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introduction to corporate finance

Questions and Answers of Introduction To Corporate Finance

5. What is a functional currency? How does its choice determine applicable translation rules under FASB Statement No. 52?
4. Compare the three principal translation methods: Where are resulting gains and losses reported?
3. Spell out specific conditions when translation exposure hedging is warranted.
2. Is hedging translation exposure warranted when financial markets are efficient?
1. What is translation exposure? How does it differ from transaction exposure?
Q: Assume that the exchange rate at the end of the quarter is 1.21. Explain the composition of the net hedging cost.
Q: Assume that Marianne S.A.’s short-term debt is in fact a loan from its parent and that it is denominated in dollars. How would the net euro translation exposure change?
■ What the true cash flow cost of hedging is
■ How to hedge translation exposure through borrowing in the exposed currency
■ How to hedge translation exposure with forward and currency options
■ When hedging translation exposure is warranted
■ How translation exposure is measured under alternative methods
■ What translation exposure is and when it should be hedged
6. What is your advice to Mr. Jain as the last month window is approaching? Refer to Case Exhibits 16.4 and 16.5 to answer question
5. What would be the outcome at the expiration of the swap? Formulate alternative exchange scenarios before quantifying the costs or benefits of the currency swap as a possible hedge. Refer to Case
4. What is the role played by currency options attached to the currency swap? Is TT Textiles purchasing or writing those options? Refer to Case Exhibits 16.4 and 16.5 to answer question
3. What makes the currency swap an attractive solution for TT Textiles? Would you characterize it as a hedge? Refer to Case Exhibits 16.4 and 16.5 to answer question
2. How could TT Textiles protect itself against currency risk? Sketch the different options available, quantify them, and compare them graphically. Refer to Case Exhibits 16.4 and 16.5 to answer
1. What is the nature of TT Textiles’ exposure to foreign exchange risk? Refer to Case Exhibits 16.4 and 16.5 to answer question
15. Merck (U.S.) acquires Banyu (advanced). On August 3, 1983, Merck, the giant U.S.-based pharmaceutical company, reached an agreement with Banyu for the friendly acquisition of 50 percent of
14. Boeing finances the sale of 20 Boeing jets to Lufthansa (C-advanced). Boeing is seeking short-term financing for its export sales to Germany. The Overseas Private Investment Corporation (OPIC)
13. Lufthansa hedges the purchase of 20 Boeing jets (B-advanced). Heinz Ruhnan could have considered the use of currency options.a. What would be the advantage of using a currency option to hedge
12. Lufthansa hedges the purchase of 20 Boeing jets (A-advanced). In January 1985, Lufthansa German Airlines purchased 20 Boeing 737 long-distance aircraft for US$500 million payable to Boeing
11. Currency and commodity price risk (intermediate). Metallgesellschaft (MG), a leading German metal processor, has scheduled the delivery of 20,000 metric tons of copper for August 10, 2013, to
10. Hedging helicopter exports with collars (intermediate). The European defense contractor Eurocopter exports 25 single-engine light helicopters known as Ecureuil (squirrel) to the Japanese Coast
9. Zanussi exports financing (intermediate). The Italian manufacturer of household appliances Zanussi is exporting dishwashers to Canada and extending 180 days credit to its Canadian wholesaler. The
8. Moulinex exports financing (intermediate). On February 15, 2013, Moulinex, a French manufacturer of kitchen utensils, concluded a major exports contract with British retailer Tesco. It expects
7. Dinky Toys’ cross-border acquisition (intermediate). Dinky Toys, Inc. (DTI)of Pennsylvania has just purchased a Thai company that manufactures plastic beams and sockets for children’s
6. John Deere’s Chinese acquisition (intermediate). The U.S. farming equipment giant just won approval from the Chinese authorities for the acquisition of Shen-Zhen Excavators Ltd. – a
5. Currency risk in the travel industry (intermediate). Ulysses Travel Ltd (UTL) is a Boston-based travel operator that specializes in tour and holiday packages with destinations in Spain, Italy, and
4. Sony’s royalties payment (beginner). The U.S. sales subsidiary of the Japanese consumer electronics giant Sony Inc. is committed to paying a fixed lump sum of money (royalties) set at 2.5
3. Bombardier’s exports receivable (B-beginner). Royal Bank of Canada had just revised its forecast, saying that the CAD would further rise to CAD 1 = US$1.08 before declining below parity by the
2. Bombardier’s exports receivable (A-beginner). Canada-based defense contractor Bombardier signed a sales contract for the delivery by the end of 2008 of five Dash 8 twin-engine turboprops to
1. Electrolux transaction exposure (beginner). The Swedish manufacturer of home appliances exports €175 million of vacuum cleaners every month to Carrefour, the French retailer. Payment is due at
10. What is different about hedging contingent transaction exposures? What are the most appropriate instruments and techniques for hedging transaction exposures?
