Questions and Answers of Introduction To Corporate Finance

What is the difference between a currency board and dollarization?
Why did the Argentine currency board collapse whereas Hong Kong has been able to hold on to its fixed exchange rate against the U.S. dollar?
What are the key macroeconomic variables that explained devaluation or revaluation in the Bretton Woods system?
Should Greece exit the euro-zone? What would be the implications for Greece versus the euro-zone and the European Union?
Would the euro-zone’s economic problems be alleviated if the currency were to depreciate significantly against the U.S. dollar and the Japanese yen? Which euro-zone country would benefit the most?
Why did the European Monetary System fail? How does the euro differ from the EMS? Were the lessons from the EMS failure learned when the euro was designed?
The euro-zone is sometimes referred as a DM-zone (the Deutsche mark being the former currency of Germany); explain.
Why are member countries of the euro-zone experiencing different rates of inflation when the European Central Bank implements a single monetary policy with a single interest rate?
What are the defining characteristics of an optimum currency area? What are the main differences between the United States and the euro-zone in this respect?
Referring to the North American Free Trade Agreement (NAFTA), should the United States, Mexico, and Canada adopt a common currency?
Brazilian real appreciates. Wharton Econometrics Forecasting Associates expects the Brazilian real (BRL) to depreciate by 30 percent against the U.S. dollar over the next 90 days from its current
Calculating par values against the dollar and gold. In 1958, the French franc(FF) was defined as worth 1/175 ounce of gold. What was the FF’s par value against the dollar? What were the floor and
The ECU as a basket of currencies. What is the percentage/weight of the ECU’s total value accounted by the Spanish peseta? Refer to Exhibit 3. 4 in the text.Would you get a different result if you
The CFA franc devalues. The CFA franc was defined in terms of the French franc (FF) as CFA 50 = FF 1 from 1947 until 1994, when its value changed to CFA 100 = FF 1. Was the CFA devalued or revalued
The CFA franc and the birth of the euro. In 1999, the launch of the euro buried the French franc to which the CFA franc was pegged: the CFA franc would now be convertible into euros (€) rather than
Exchange controls for foreign portfolio investments. The Boston-based Flying Dragon emerging market fund (FDE) was planning to purchase 1 million shares of Bangkok Bank at the price of THB 129 when
Asian financial crisis and the Thai baht. On July 3, 1997, the Thai baht was unpegged from the U.S. dollar and promptly depreciated from THB 25 = US$1 to THB 60 = US$1. What was the baht’s
Hong Kong currency board and the Chinese yuan. For the past 25 years Hong Kong has relied on a currency board to peg its currency against the U.S. dollar at HK$7.80 = US$1. Since 2005, the Chinese
Denmark pegs its currency to the euro. Even though Denmark opted not to join the single currency in 1999, it has pegged its currency very tightly to the euro ever since and keeps the value of the
A single currency for the Gulf states. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates have long been rumored to be seriously onsidering the adoption of a common currency.
Britain’s love affair with the euro (web exercise). Even though Britain is a member of the European Union, it opted not to join the euro-zone in 1998. Acrimonious debate within the British
Mapping central bank intervention strategies (web exercise). Log in to www.pacific.commerce.ubc.ca/xr to plot the Thai baht, Mexican peso, Indian rupee, and Egyptian pound against the U.S. dollar
The Ecuadorian sucre finds peace (web exercise). Log in to www.pacific commerce.ubc.ca/xr to plot the Ecuadorian sucre over the period 1997−2012.What happened to the sucre in 2000?
When Switzerland becomes a dirty floater (web exercise). Log in to www.pacific.commerce.ubc.ca/xr. Explain the National Swiss Bank foreign exchange policy over the period 2008−2013. Would a partial
Why should a balance of payments always balance?
If the balance of payments always balances, how can a nation have a balance of payments surplus or deficit?
What are the major transaction categories making up the current account?
What is the difference between international portfolio investment and foreign direct investment? Where do they appear on the balance of payments?
What are the major differences between the United States’ and China’s balance of payments?
Why is China accumulating forex reserves so rapidly? Is its balance of payments indeed balancing?
What are the key transactions making up the balance of invisible trade? Where does it appear on the balance of payments?
