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FINANCE 6644: Global Financial Strategy Krishnan Dandapani November 2016 Final Exam Review Questions Instructions A. B. C. D. 1. Please be concise and precise in your answers. Practice answers for closed book, class room setting. Suggested length: minimum 1 page [1.5 spacing]; maximum 2 pages per question. You answer 3 short essays and 2 Problems in two hours, 30 minutes in final exam. Questions Ethical Standards A. Can a multinational firm adopt varying ethical standards [such as with regard to product safety (Pinto), employee benefits (Nike) and \"kickbacks\" to win business] in its global operations? Why or Why Not? Discuss in depth based on the goals of multinational corporations? B. How do corporate governance and financial management differ for US based corporations and global multinational corporations? Explain with specific examples how these differences affect decision making of global finance manager. 2. Financial Institutions Muti-goal Optimization Strategy: a. Identify the major 'objectives' and 'problems' in the management of financial institutions globally. What strategies do institutions use to meet these challenges? b. How do regulators evaluate the financial institutions? c. Why did 'Virtual Banks' fail? What are the prospects for Mobile Banking, and Cloud Banking worldwide in the forthcoming decade? What is the impact of FinTech companies on Banking models? 3. Trade Policy and Offshoring Strategy: a. Why do nations trade with one another? Explain in your own words. (Ricardo's Comparative advantage Chapter 1 Appendix: Economics and Efficiency) b. What is Dynamic Comparative Advantage? [Vernon's Theory] What are the economic and sociological implications of Vernon's theory for the current debate on \"Outsourcing\" and \"Off-shoring?\" c. Globalization and Free Trade agreements (such as NAFTA) have had major impact on employees. What strategies should Governments and Corporations adopt to minimize the impact of off-shoring on its employees in a global economy? 4. Global Pricing Strategy With the emergence of the Internet as a dominant influence in global markets, many anticipated that the \"Law of One Price\" [LOP] for all products would evolve. However that did not materialize. A. What is \"Law of One Price\"? When would that exist globally? B. Identify the major pricing strategies/ methodologies of corporations in pricing products and services. C. Discuss the impact of the Internet on \"Global Pricing Strategies\" of firms with specific reference to 'Internet Pricing' and 'Brick and Mortar pricing'. 5. Theoretical Relationship 2 :Inflation and Interest Rates; Domestic Fisher Effect A. What is the 'Domestic Fisher Effect'? Use your own example to illustrate. B. What is the relationship between Inflation and interest rates ? Illustrate theoretically and empirically with your own example using actual inflation rates for two countries. C. Why is \"Fisher Effect theory\" important for the Global Financial manager? 6. Theoretical Relationship # 3: Inflation and Exchange Rates; Purchasing Power Parity A. Explain the concept of 'purchasing power parity' (PPP) in your own words. B. What are the requisite conditions for PPP to exist? C. What is the relationship between PPP and exchange rates ? 7. Theoretical Relationship # 4: Interest Rates and Exchange Rates; Interest Rate Parity A. Illustrate the concept of 'Interst Rate Parity' [IRP] and 'Covered Interest Arbitrage' with a numerial example of your own. B. What is Currency Carry-Trade? Explain using your own example. What are the popular global carry-trade strategies? What are its inherent risks? C. What are the implications of IRP and Carry-Trade, for Foreign Exchange Market.? 8. Global Financial Crisis: Briefly Explain these crisis in your own words: what are the causes for this, what precipitated it, how it was resolved and what are the lessons learnt from it. A. Debt Crisis: 1. Russia - 1997 2. Iceland - 2008 B. Foreign Exchange Crisis: 1. Mexico (Tequila) Crisis - 1994 2. Switzerland - 2014 D. Banking Crisis: 1. Japan - 1990 2. Greece - 2015 9. Risk Management and Hedging Strategy Using Forwards You have been hired by Amerikan Airlines. Your primary task is to keep the Airline in Business and to ensure that you have to accomplish these two goals. Keep airfares low and at a comparable steady price throughout the year Protect the airline from fluctuating fuel costs With these objectives you need to develop Hedging strategies in the Forward Market. An historical Review reveals that the Airline consumes 1 million barrels of fuel during the planned horizon and the price of fuel has fluctuated in the previous 5 years from $30.00 to $145.00. Fuel cost represents about 35% of the cost of operation and is next in importance to salaries and wages. Identify the steps you would initiate to protect the company from fluctuating fuel costs and achieve your above two objectives. 10. Curency Wars: A. What are Currency wars? B. Why do nations engage in Currency wars? C. Who gains and who loses? D. Explain the economic implications on warring nations using a specific example. 11. Global Markets Investment Strategy: a. Why should investors consider investing overseas? b. What are the potential advantages, and perils? Illustrate using China's stock markets as an example c. What is Market Efficiency? What are the implications of Market Efficiency, for the pricing of securities and investing corporations' money? d. Why is psychology important in global setting? 