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business
introduction to corporate finance

Questions and Answers of Introduction To Corporate Finance

18. What is an ADR?
17. Why do firms sponsor ADR or GDR programs?
16. What is the difference between “sponsored” and “unsponsored” American depositary receipts programs?
15. How do you explain why firms often list their shares on foreign equity markets?Which equity markets are the primary hosts to foreign listing?
14. Is the inverse of a firm’s P/E ratio a reasonable proxy for its equity cost of capital?
13. Why was Novo’s P/E ratio so much smaller than its key competitors’ P/Es?What were the implications for Novo’s ability to compete in world markets?
12. How can one measure degrees of segmentation across national equity markets?
11. Explain the concept of “mildly segmented” capital markets.
1Q: Can you gauge the reduction in Novo’s cost of equity capital when its P/E ratio climbs from 5 to 16?
1Q: What would be the turnover ratio of an equity market in which every listed stock traded once and only once during the year?
1■ What is the rationale for cross-listing shares in multiple stock markets
1■ What the costs and benefits are of listing and/or raising capital via ADRs and GDRs
1■ What American depositary receipts (ADRs) and global depositary receipts(GDRs) are
1■ Why foreign listings of a firm’s shares may reduce its cost of equity capital
1■ How continuing mild degrees of capital market segmentation warrants foreign equity financing
1.■ What the hallmarks of national equity markets are
5. Why did Thai Airways end up choosing FOIL? Songkran Piyavasti, the CFO of Thai Airways, was planning a round of capital raising to meet the airline’s fleet expansion plans and needed to raise up
4. What is the West Texas Intermediate (WTI) oil price range within which Thai Airways is immunized against oil price risk? What is the cost of the hedge? Songkran Piyavasti, the CFO of Thai Airways,
3. How does FOIL as proposed by Standard Chartered Bank differ from traditional oil price hedges bundled with a loan or a note? Songkran Piyavasti, the CFO of Thai Airways, was planning a round of
2. How could Thai Airways hedge its oil price exposure with traditional derivatives such as oil futures, forwards, options, and swaps? Songkran Piyavasti, the CFO of Thai Airways, was planning a
1. What is the nature of Thai Airways’ exposure to oil price risk? Songkran Piyavasti, the CFO of Thai Airways, was planning a round of capital raising to meet the airline’s fleet expansion plans
7. Corporate Ratings (intermediate). Log in to Standard &Poor’s website to find the credit ratings of Peugeot-Citroen, Volvo, Fiat-Chrysler, and Toyota. When were these ratings last upgraded or
6. Country Ratings (intermediate). Log in to Standard & Poor’s website at www.standardandpoors.com to find the country rating of the Ukraine, Vietnam, Nigeria, and Argentina. Are the ratings
5. Mapping Argentina’s capital market segmentation (intermediate). The Argentine peso (ARS) is officially trading at ARS 4.65 = US$1, with increasing volume of forex transactions channeled through
4. Positioning Venezuela on the capital market emergence continuum (web exerciseintermediate).By accessing the IMF monthly Financial Statistics and other pertinent websites:a. Compute for 2012 the
3. The cost of financial intermediation (intermediate). Weyerhaeuser, the lumber multinational company, is comparing the cost of alternative methods for financing its exports trade. US$500 million is
2. Comparing financing options (beginner). Maytag Limited, the manufacturer of white goods appliances, estimates that because of the seasonal nature of its business, it will require an additional
1. Commercial paper (beginner). Toro, theWisconsin-based AA-rated manufacturer of snowblowers and lawn mowers, anticipates that because of the seasonal nature of its business it will require an
