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Multinational Finance Evaluating Opportunities Costs and Risks of Operations 5th edition Kirt C. Butler - Solutions
Using both words and graphs, demonstrate that a long (¥/$) call option on dollars is equivalent to a long ($/¥) put option on yen.
Gretchen Van Damme is considering buying call options on Swiss francs on the International Monetary Market of the Chicago Mercantile Exchange with a March expiration date and a strike price of $0.77/SF. The current spot rate of exchange is $0.77/SF. Gretchen believes that the spot Swiss franc
Dubious Value, Inc. is scheduled to receive a 144 million cruzados dividend from its affiliate in Companies, Brazil, in three months. Name and briefly describe several different financial market hedges of Dubious' exposure to currency risk.
Option payoff profiles: a. Construct an option position (a combination of calls and/or puts) with the same risk profile (v$/SFr versus s$/SFr) as a forward contract to buy SFr for dollars at an agreed-upon future date. Clearly identify the asset underlying the option(s), whether you are using puts
You buy an HK$1 million call option on Hong Kong dollars with an exercise price of $0.1667/HK$. The spot rate at expiration is $0.1685/HK$. What is the value of your option at expiration?
You buy a $1 million call option on U.S. dollars with an exercise price of $0.1667/HK$. The spot price at expiration is $0.1685/HK$. What is the value of your option at expiration?
You buy a call option on SFr with a strike price of $0.6573/SFr. You pay a premium of $0.0010/SFr to buy the option. The contract size is SFr125, 000. If the option expires when the spot price is $0.6682/SFr, what is your net profit on this transaction? (For simplicity, ignore the time value of
You buy a put option on SFr with a strike price of $0.6573/SFr. You pay a premium of $0.0010/SFr to buy the option. The contract size is SFr125, 000. If the option expires when the spot price is $0.6682/SFr, what is your net profit on this transaction?
You write a call option on pounds and give it to Scrooge McDuck to compensate him for some consulting work. The contract size is £125,000 and the exercise price is £0.6344/$. If the option expires when the spot rate is £0.6285/$, will Scrooge's treasure chest of dollars grow larger or smaller?
You grow mesquite trees on your farm in Texas. Whenever a tornado strikes, you collect the fallen branches and sell the wood to Switzerland for use in bratwurst barbecues. You expect a payment of SFr62, 500 in two months. In order to hedge, you buy a put option on francs that expires in two months
What is the advantage of a currency option hedge relative to a currency forward or futures hedge? What is the disadvantage of a currency option?
You own a put option to sell Swiss francs for U.S. dollars. Draw the following: a. The value of the put option against the underlying spot rate (S$/SFr). Identify the exercise price K$/SFr on the graph. b. Change in option value (V$/SFr) against change in the underlying spot rate (S$/SFr).
You work for SABMiller plc in London. You have an accounts payable balance of 10 million Chinese new yuan (CNY) that is due in one year to a Chinese supplier. HSBC is offering a European call option on 10 million yuan with an exercise price of K£/CNY = £0.10/CNY. The current spot rate is
What is a fully covered currency coupon swap?
What is the difference between a bond equivalent yield and a money market yield?
A swap dealer quotes a euro midrate of 3.8175 percent in bond equivalent yield with quarterly compounding for a 2-year yen-per-euro currency coupon swap. The corresponding 2-year yen rate is 2.9291 percent in quarterly compounded bond equivalent yield. The dealer charges an annual fee of ±8bp
What is multinational treasury management?
How can treasury assist in managing relations among the operating units of the MNC?
What are the five steps in a currency risk management program?
What function does a firm's strategic business plan perform?
Why is international trade more difficult than domestic trade?
Describe four methods of payment on international sales.
What is a banker's acceptance, and how is it used in international trade?
What is countertrade? When is it most likely to be used?
Victor's Secret has a bankers' acceptance drawn on Union Bank of Switzerland (UBS) with a face value of $10 million due in six months. UBS receives an acceptance fee of $10,000 at maturity. Citigroup is willing to buy the acceptance at a discount rate of 4 percent compounded quarterly. a. How
Victor's Secret sells $10 million in accounts receivable to a factor. The receivables are due in three months. The factor charges an upfront (time zero) fee of 2 percent for purchasing the receivables on a nonrecourse basis. The factor also charges a fee of 1 percent per month for every month
Payless Shoes has a shoe contract with a Taiwanese supplier. The T$30 million purchase is invoiced in new Taiwan dollars (T$) and is due in three months. The current spot and 3-month forward exchange rates are T$30/$. a. Draw Payless' expected future cash flow in new Taiwan dollars on a time line.
Is translation exposure important to shareholders?
In what way is equity a call option on firm value?
A firm based in the United Kingdom has promised to pay bondholders £10,000 in one year. The firm will be worth either £9,000 or £19,000 with equal probability at that time depending on the value of the dollar. The firm will be worth £14,000 if it hedges against currency risk.a. Identify the
What is a risk profile?