9. Why do firms generally hedge less than their full exposure? What does it say about their attitude toward risk?
8. What is different about hedging long-term transaction exposures?
7. Why should firms consider financing international trade in a third currency that is neither the exporter’s nor the importer’s currency? Show how financing and hedging can be effectively
6. Compare the pros and cons of using forwards and currency options versus forward protection agreements for hedging transaction exposures.
5. What is the difference between hedging with forward contracts and with money market hedges? When would you expect their respective costs to be somewhat different?
4. When is the establishment of a reinvoicing center warranted?
3. What are the benefits of netting transaction exposures?
2. Why is hedging transaction exposure generally warranted?
1. What is transaction exposure to foreign exchange risk?
Q: Referring to the case of Sun’s exports to France, what hedging policy should Sun favor if it were very bullish on the euro (expected the euro to appreciate)?
Q: Assume that the forward rate on June 30, 2013, is F(365) = 1.30. How much would Sun receive from its €10,000,000 exports receivable? What is the annualized percentage cost of hedging?
Q: Otis-Netherlands also independently sells suspension cable to LMEricsson, the Swedish multinational corporation. The shipment is worth SEK 24 million to be paid in 90 days. How would this
■ Why the cost of hedging will generally warrant only partial exposure rather than total risk elimination, and how to determine this optimal hedge ratio
■ How to use currency options to manage uncertain transaction exposure, as is often the case in international bidding contests or in cross-border mergers and acquisitions
■ How international trade transactions can be financed and insulated from exchange rate risk
■ How to use money market hedges and currency swaps to manage long-term transaction exposures
■ How to use currency forwards, futures, and options to manage short-term transaction exposures
■ What transaction exposures are and how to measure and consolidate them
3. If you were to advise the Mexican government on how to compare bids denominated in different currencies, what would your advice be? The submission of a bid to the Mexican government’s agency in
2. Can Euclides match the Swedish bid without changing its dollar price? How? The submission of a bid to the Mexican government’s agency in charge of the rural telephony project had been most
1. In view of the U.S. dollar–Swedish krone exchange rate, how can you explain the discrepancy between the U.S. bid and the Swedish bid? The submission of a bid to the Mexican government’s agency
7. Forecasting Grexit (advanced). Consider the case of Greece in the spring of 2010;its national currency, the drachma, was abolished when it joined the eurozone and it officially adopted the euro as
6. Forecasting a pegged exchange rate (intermediate). You are the chief investment strategist for the Tiger Emerging Market Fund (with access to the websites www.oanda.com and www.imf.org), which has
5. Forecasting the Indian rupee (intermediate). As the Mumbai-based currency analyst for Infosys, you have been approached by 20/20, a professional currency forecasting firm that claims to have
4. Forecasting the Brazilian real (B-intermediate). The chief economist of the Lusitania country fund believes that the firm will be better served in the long term by using a composite forecasting
3. Forecasting the Brazilian real (A-intermediate). As the chief economist of the Lusitania country fund with extensive holdings in Brazil, you have been approached by Third Eye, a professional
2. Forecasting the Thai baht (beginner). French distiller Pernod-Ricard is exporting to Thailand and is concerned about the euro value of its Thai baht–denominated sales revenue. It considers two
1. Long-term currency forecast (beginner). South Korean treasury bonds maturing in seven years currently trade at 91 percent and pay an annual coupon of 7.5 percent while similar U.S. Treasuries
10. What are composite forecasts?
2. What are market-based forecasts?
1. What are exchange rate forecasts used for?
Q: Explain why the first forecast at S(t)*I = 1.48 is more accurate but not useful for the hedger/speculator as compared to the second forecast of S(t)*II = 1.58.
