Micro questions.

1. Suppose that foreign activity is conducted through a wholly owned sub- sidiary. Which assumptions are needed to achieve both Capital Import and Capital Export Neutrality? (a) The home and host corporate tax rates are the same. (b) There is no withholding tax on dividends. (c) The tax basis is computed in exactly the same way in both countries. (d) There is full payout. (e) There are no interest payments, no license payments, no lease payments, and no management fees between wos and parent. (f) A credit system applies to nondividend remittances from wos to parent.3. Explain, using a numerical example of your own, how differences between the host- and home-country rules for the allocation of overhead can impair the neutrality of a credit system or an exclusion system.4. Suppose that the world beta for a German stock (in euro) equals 1.5, and its exposures to the dollar, the yen, and the pound are 0.3, 0.2, and 0.1, respectively. (a) What is the best replicating portfolio if you can invest in a world-market index fund, as well as in dollars, yens, pounds, and euros? (b) What additional information is needed to identify the cost of capital?1. Suppose that you have the following data: E(Fj - r) (co )variance risks 0.03 var(fi) = 0.04 cov(F1, 72) = 0.02 0.04 cov (72, F1) = 0.04 var(72) = 0.06 Asset 0 is the (domestic) risk-free asset, and asset weights in a portfolio are denoted as x,, where j= 0...., 2. Which of the following portfolios is efficient, and if the portfolio is efficient, what is the investor's degree of risk aversion? (a) xo = 0, x1 = 0.4, x2 = 0.6 (b) xo = 0, x1 =0.6, x2 = 0.4 (c) x0 = 0, x1 = 0.5, x2 = 0.5 (d) xo = 0.2, x1 = 0.4, x2 = 0.4 (e) xo = 0.5, x1 = 0.25, x2 = 0.25 (f) xo = -1, x1 = 1, x2 = 1 (g) xo = 1, x1 =0, 12 =0 (h) xo = 2, x1 =-0.5, x2 = -0.52. Suppose that the capital markets of the following three countries are well integrated: North America (with the dollar), Europe (with the EUR), and Japan (with the yen). Suppose that you choose the yen as the home currency.3. Suppose that your assistant has run a market-model regression for a company that produces sophisticated drilling machines, and finds the following results (t-statistic in parentheses):1. The American firm, American African Concepts, has a one-year EUR A/P totaling EUR 100,000 and a one-year Senegalese A/R totaling CFA 120,000,000. The CFA/EUR exchange rate is fixed at 655.957. (a) Can AAC offset its EUR A/P with its cm A/R? (b) If so, how much exposure remains?3. For the two-period call example in Section ??: (a) Show the tree of European call values if X = 90. (b) Compare this with the call's intrinsic values at each node. (c) Check whether there is a chance of early exercise if the option were American