12. Country Risk Assessment and Global Capital Budegeting Strategy: Your corporation has an opportunity to make a major investment in China of $100 million to develop an offshore manufacturing facility. When this plant is fully developed and becomes operational in two years the corporation can close down its current manufacturing facility in the United States and shift operations to China. At present, the expected annual savings in labor and benefit cost is expected to be $20 million. You are asked to develop a proposal to identify the potential risk of this proposal and 'advantages' and 'problems' of this opportunity. Explain how you would proceed. A. What are the inherent risks in this opportunity? B. What economic data would you need for your analysis? Why (How would you use them)? C. What potential factors that affect exchange rates between China and US ? How would you protect against that risk? D. What other strategies do you recommend before your corporation implements this proposal? 13. European Sovereign Debt Crisis Currently many European Nations, especially the PIGS countries have a soveriegn Debt problem. A. Explain diagnostically (using numbers, chart, and graphs), What are the ultimate causes for the current crisis? B. Explain analytically (using numbers, chart, and graphs), What are the potential implications of this problem for Euro-Currency? C. Explain economically (using numbers, chart, and graphs), what are the problem for European Monetary Integration? D. Identify comprehensively (using numbers, chart, and graphs), the resultant implications of this for USA, from Trade, Investment and Central Banking perspective? 14. Electronic Fraud and Cyber Security: \"An increasingly high percentage of the world population is adopting the Internet and the global financial transactions are increasingly Electronic. Under such a scenario, the greatest threat to global finances is Cyber Security. A breach could have catastrophic consequences\" A. What are the positive aspects of adoption of Electronic Finance globally? B. What are the major challenges due to the increasing use of E-Finance? C. What should Governments, and Financial institutions do to preserve and protect citizens and ensure they are not exploited by vested interests in the cyber world? 15. Foreign Exchange Market: A. How is the Foreign Exchange Rate for a country Determined? B. Is the Foreign Exchange Market Efficient? What are its implications for Finance manager? 16. Currency Swaps: A. What are Currency Swaps? B. What are the different type of Currency Swaps? C. Illustrate using a specific example the advantages and challenges for participants engaged in a Cross Currency Swap. 17. Foreign Exchange Hedging using Foreign Currency Derivatives: Problem Sarah Forbes is the Chief Financial Officer [CFO] of Daytona Manufacturing, a U.S. based manufacturer of gas turbine equipment. She has just concluded negotiations for the sale of a turbine generator to Crown, a British firm for TEN million pounds. This single sale is quite large in relation to Daytona's present business. Daytona has no other current foreign customers, so the currency risk of this sale is of particular concern. The sale is made in March with payment due three months later in June. Sarah Forbes has collected the following financial market information for the analysis of her currency exposure problem: Spot Exchange rate: $1.2640 per British pound. Three month forward rate: $1.2549 per pound Daytona's cost of capital: 12% U.K. three month borrowing interest rate: 10.0% (or 2.5% per quarter) U.K. three month investment interest rate: 8.0% (or 2% per quarter) U.S. three month borrowing interest rate: 8.0% ( or 2.0% per quarter) U.S. three month investment interest rate: 6.0% (or 1.5% per quarter) June put option in the over-the-counter (bank) market for 1,000,000 British pounds; Strike price $1.25 (nearly at-the money) 1.5% premium June put option in the over-the counter (bank) market for 1,000,000 British pounds: Strike price $1.21 (out-of-the money) 1.0% premium Daytona's foreign exchange advisory service forecasts that the spot rate in there months will be $1.26 per British pound. Like many manufacturing firms, Daytona operates on relatively narrow margins. Although Ms. Forbes and Daytona would be very happy if the pound appreciated versus the dollars, concerns center on the possibility that the pound will fall. When Ms. Forbes budgeted this specific contract, she determined that the minimum acceptable margin was at a sale price of $12,000,000. The budget rate, the lowest acceptable dollar per pound exchange rate, was therefore established at $1.20 per British pound. Any exchange rate below would result in Daytona actually losing money on the transaction. Four alternatives are available to Daytona to manage the exposure: A. Remain un-hedged. B. Hedge in the forward market. C. Hedge in the money market. D. Hedge in the options market. What should Daytona do? 18. XYZ Triangular Arbitrage Strategy: - Comprehensive Problem You are the Financial Manager of the Trading Division of XYZ Foreign Exchange Division. Your Asian Division based in Hawaii is providing you the following quotations from Asian Banks. (You may either buy or sell at the stated rates). Singapore Bank: Singapore dollar quote for Korean Won Hong Kong Bank: HK$ quote for Singapore dollars Korean Bank: Korean won quote for Hong Kong dollars Won HK$ Won 644.00/S$ 3.50/S$ 175.00/HK$ Your Latin American Division in Miami is providing you the following quotations from South American banks. (You may either buy or sell at the stated rates). Bank of New York: US dollar quote for Mexican Peso: Bank of Cancun: Sol Quote for Mexican Peso: Bank of Lima: Dollar quotes for Peru's Sol: Peso Sol USD 10.00/1$ 1 / 3 Peso 1.00 / 3 Sol Assume you have an initial wealth of $1,000,000 Hong Kong Dollars in Hong Kong, and $1,000,000 U.S. dollars in U.S.A. A. Is Triangular Arbitrage Possible with Asian Currencies? If so, compute XYZ's profits? B. Is Triangular Arbitrage Possible with Latin American Currencies? If so, compute XYZ's profits? C. As a percentage return on Investment [(Profits/ Investment) x 100], which is a more profitable investment for XYZ, Asian or Latin American currencies? D. If the cost per transaction in Asia is $8,000 HK Dollars per transaction, and in Latin America it is $25,000 US Dollars per transaction which is a more profitable for XYZ after adjusting for transactions costs: Asia or Latin America