14. Should securitization be blamed for the subprime crisis?
13. What makes emerging financial markets emerge?
12. Explain how to map a given national financial system in a 3D space.
11. What does it mean for financial markets to be “segmented”?
10. What are the unique risks inherent in an international securitization transaction?
9. What is securitization? Why does it lower the cost of consumer financing?
8. What is the role played by commercial paper in financial disintermediation?
7. What is the role played by credit rating agencies?
6. What are the conditions for successful disintermediation?
5. What is financial disintermediation? Is it desirable?
4. What are financial intermediaries?
3. What does it mean to describe financing as a global procurement decision?
2. What are the principal functions performed by the financial sector?
1. What are the principal sources of financing available to firms that find themselves in a cash-deficit situation?
Q: The Mexican peso is currently trading at MXN 12 = US$1 when its fair value in PPP terms is generally believed to be atMXN15 = US$1.Where would the peso be positioned along the foreign exchange
Q: Chlorox, the manufacturer of household cleaning products, is in need of$250 million for working capital financing over the next 90 days. It has the choice between (a) a one-year credit line from
■ Why the cost of capital differs from one country to the next – the notion that capital markets are to some degree segmented
■ What the emergence process is for national capital markets and what its drivers are
■ How deregulation is eroding segmentation barriers and bridging the cost of capital differential across national capital markets
■ How securitization lowers the cost of consumer financing
■ How financial disintermediation lowers the cost of capital available to firms and other borrowers
■ How banks compete with capital markets in channeling savings into productive investments
■ What are functions performed by the financial sector in the overall economy
5. How should Daewoo hedge itself? How would it impact the financing cost? Daewoo Corporation, headquartered in Seoul, South Korea, was established in 1967 by an entrepreneur named Woo Choog Kim and
4. How would you measure the exposure incurred by Daewoo in writing “deep-inthe-money” options? Daewoo Corporation, headquartered in Seoul, South Korea, was established in 1967 by an entrepreneur
3. Under what exchange rate scenario is the “option-loan” interest-free? What is Daewoo’s cost of financing? Daewoo Corporation, headquartered in Seoul, South Korea, was established in 1967 by
2. What are the mechanics for Daewoo of writing “deep-in-the-money” yen put/dollar call options? Daewoo Corporation, headquartered in Seoul, South Korea, was established in 1967 by an
1. What are “deep-in-the money” currency options? Why is writing “deep-in-themoney”currency options tantamount to short-term financing?Daewoo Corporation, headquartered in Seoul, South Korea,
15. Open Interests (advanced). Log in to the Bank of International Settlements website at www.bis.org and find the current open interest for interest rate futures and currency options worldwide. Were
14. Implied Volatilities for Currency Options (advanced). Log in to the Federal Reserve Bank of New York website at www.ny.frb.org/markets/impliedvolatility.html and identify the three most volatile
13. Currency Options (intermediate). Log in to the Philadelphia Stock Exchange website at www.phlx.com and identify the three most traded currency option contracts.
12. Futures Quotations (intermediate). Log in to the Chicago Mercantile Exchange at www.cmegroup.com and sketch two futures contract prices at the deepest discount to the U.S. dollar from the
11. Covered put options (intermediate). Show graphically that writing a covered call option on sterling amounts to writing a naked put option on sterling.
10. Valuing a September Canadian dollar (CAD) call option (intermediate).On June 15 the premium on a September CAD put option is US$0.017 per CAD at a strike price of US$1.07. If the quarterly U.S.