In what ways can diversified multinational operations provide a natural hedge of transaction exposure to currency risk?
What is multinational netting? Why is it used by multinational corporations?
What is leading and lagging? Why is it used by multinational corporations?
Define each of the following: (a) Currency forwards (b) Currency futures (c) Currency options (d) Currency swaps (e) Money market hedges.
What is a currency cross-hedge? Why might it be used?
Refer to Exhibit T9.1. Draw each of the following:a. Bernd's underlying transaction on a time line.b. Bernd's risk profile in levels (V€/$ versus S€/$).c. Bernd's risk profile in changes (v€/$ versus s€/$).Exhibit T9.1Bernd lives in Berlin and uses the euro as his currency of denomination.
Refer to Exhibit T9.1. How much will Bernd owe in three months at each of the following exchange rates? a. S€/$ = €1.20/$. b. S€/$ = €1.10/$. c. S€/$ = €1.30/$. Exhibit T9.1 Bernd lives in Berlin and uses the euro as his currency of denomination. Bernd has an accounts payable balance
Refer to Exhibit T9.1. Draw a risk profile (v€/$ versus s€/$) for each of the following: a. Bernd's underlying currency risk exposure b. a currency forward hedge of Bernd's exposure c. the exposure of the net (or hedged) position Exhibit T9.1 Bernd lives in Berlin and uses the euro as his
Refer to Exhibit T9.1. Show the parts of a money market hedge of Bernd's exposure. Draw the risk exposures of the underlying position, the money market hedge, and the net position. Exhibit T9.1 Bernd lives in Berlin and uses the euro as his currency of denomination. Bernd has an accounts payable
Refer to Exhibit T9.1. How can a currency option hedge reduce Bernd's exposure to currency risk. Assume a striking price of €1.20/$ and an option premium of €0.20/$. Draw a graph of V€/$ versus S€/$ showing the risk exposures of the underlying position, the currency option hedge, and the
Identify cash flows after netting of transactions.
You work for an Argentinian importer and expect to pay €1 million in one year to a European supplier. You can trade at the following prices: Spot rate, Argentinean australs per euro AA24.38/€ One-year forward rate AA24.96/€ One-year Argentinean interest rate 5.050% One-year euro
What is the price elasticity of demand, and why is it important?
What five steps are involved in estimating the impact of exchange rate changes on the value of the firm's real assets or on the value of equity?
What is an integrated market? a segmented market? Why is this distinction important in multinational financial management?
State how each of the following companies are affected by a real depreciation of the domestic currency: (a) An importer (b) An exporter (c) A diversified multinational corporation competing in globally competitive goods and financial markets.
What is meant by the statement "Exposure is a regression coefficient?"
List several financial market alternatives for hedging operating exposure to currency risk. How effective are these in hedging the nonmonetary cash flows of real assets? Why might firms hedge through the financial markets rather than through changes in operations?
List several operating strategies for hedging operating risk. What are the advantages and disadvantages of these hedges compared to financial market hedges?
Copper Kettle, Inc of the United States manufactures (what else?) copper kettles. Copper Kettle imports its raw materials from Chile, and sells most of its goods in the domestic United States. Accounts that are denominated in Chilean pesos are indicated in the balance sheet below. Inventory is not
U.K.-based OSA has an expected expense of ‚¬20 million due in one year. Actual expenses might be as low as ‚¬15 million or as high as ‚¬25 million. The expected future spot rate is E[S1£/‚¬] = $0.6000/‚¬. OSA wants to hedge the expected euro expense with a one-year ‚¬20 million
List the translation accounting rules of the U.S.Standard FAS #52 "Foreign Currency Translation."
What is the IASB? Over which organizations does it have jurisdiction?
What is a hedge? Why is it difficult to distinguish a hedge from a speculative position? How does the United States' FAS #133 qualify a hedge?
For which accounts does FAS #52 do a good job? For which accounts is it less believable?
List three information-based reasons for hedging a translation exposure to currency risk.
How can corporate hedging of translation exposure reduce the agency conflict between managers and other stakeholders? In what other ways can agency conflicts be reduced?
Identify several cross-border differences in corporate hedging of translation exposure? What might account for these differences?
Recommend general policies for deciding whether to hedge a translation exposure to currency risk.
Describe the rules of FAS #133 "Accounting for Derivative Instruments and Hedging Activities."
What are the advantages and disadvantages of valuing assets and liabilities at historical cost? At market value?
LauppCampfitters is the German subsidiary of a U.S. firm. Laupp's balance sheet is shown below in euros and dollars at the historical and current exchange rate of $1.00/‚¬.a. Translate this balance sheet into dollars at an exchange rate of $0.90/‚¬ under the current rate method of FAS
Describe five modes of entry into international markets. Which of these modes requires the most resource commitment on the part of the MNC? Which has the greatest risks? Which offers the greatest growth potential?
What is an investment agreement? What conditions might it include?
What constitutes an insurable risk? List several insurable political risks.
What operational strategies does the multinational corporation have to protect itself against political risk?
