Ch. 20 p608 Problems # 4. Financing and Exchange Rate Risk How can a U.S. firm finance in euros and not necessarily be exposed to exchange rate risk? 5. ShortTerm Financing Analysis Assume that Davenport, Inc., needs $3 million for a 1year period. Within 1 year, it will generate enough U.S. dollars to pay off the loan. It is considering three options: (1) borrowing U.S. dollars at an interest rate of 6 percent, (2) borrowing Japanese yen at an interest rate of 3 percent, or (3) borrowing Canadian dollars at an interest rate of 4 percent. Davenport expects that the Japanese yen will appreciate by 1 percent over the next year and that the Canadian dollar will appreciate by 3 percent. What is the expected \"effective\" financing rate for each of the three options? Which option appears to be most feasible? Why might Davenport, Inc., not necessarily choose the option reflecting the lowest effective financing rate? 8. BreakEven Financing Providence Co. needs dollars. Assume that the local 1year loan rate is 15 percent, while a 1year loan rate on euros is 7 percent. By how much must the euro appreciate to cause the loan in euros to be more costly than a U.S. dollar loan? 12; BreakEven Financing Lakeland, Inc., is a U.S.based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a 1year loan of 10 million pesos for operating expenses. Since the Mexican interest rate is 70 percent, Lakeland is considering borrowing dollars, which it would convert to pesos to cover the operating expenses. By how much would the dollar have to appreciate against the peso to cause such a strategy to backfire? (The 1year U.S. interest rate is 9 percent.) Ch. 21 p.630 Problems 5; Investing Strategy Tallahassee Co. has $2 million in excess cash that it has invested in Mexico at an annual interest rate of 60 percent. The U.S. interest rate is 9 percent. By how much would the Mexican peso have to depreciate to cause such a strategy to backfire? 10; Effective Yield Repeat question 9, but this time assume that Rollins, Inc., expects the 180day forward rate of the pound to substantially overestimate the spot rate to be realized in 180 days. 14; Interest Rate Parity Dallas Co. has determined that the interest rate on euros is 16 percent while the U.S. interest rate is 11 percent for 1year Treasury bills. The 1year forward rate of the euro has a discount of 7 percent. Does interest rate parity exist? Can Dallas achieve a higher effective yield by using covered interest arbitrage than by investing in U.S. Treasury bills? Explain. 17; Impact of September 11 Palos Co. commonly invests some of its excess dollars in foreign government shortterm securities in order to earn a higher shortterm interest rate on its cash. Describe how the potential return and risk of this strategy may have changed after the September 11, 2001, terrorist attack on the United States