What are international remittances? Where do they appear on the balance of payments?
Where are illicit activities such as drug trafficking and international terrorism recorded on the balance of payments?
What is the cash-flow relationship between the net international indebtedness of a country and its balance of payments?
What major differences would you expect between the balance of payments of a country that operates under a system of fixed exchange rates versus floating exchange rates?
Does it make sense for France or any other member country of the euro-zone to keep a national balance of payments? Given the single currency, do you believe that the euro-zone balance of payments is
Balance of payments accounting. For the following international transactions, identify the balance of payments accounts and whether the transaction would generate an inflow or an outflow of foreign
Balance-of-payments double-entry bookkeeping. Show how the following transactions should be recorded in the U.S. balance of payments using a double-entry accounting system:■ Newmont Mining—a U.S.
Boeing’s big-ticket exports. Cathay Pacific, the Hong Kong–based airline, purchases five Boeing Dreamliners in 2013 for $750 million. The U.S. Export-Import Bank provides a seven-year loan for
Trials and tribulations of Argentina’s currency board. Using data from the International Monetary Fund and the Bank for International Settlements, chart the current (balance of both visible and
International debt forgiveness. Assume that France decides to write off €10 billion of debt to Morocco. What would be the impact of debt forgiveness on(1) France’s balance of payments and (2)
Bank of China’s international reserves management. How would China’s balance of payments be affected should its central bank decide to sell one billion of dollar-denominated U.S. Treasury bonds
Accounting for natural disasters. The earthquake-cum-tsunami that devastated part of Japan on March 11, 2011, is estimated to be a loss of US$250 billion.What is its likely impact on the Japanese
The world’s largest creditor nation. How is Japan’s annual balance of payments impacted by the country’s dominant international creditor position? Which accounts are directly affected? Is Japan
Grexit. Referring to IMF balance of payments statistics for Greece in 2010, what was its current account situation? How does it compare to its budget deficit?How would Greece’s exit from the euro
Taiwan’s official reserve account. Assume that in 2012 Taiwan ran a surplus on its current account of US$125 billion and a capital account deficit of US$25 billion.What would be the net impact on
Tequila Crisis (A) (web exercise). Log in to www.pacific.commerce.ubc.ca/xr to graph the Mexican price of one U.S. dollar over the period 1992–1996. Can you characterize the exchange rate regime(s)
Tequila Crisis (C) (web exercise). Log in to IMF International Financial Statistics to present and analyze Mexico’s capital account over the period 1992–1996. How can you reconcile your findings
Tequila Crisis (D) (web exercise). Log in to IMF International Financial Statistics to present and analyze Mexico’s official reserve account over the period 1992–1996. What can you infer about
Foreign remittances and the subprime crisis (A). Log in to the IMF International Financial Statistics and track the flows of expatriates’ remittances to Mexico before, during, and after the
Foreign remittances and the subprime crisis (B). Track the flows of expatriates’remittances to the Philippines before, during, and after the subprime crisis. What is your interpretation? How do
What is the basic function performed by the foreign exchange market?
What are the differences between an FX trader/dealer and an FX broker?
Contrast a voice broker with electronic broking systems.
What are the activities performed by the front office and back office of a trading room?
What is algorithmic trading?
Do you believe that currency traders are a dying species?
Why is foreign exchange trading directly linked to trade in goods and services accounting for only 15 percent of the foreign exchange market turnover?
Why is the foreign exchange market often referred to as “the market that never sleeps”?
Why is foreign exchange considered an asset class?
Why is the price of Swiss franc for U.S. dollar in Zurich and New York City almost—but not quite—the same? What do you think explains the small difference in rates?
What is meant by bilateral arbitrage in the foreign exchange market?
What is meant by trilateral arbitrage in the foreign exchange market?
What is the bid-ask spread in foreign exchange?
State the Law of One Price. Why does it hold in the foreign exchange market?
Would you expect the bid-ask percentage spread to be different for the Indonesian rupiah versus the U.S. dollar than for the Japanese yen?
What is the meaning of a forward premium or discount?
What is the difference between a forward and a nondeliverable forward contract?For which currencies are nondeliverable forward contracts usually traded?