How can the MNC protect its competitive advantages in the international marketplace?
What are the relative advantages and disadvantages of foreign direct investment, international acquisitions/mergers, and international joint ventures?
Define country risk? Define political risk? Define financial risk? Give an example of each different type of country risk.
What factors might contribute to political and to financial risk in a country according to the ICRG country risk rating system?
What is the difference between a macro and a micro country risk? Give an example of each.
How is expropriation included in a discounted cash flow analysis of a proposed foreign investment? Does expropriation impact expected future cash flows? From a discounted cash flow perspective, is it likely to impact the discount rate on foreign investment?
What are intellectual property rights? How are they at risk when the multinational corporation has foreign operations?
Describe the two recipes for discounting foreign currency cash flows. Under what conditions are these recipes equivalent?
Discuss each cell in Figure 13.5. What should (or shouldn't) a firm do when faced with a foreign project that fits the description in each cell?
Why is it important to separately identify the value of any side effects that accompany foreign investment projects?
You are a successful U.K. wine producer and are considering investing in a second operation in the country of Vino (with currency V). International parity conditions hold, and the investment will be 100 percent equity-financed. Interest and inflation rates and the characteristics of the investment
You have invested in a diamond mine in Nigeria. The mine is expected to generate nominal, after-tax cash flows of £1 million per year in perpetuity at a risk-adjusted discount rate of 12.5 percent per year. Unfortunately, the Nigerian government requires that you leave each year's cash flow in
Consider the Vino project described in Exhibit T13.2. Suppose the international parity conditions do not hold. In particular, assume real rates ʀ£ = 0.0% and ʀV= 12.0%, and inflation p£ = 17.6% and pV = 10.0%, so that nominal interest rates are i£ = 17.6% and iV = 23.2% from the Fisher
Consider the Vino project described in Exhibit T13.2. Suppose the international parity conditions do not hold with real rates of q£ = 12.0% and qV = 0.0%, and inflation of p£ = 5.0% and pV = 23.2%, so that nominal interest rates are i£ = 17.6% and iV = 23.2%. The spot rate is expected to remain
You are considering investing in an oil well in Azerbaijan. The well costs £40 million and generates end-of-year expected after-tax cash flow of £10 million per year in perpetuity. The appropriate risk-adjusted discount rate is 20 percent per year. There is a 20 percent chance that the
Consider the Vino project described in Exhibit T13.2. Suppose the government of Vino requires that you operate a local crisis center for alcoholics. Your refusal to do so will result in a government veto of your investment project. Although the crisis center is expected to generate positive cash
Consider the Vino project described in Exhibit T13.2. Suppose the government of Vino offers you a three-year, subsidized, nonamortizing V500, 000 loan if (and only if) you undertake the wine production investment. Assume they offer you an attractive loan rate of 12.2% even though corporate debt on
Consider the Vino project described in Exhibit T13.2. Suppose that beginning in year 2, there is a 20% chance each year the government will seize your assets in Vino. Specifically, if the assets are not seized, you expect to receive the cash flows described in Exhibit T13.2. However, if they are
Consider the Vino project described in Exhibit T13.2. Suppose 70% of your cash flow must be retained in Vino until the investment is 3 years old. Blocked funds are stored with the aging wine for luck and earn no interest. Assume the discount rate that appropriately reflects the riskiness of the
The World Bank offers you a subsidized loan if you undertake a power generation project in Kenya. The nonamortized loan will be for £100 million and is to be repaid over five years at 10 percent compounded quarterly (2.5 percent per quarter) with quarterly interest payments. The market rate of
What is a targeted registered offering and why is it useful to the corporation?
What is project financing, and when is it an appropriate source of funds?
What evidence is there on the international determinants of corporate capital structure? How is the international evidence similar to the domestic U.S. evidence?
What distinguishes an integrated from a segmented capital market?
What factors could lead to capital market segmentation?
Does the required return on a project depend on who is investing the money or on where the money is being invested?
Does the value of a foreign project depend on the way it is financed?
An important input into the required return on equity in the security market line is the market risk premium. How much is the market risk premium?
When is the adjusted present value approach to project valuation most useful?
What is the usual consequence of an increase in country risk on a national stock market? Do stock markets in high-risk countries have higher or lower volatility than other markets? Do they have higher or lower betas relative to a world stock market index?
What is a stock market liberalization? What are the effects of liberalizations on (a) Emerging market correlations with the world stock returns (b) Local market volatility (c) The local cost of capital?
Suppose the market value of debt is £2billion, the market value of equity is £2 billion, the before-tax cost of debt is 10 percent, the before-tax cost of equity is 16 percent, and the corporate tax rate is 40 percent. Calculate the weighted average cost of capital.
Italy's Olivetti has a beta of 1.0 when measured against the MSCI world stock market index and 0.8 against Milan's BancaCommerziale index of 200 stocks. The euro risk-free rate is 5 percent. a. If the market risk premium on the MSCI world index is 4 percent, what is the required return on Olivetti
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