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Questions and Answers of Banking

How do you use foreign currency futures to speculate on the exchange rate movements, and what role do long and short positions play in that speculation?
How do foreign currency futures and foreign currency forwards compare?
Define a put and call on the British pound sterling?
The interest yields on U.S. Treasury securities in early 2009 fell to very low levels as a result of the combined events surrounding the global financial crisis. Calculate the simple and annualized
Delos is continuing to renegotiate its prior loan agreement (€80 million for 6 years at 8.625% per annum), two years into the agreement. Delos is now facing serious tax revenue shortfalls, and
Raid Gauloises is a rapidly growing French sporting goods and adventure racing outfitter. The company has decided to borrow €20,000,000 via a euro-euro floating rate loan for four years. Raid must
Firenza Motors of Italy recently took out a 4-year €5 million loan on a floating rate basis. It is now worried, however, about rising interest costs. Although it had initially believed interest
Lluvia Manufacturing and Paraguas Products both seek funding at the lowest possible cost. Lluvia would prefer the flexibility of floating rate borrowing, while Paraguas wants the security of fixed
Ganado Corporation entered into a three-year cross currency interest rate swap to receive U.S. dollars and pay Swiss francs. Ganado, however, decided to unwind the swap after one year - thereby
Using the table of swap rates in the chapter (Exhibit 8.13), and assume Ganado enters into a swap agreement to receive euros and pay Japanese yen, on a notional principal of €5,000,000. The spot
Falcor is the U.S.-based automotive parts supplier which was spun-off from General Motors in 2000. With annual sales of over $26 billion, the company has expanded its markets far beyond the
The global credit crisis became globally visible in September 2007. Interest rates, particularly the extremely short-term interest rates, will often change quickly (typically up) as indications that
Bernie Madeoff pays $240,000 for a new four bedroom 2400 square foot home outside of Tonopah, Nevada. He plans to make a 20% downpayment, but is having trouble deciding whether he wants a 15-year
Botany Bay Corporation of Australia seeks to borrow US$30,000,000 in the Eurodollar market. Funding is needed for two years. Investigation leads to three possibilities. Compare the alternatives and
Chrysler LLC, the now privately held company sold-off by DaimlerChrysler, must pay floating rate interest three months from now. It wants to lock in these interest payments by buying an interest rate
Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future floating rate interest payments for fixed rates. At present she is paying
A sovereign borrower is considering a $100 million loan for a four-year maturity. It will be an amortizing loan, meaning that the interest and principal payments will total, annually, to a constant
The country of Sahara is negotiating a new loan agreement with a consortium of international banks. Both sides have a tentative agreement on the principal -- $220 million. But there are still wide
Delos borrowed €80 million two years ago. The loan agreement, an amortizing loan, was for 6 years at 8.625% interest per annum. Delos has successfully completed two years of debt-service, but now
What is an interest "reference rate," and how is it used to set rates for individual borrowers?
What is a plain vanilla interest rate swap? Are swaps a significant source of capital for multinational firms?
Why do fixed for floating interest rate swaps never swap the credit spread component on a floating rate loan?
How can interest rate swaps be used by a multinational firm to manage its debt structure?
How does a company cancel or unwind a swap?
Why has LIBOR played such a central role in international business and financial contracts? Why has this been questioned in recent debates over its value reported?
What is a credit risk premium?
What do the general categories of investment grade and speculative grade represent?
What is sovereign debt? What specific characteristic of sovereign debt constitutes the greatest risk to a sovereign issuer?
Why do borrowers of lower credit quality often find their access limited to floating-rate loans?
What is an interest rate future? How can they be used to reduce interest rate risk by a borrower?
The Ecuadorian sucre (S) suffered from hyper-inflationary forces throughout 1999. Its value moved from S5,000/$ to S25,000/$. What was the percentage change in its value?