9. Put-call parity (intermediate). Assuming (1) that you can buy a pound sterling call with strike price of $1.50 for 3 cents, (2) that you can sell a sterling put at the same strike price for 4
8. Writing a strangle (advanced). Assuming that Allied-Lyons would write a strangle as a speculative strategy, rather than a straddle as in problem 7, would you consider it to be more or less
7. Writing a straddle (advanced). Assuming that Allied-Lyons was relying on a straddle strategy (refer to “International Corporate Finance in Practice 8.3”for background information), explain
6. Speculating and hedging with currency options (intermediate). A trader at Credit Suisse is speculating on the movement of the Swedish krona (SEK). She is prepared to invest US$10 million in the
5. Speculating with currency options (beginner). Referring to problem 3, Prometheus Partners is considering currency options as alternative instruments to speculate on the possible demise of the
4. Speculating with currency options (beginner). A hedge fund manager anticipates a weaker euro over the next 180 days. Both six-month put and call options on the euro are available with strike price
3. Speculating with futures (intermediate). A trader for Prometheus Partners, a macro hedge fund, is debating how to structure his bet that the euro-zone will break up in the next six to nine months,
2. Going long with Mexican peso futures contract (intermediate). Soledad McArthur is the chief currency trader at the Magna Carta macro hedge fund.She decides on January 15 to go long by buying
1. Reading futures prices (beginner). Refer to Exhibit 8.2 for futures prices.a. What is the December 2018 futures price for Australian dollars and Japanese yen?b. What is the cross-rate for December
12. What are zero-premium options?Why are they more attractive to risk managers than plain-vanilla options?
11. What is meant by the intrinsic value and the time value of an option?
10. What is an option straddle strategy? How does it take advantage of exchange rate volatility?
9. Explain how the put-call parity ties the currency options market to the forwards market.
8. Identify the key parameters that determine the value of a currency option.
7. Compare futures margins with options premiums.
6. What is the difference between writing and buying a currency option?
5. What is the nature of credit or counterparty risk when trading options?
4. What are the differences between currency put and call options?
3. Compare counterparty risk for over-the-counter forward contracts with exchange-traded futures. Why is the secondary market for futures more liquid than it is for forwards?
2. How is counterparty risk mitigated in a currency futures contract? Explain how the daily marking to market of currency futures reduces the risk of trading this derivative.
1. What are the key differences between currency forwards and futures contracts?
Q: You observed that the premium for buying a £ call option at-the-money$1.52 = £1 has increased from 3¢ to 4¢ as the spot exchange rate changed from $1.52/£ to $1.54/£. What is the sensitivity
Q: Referring to Exhibit 8.4, why is the premium increasing for increasing strike prices in the case of € put options but decreasing in the case of call options?
Q: What is the nature of credit risk to which the buyer and the writer of currency options are exposed?
Q: Referring to Exhibit 8.2, what is the closing rate for a Mexican peso (MXN)September futures contract? How many contracts are outstanding? Can you quote the contract in Mexican peso per U.S.
■ What the different option strategies are
■ How the put-call parity binds the option market to the forward market
■ How currency options are priced
■ What currency options are and how they differ from futures and forwards
■ How counterparty risk in futures contracts is mitigated
■ What currency futures contracts are and how they differ from currency forward contracts
■ How financial derivatives came into being
7. Interest Rate Parity. Access the Financial Times website markets.ft.com/RESEARCH/Markets/Interest-Rates to download 3-month LIBOR and CD rates for U.S. dollar and the pound sterling, the euro, and
8. Hyperinflation in Turkey (intermediate). Visit www.imf.org to sketch the nominal lira price of one U.S. dollar over the period 1994–2001. Contrast it with the real/PPP rate over the same period.
6. BigMac Currencies. Search the Economist website www.economist.com/marketdata to access the latest version of the Big Mac of currency over-/undervaluation.Compare how the valuation of the Indian
5. BigMac currencies (intermediate). In 2006 a Big Mac cost ARS 7.00 in Argentina and US$3.10 in the United States. Four years later, in 2010, the same Big Mac cost ARS 14.00 in Argentina and US$3.73
4. Purchasing power parity and the Argentine currency board (C-intermediate). On January 6, 2002, Argentina’s newly elected president Duhalde devalued the ARS from ARS 1 = US$1 to ARS 1.40 = US$1.
3. Purchasing power parity and the Argentine currency board (B-intermediate).Assume over the 10-year period 1991–2001 the U.S. economy experienced an annualized inflation rate of 1.5 percent. While

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