■ What the key steps are in forecasting pegged yet adjustable exchange rates(Appendix 15A)
■ When to use econometric versus technical analysis forecasting models
■ How to measure the accuracy versus the correctness of various exchange rate forecasting models
■ What various methods are used in model-based exchange rate forecasting
■ Under what conditions forward exchange rates are reliable predictors of future spot exchange rates
■ Why evidence of foreign exchange market efficiency may invalidate model-based forecasts
5. What is the relationship between hedging and value creation? Christoph Schmid was sitting in his home office finishing reading a report on biofuels issued by the European Commission. He had found
4. What are the different hedging options available to Bio-Oils? Christoph Schmid was sitting in his home office finishing reading a report on biofuels issued by the European Commission. He had found
3. How do you interpret the correlation matrix between fossil fuels and vegetable oils? What are the implications about the selection of vegetable oil for this project? Christoph Schmid was sitting
2. What is the nature of risk that faces Bio-Oils? Christoph Schmid was sitting in his home office finishing reading a report on biofuels issued by the European Commission. He had found that report
1. Should Christoph Schmid accept the offer? Christoph Schmid was sitting in his home office finishing reading a report on biofuels issued by the European Commission. He had found that report surfing
4. Why is hedging value-creating?
3. What is the rationale for hedging currency risk?
1. What is foreign exchange risk?
5. Would you advise Mr. Brill to use a letter of credit for future WPI exports to Venezuela? Detail the mechanics of such an approach. What would be its cost? In May 2003, the export manager and
4. Would a further devaluation of the Bolivar help WPI’s competitive position in Venezuela? In May 2003, the export manager and deputy international treasurer for Warrick Pharmaceuticals Inc.
3. What is your outlook on the Venezuela foreign exchange situation? In May 2003, the export manager and deputy international treasurer for Warrick Pharmaceuticals Inc. (WPI), Mr. Albert Brill, was
2. Is WPI exposed to any of the above risks in its dealing with Venezuela? How could those risks be mitigated? In May 2003, the export manager and deputy international treasurer for Warrick
1. Define risk or risks in export transactions. Is WPI’s policy of shipping on open account warranted? In May 2003, the export manager and deputy international treasurer for Warrick Pharmaceuticals
8. Foreign Trade Financing with Commercial Banks versus Exim Bank (intermediate).Access the website of a major international bank such as Citibank (www.citibank.com) or Bank of America
7. Exim Bank (beginner). Log in to www.exim.gov and review the different programs that the U.S. Exim Bank makes available to U.S. exporters. How do they compare to similar programs the French COFACE
6. Pemex’s securitization of exports receivables (beginner). By issuing US$500 million of BBB-rated future exports-backed securities through an offshore special purpose vehicle (SPV) domiciled in
5. Bollywood Studio of India (BSI) exports to Cambodia (B-intermediate). BSI has been approached by a factor that offers to purchase the AngkorWat Entertainment Inc. exports receivable at a 15
4. Bollywood Studio of India (BSI) exports to Cambodia (A-beginner). BSI has sold to Cambodia’s Angkor Wat Entertainment Inc. (CAWE) INR 10 million licensing rights to 10 of its recent films.
3. Cisco Systems’ bank acceptances (intermediate). Cisco Systems has sold to Dhaka’s municipal water and sewer company an integrated computer system to modernize its citywide billing procedure.
2. Cisco Systems’ trade acceptances (B-intermediate). Following a three-month-long crippling strike, France-Telecom was downgraded to BBB.a. Should Cisco Systems reconsider its open account exports
1. Cisco Systems’ trade acceptances (A-beginner). Cisco Systems (U.S.) has sold to France-Telecom Internet servers for the amount of €10 million to be paid in three months. The transaction is
13. Discuss the principal forms of government assistance provided by governments to their exporters.
12. Discuss the function performed by the bill of lading, commercial invoice, insurance certificate, and consular invoice.
11. Explain why governments subsidize national exports.
10. What is international leasing?
9. What is the difference between a bank loan collateralized with A/Rs and factoring?
8. Identify the key documents accompanying an export transaction. Which specific functions do they perform?

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