BP (UK) and Rosneft (Russia) had severed a long-term joint venture in 2013, with Rosneft buying BP's out with $55 billion in cash and a 20% interest (equity interest) in Rosneft itself. Rosneft
Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United StatesWhat are the current spot exchange rate for the following cross rates?a. Japaness Yen/Us dollar exchange rateb. Japanese
The Japanese yen-euro cross rate is one of the more significant currency values for global trade and commerce. The graphic at right shows this cross-rate from when the euro was launched in January
The Canadian dollar's value against the U.S. dollar has seen some significant changes over recent history. Using the following graph of the C$/US$ exchange rate for the 30 year period between 1980
Mexico was famous - or infamous - for many years in having two things every six years (cada seis años in Spanish): a presidential election and a currency devaluation. This was the case in 1976,
The Turkish lira (TL) was officially devalued by the Turkish government in February 2001 during a severe political and economic crisis. The Turkish government announced on February 21st that the lira
As illustrated in the graph, the Argentine peso moved from its fixed exchange rate of Ps1.00/$ to over Ps2.00/$ in a matter of days in early January 2002. After a brief period of high volatility,
The Thai baht (Bt) was devalued by the Thai government from BT25/$ to BT29/$ on July 2, 1997. What was the percentage devaluation of the baht?
The Brazilian reais' (BRL or R$) value was BRL 1.80 to 1.00 USD on Thursday January 24, 2008, then plunged in value to BRL 2.39 to 1.00 USd on January 26, 2009. What was the percentage change in its
Mikhail Khodorkovsky was one of the infamous Russian oligarchs, accumulating billions of dollars in wealth in the mid-1990s with the fall of the Soviet Union. But in 2003 he had been imprisoned by
Calculate the percentage change in the value of the Ruble for the three different cross rates shown below for the six dates. Did it fall further against the U.S. dollar or the Swiss franc?
What are the three basic theoretical approaches to exchange rate determination?
What is the downside of both direct and indirect intervention?
Are capital controls really a method of currency market intervention, or more of a denial of activity? How does this fit with the concept of the impossible trinity?
What was the primary disequilibrium at work in Asia in 1997 that likely caused the Asian financial crisis? Do you think it could have been avoided?
What was the basis of the Argentine Currency Board, and why did it fail in 2002?
What are the major differences between short-term and long-term forecasts for a fixed exchange rate versus a floating exchange rate? Discuss.
The emerging market crises of 1997-2002 were worsened because of rampant speculation. Do speculators cause such crisis or do they simply respond to market signals of weakness? How can a government
Define stabilizing and destabilizing expectations, and describe how they play a role in the long-term determination of exchange rates.
The most widely accepted theory of foreign exchange rate determination is purchasing power parity, yet it has proven to quit poor at forecasting future spot exchange rates. Why?
Many multinational firms use forecasting services regularly. If forecasting is essentially "foretelling the future," and that is theoretically impossible, why would these firms spend money on these
Statistics on a country's balance of payments are used by the business press and business itself often in terms of predicting exchange rates, but the academic profession is highly critical of it. Why?
Which of the three major theoretical approaches seems to put the most weight into arguments on the supply and demand for currency? What is its primary weakness?
What is foreign currency intervention? How is it accomplished?
Why do governments and central banks intervene in the foreign exchange markets? If markets are efficient, why not let them determine the value of a currency?
When is direct intervention likely to be the most successful? And when is it likely to be the least successful?
Brent Bush, CFO of a medical device manufacturer, BioTron Medical, Inc., was approached by a Japanese customer, Numata, with a proposal to pay cash (in yen) for its typical orders of ¥12,500,000
Mattel is a U.S.-based company whose sales are roughly two-thirds in dollars (Asia and the Americas) and one-third in euros (Europe). In September Mattel delivers a large shipment of toys (primarily
Chronos Time Pieces of Boston exports wrist watches to many countries, selling in local currencies to watch stores and distributors. Chronos prides itself on being financially conservative. At least
Farah Jeans of San Antonio, Texas, is completing a new assembly plant near Guatemala City. A final construction payment of Q8,400,000 is due in six months. ("Q" is the symbol for Guatemalan
Jason Stedman is the director of finance for Burton Manufacturing, a U.S.-based manufacturer of hand-held computer systems for inventory management. Burton's system combines a low-cost active tag
Micca Metals, Inc. is a specialty materials and metals company located in Detroit, Michigan. The company specializes in specific precious metals and materials which are used in a variety of pigment
Ganado - the same U.S.-based company as discussed in this chapter, has concluded a second larger sale of telecommunications equipment to Regency (U.K.). Total payment of £3,000,000 is due in 90
On May 1st, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12 megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for €4,000,000, payable
Navarro was a U.S.-based multinational company which manufactured and distributed specialty materials for sound-proofing construction. It had recently established a new European subsidiary in
Korean Airlines (KAL) has just signed a contract with Boeing to purchase two new 747-400's for a total of $60,000,000, with payment in two equal tranches. The first tranche of $30,000,000 has just
The challenge with the Korean Money Market Hedge is that it is a payable - a payable form a Korean won cash balance. A MM Hedge for a payable is to simply transfer money into the target currency at
Bobcat Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,500 million.