What is the implicit interest rate for a given currency?
Ford Motor Company has successfully negotiated the sale of Volvo Car Corporation for the cash amount of SEK 10 billion. Svenska Handelbank quotes the Swedish krona at SEK 6. 7100-37 = US$1. What is
A currency trader at UBS in New York City quotes to a customer the dollar-Swissie as CHF 1. 1975-85 = US$1. What is the bid price for the U.S. dollar?What is the bid price for the Swiss franc? At
Weyerhaeuser Inc.—the U.S. lumber multinational—is importing a shipment of pine trees from Canada. The invoice is for CAD 250 million. Wells Fargo’s currency trader quotes the Canadian dollar
If the dollar price of one Russian ruble (RUB) is US$0.03282 = RUB 1 in New York City and at the same time the Russian ruble price of one dollar is 30. 469 in Moscow, show how arbitrageurs could take
Siam Commercial Bank in Bangkok (Thailand) quotes the U.S. dollar at THB 31. 25/US$ whereas Standard Chartered Bank of Singapore quotes the U.S. dollar at SGD1.31/US$. What is the cross-rate THB/SGD?
Referring to exchange rate quotations provided in the Wall Street Journal (Exhibit 5. 5) for the Brazilian real and the Thai baht, compute the crossrate price of one Brazilian real in Thai baht
Referring to the forward quotes in the Wall Street Journal (Exhibit 5. 5) for the Japanese yen, determine whether the yen is at a premium or discount against the U.S. dollar. What is the percentage
Referring to the following spot and forward bid-ask rates for the US$/€ exchange rate, answer the questions that follow:a. Is the euro at a premium or discount vis-à-vis the U.S. dollar?b. What is
The chief currency strategist at the Copenhagen-based Viking hedge fund was reviewing the forecast that the fund chief economist had just released. Within six to nine months Greece would exit the
Assuming that transaction costs represent 1/16 of 1 percent of the amount transacted, what is the maximum/minimum dollar price of one Japanese yen that you would expect to prevail in New York, given
Geneviève received as a graduation present a oneweek cruise on the Baltic Sea that will take her from Kiel (Germany) to Copenhagen(Denmark), Stockholm (Sweden), and Saint Petersburg (Russia) before
Assume that the Thai baht (THB) is quoted as THB 30. 2511-3987 per US$1 and that the Japanese yen (¥) is quoted as 76. 2518-7985 per US$1. What is the cross ¥/THB bid-ask price that the bank would
Assuming that the pound is worth 1. 1567 euros in Paris and 1. 4393 Swiss francs in Zurich, can Britain-based arbitrageurs make profits, given that the Swiss franc is worth 0. 8102 euros in Paris?a.
Show that if two currencies i and j independently maintain their exchange rate within a band of fluctuations defined as +/−1 percent around a par value S$,i(t)PAR or S$,j(t)PAR vis-à-vis the U.S.
Shares of Telefonos Mexicanos (Telmex) listed on the New York Stock Exchange fell from US$60 to US$48 when the Mexican peso (MXN)was devalued on December 19, 1994, from MXN3.44 to MXN 6. 05 = $1.a.
What is interest rate arbitrage?
What are the risks involved in covered interest arbitrage? Can they be eliminated?
Why do currencies yielding low interest rates tend to sell at a forward premium?
What are the main reasons accounting for the fact that covered interest rate parity may not hold as perfect equality?
Why were large deviations from covered interest rate parity observed during the subprime crisis?
What are the risks involved in the carry trade?
Is the carry trade consistent with covered interest rate parity?
What is the difference between the carry trade and speculation through forward contracts?
What is finance?
Discuss how the four most important types of financial intermediaries operate.
What difficulties do analysts face when trying to compare the financial statements of firms that are based in different countries?
Why should people be aware of the precise definition of a financial ratio employed by those who calculate the ratio?
What three areas of a firm’s operations does the DuPont system provide information about?
All else being equal, list three factors that will lead to higher ROE ratios.
What can we use as a basis for comparison when looking at financial ratios? What kind of information can we gain from this comparison?
Why is it so important to look at stock and flow leverage ratios to assess a firm’s debt situation?

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