Siam Cement, the Bangkok-based cement manufacturer, suffered enormous losses with the coming of the Asian crisis in 1997. The company had been pursuing a very aggressive growth strategy in the
Proctor and Gamble's affiliate in India, P & G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by
Elan Pharmaceuticals, a U.S.-based multinational pharmaceutical company, is evaluating an export sale of its cholesterol-reduction drug with a prospective Indonesian distributor. The purchase would
Embraer of Brazil is one of the two leading global manufacturers of regional jets (Bombardier of Canada is the other). Regional jets are smaller than the traditional civilian airliners produced by
Krystal is a U.S.-based company which manufactures, sells, and installs water purification equipment. On April 11th the company sold a system to the City of Nagasaki, Japan, for installation in
Caribou River, Ltd., a Canadian manufacturer of raincoats, does not selectively hedge its transaction exposure. Instead, if the date of the transaction is known with certainty, all foreign
Pupule Travel, a Honolulu, Hawaii - based 100% privately owned travel company has signed an agreement to acquire a 50% ownership share of Taichung Travel, a Taiwan - based privately owned travel
Define the three types of foreign exchange exposure.
How does a money market hedge differ for an account receivable versus that of an account payable? Is it really a meaningful difference?
Theoretically, shouldn't forward contract hedges and money market hedges have the same identical outcome? Don't they both use the same three specific inputs-the initial spot rate, the domestic cost
Why do many firms object to paying for foreign currency option hedges? Do firms pay for forward contract hedges? How do forwards and options differ if at all?
According to surveys of corporate practices, which currency exposures do most firms regularly hedge?
What is the hedge ratio? Why would the hedge ratio ever be less than one?
What is a hedge? How does that differ from speculation?
What are the four main types of transactions from which transaction exposure arises?
1. What is the business reason for China Noah's potential currency exposure? Does the company really need to subject itself to substantial exchange rate risk? Is the risk "material" to China Noah?
Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from $1.2000/€ to $0.9000/€ rather than to $1.0000/€. Recalculate
Cairo Ingot, Ltd., is the Egyptian subsidiary of Trans Mediterranean Aluminum, a British multinational that fashions automobile engine blocks from aluminum. Trans-Mediterranean's home reporting
Using facts in the chapter for Ganado Europe, assume as in question Ganado Europe (A) that the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from $1.2000/€ to $0.9000/€
Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from $1.2000/€ to $1.500/€. Calculate Ganado Europe's translated balance
Using facts in the chapter for Ganado Europe, assume as in Ganado Europe (C) that the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from $1.2000/€ to $1.5000/€. Calculate Ganado
Tristan Narvaja, S.A., is the Uruguayan subsidiary of a U.S. manufacturing company. Its balance sheet for January 1 follows. The January 1st exchange rate between the U.S. dollar and the peso
Calculate Tristan Narvaja's contribution to its parent's translation loss if the exchange rate on December 31st is $U22/$. Assume all peso accounts remain as they were at the beginning of the year.
Calculate Tristan Narvaja's contribution to its parent's translation gain or loss using the current rate method if the exchange rate on December 31 is $U12/$. Assume all peso accounts remain as they
Bangkok Instruments, Ltd., is the Thai affiliate of a U.S. seismic instrument manufacturer. Bangkok Instruments manufactures the instruments primarily for the oil and gas industry globally, though
Using the original data provided for Bangkok Instruments, assume that the Thai baht appreciated in value from B30/$ to B25/$ between March 31 and April 1. Assuming no change in balance sheet
Where do you believe that most company's would prefer currency translation imbalances or adjustments to go, to earnings or consolidated equity? Why?
What are the primary options firms have to manage translation exposure?
If a U.S.-based multinational company generates more than 80% of its profits (earnings) outside the U.S. in the euro zone and Japan, and both the euro and the yen fall significantly in value versus
When is a balance sheet hedge justified?
When would a multinational firm, if ever, realize and recognize the cumulative translation losses recorded over time associated with a subsidiary?

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