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International financial management 9th Edition Jeff Madura - Solutions

Duve, Inc. desires to penetrate a foreign market with either a licensing agreement with a foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and return between a licensing agreement with a foreign firm and the acquisition of a foreign firm.
Snyder Golf Co., a U.S. firm that sells high-quality golf clubs in the United States, wants to expand internationally by selling the same golf clubs in Brazil.a. Describe the tradeoffs that are involved for each method (such as exporting, direct foreign investment, etc.) that Snyder could use to
Explain why political risk may discourage international business.
Following the terrorist attack on the United States, the valuations of many MNCs declined by more than 10 percent. Explain why the expected cash flows of MNCs were reduced, even if they were not directly hit by the terrorist attacks.
Anheuser-Busch, the producer of Budweiser and other beers, has recently expanded into Japan by engaging in a joint venture with Kirin Brewery, the largest brewery in Japan. The joint venture enables Anheuser-Busch to have its beer distributed through Kirin’s distribution channels in Japan. In
Birm Co., based in Alabama, considers several international opportunities in Europe that could affect the value of its firm. The valuation of its firm is dependent on four factors:(1) expected cash flows in dollars, (2) expected cash flows in euros that are ultimately converted into dollars, (3)
Fort Worth, Inc., specializes in manufacturing some basic parts for sports utility vehicles SUVs) that are produced and sold in the United States. Its main advantage in the United States is that its production is efficient and less costly than that of some other unionized manufacturers. It has a
In addition to all of its stores in the United States, Wal-Mart has 13 stores in Argentina, 302 stores in Brazil, 289 stores in Canada, 73 stores in China, 889 stores in Mexico, and 335 stores in the United Kingdom. Overall, it has 2,750 stores in foreign countries. Consider the value of Wal-Mart
Nantucket Travel Agency specializes in tours for American tourists. Until recently, all ofIts business was in the United States. It just established a subsidiary in Athens, Greece, which provides tour services in the Greek islands for American tourists. It rented a shop near the port of Athens. It
Carlisle Co. is a U.S. firm that is about to purchase a large company in Switzerland at a purchase price of $20 million. This company produces furniture and sells it locally (in Switzerland), and it is expected to earn large profits every year. The company will become a subsidiary of Carlisle and
This exercise can be found in Appendix E at the back of this textbook.
1. What are the advantages Blades could gain from importing from and/or exporting to a foreign country such as Thailand?2. What are some of the disadvantages Blades could face as a result of foreign trade in the short run? In the long run?3. Which theories of international business described in
1. Is Sports Exports Company a multinational corporation?2. Why are the agency costs lower for Sports Exports Company than for most MNCs?3. Does Sports Exports Company have any comparative advantage over potential competitors in foreign countries that could produce and sell footballs there?4. How
Should Trade Restrictions Be Used to Influence Human Rights Issues?Point Yes. Some countries do not protect human rights in the same manner as the United States. At times, the United States should threaten to restrict U.S. imports from or investment in a particular country if it does not correct
a. Of what is the current account generally composed?b. Of what is the capital account generally composed?
a. How would a relatively high home inflation rate affect the home country’s current account, other things being equal?b. Is a negative current account harmful to a country? Discuss.
How can government restrictions affect international payments among countries?
a. What are some of the major objectives of the IMF?b. How is the IMF involved in international trade?
Would the U.S. balance-of-trade deficit be larger or smaller if the dollar depreciates against all currencies, versus depreciating against some currencies but appreciating against others? Explain.
Why do you think international trade volume has increased over time? In general, how are inefficient firms affected by the reduction in trade restrictions among countries and the continuous increase in international trade?
Explain how the existence of the euro may affect U.S. international trade.
When South Korea’s export growth stalled, some South Korean firms suggested that South Korea’s primary export problem was the weakness in the Japanese yen. How would you interpret this statement?
Assume a simple world in which the United States exports soft drinks and beer to France and imports wine from France. If the United States imposes large tariffs on the French wine, explain the likely impact on the values of the U.S. beverage firms, U.S. wine producers, the French beverage firms,
There has been considerable momentum to reduce or remove trade barriers in an effort to achieve “free trade.” Yet, one disgruntled executive of an exporting firm stated, “Free trade is not conceivable; we are always at the mercy of the exchange rate. Any country can use this mechanism to
U.S.-based MNCs commonly invest in foreign securities.a. Assume that the dollar is presently weak and is expected to strengthen over time. How will these expectations affect the tendency of U.S. investors to invest in foreign securities?b. Explain how low U.S. interest rates can affect the tendency
a. Explain why a stronger dollar could enlarge the U.S. balance-of-trade deficit. Explain why a weaker dollar could affect the U.S. balance of- trade deficit.b. It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate any current account deficit. Explain why this
1. How could a higher level of inflation in Thailand affect Blades (assume U.S. inflation remains constant)?2. How could competition from firms in Thailand and from U.S. firms conducting business in Thailand affect Blades?3. How could a decreasing level of national income in Thailand affect
Identify the factors that affect the current account balance between the United States and the United Kingdom. Explain how each factor may possibly affect the British demand for the footballs that are produced by the Sports Exports Company.Mini CaseRecall from Chapter 1 that Jim Logan planned to
Should Firms That Go Public Engage in International Offerings?Point Yes. When a U.S. firm issues stock to the public for the first time in an initial public offering (IPO), it is naturally concerned about whether it can place all of its shares at a reasonable price. It will be able to issue its
Explain why an MNC may invest funds in a financial market outside its own country.
Explain why some financial institutions prefer to provide credit in financial markets outside their own country.
Explain how the appreciation of the Australian dollar against the U.S. dollar would affect the return to a U.S. firm that invested in an Australian money market security.
Explain how the appreciation of the Japanese yen against the U.S. dollar would affect the return to a U.S. firm that borrowed Japanese yen and used the proceeds for a U.S. project.
List some of the important characteristics of bank foreign exchange services that MNCs should consider.
The Wolf pack Corp. is a U.S. exporter that invoices its exports to the United Kingdom in British pounds. If it expects that the pound will appreciate against the dollar in the future, should it hedge its exports with a forward contract? Explain.
Explain how syndicated loans are used in international markets.
What is the function of the international money markets? Briefly describe the reasons for the development and growth of the European money market. Explain how the international money, credit, and bond markets differ from one another.
Briefly describe the historical developments that led to floating exchange rates as of 1973.
Explain how the Asian crisis would have affected the returns to a U.S. firm investing in the Asian stock markets as a means of international diversification. (See the chapter appendix.)
a. With regard to Euro credit loans, who are the borrowers?b. Why would a bank desire to participate in syndicated Euro credit loans?c. What is LIBOR, and how is it used in the Euro credit market?
You just came back from Canada, where the Canadian dollar was worth $.70. You still have C$200 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for $.60. Next week, you will be going to Mexico and will need pesos. The
Explain why firms may issue stock in foreign markets. Why might U.S. firms issue more stock in Europe since the conversion to a single currency in 1999?
Chapman Co. is a privately owned MNC in the United States that plans to engage in an initial public offering (IPO) of stock, so that it can finance its international expansion. At the present time, world stock market conditions are very weak but are expected to improve. The U.S. market tends to be
Why do you think the terrorist attack on the United States was expected to cause a decline in U.S. interest rates? Given the expectations for a decline in U.S. interest rates and stock prices, how were capital flows between the United States and other countries likely affected?
Recently, Wal-Mart established two retail outlets in the city of Shanzen, China, which has a population of 3.7 million. These outlets are massive and contain products purchased locally as well as imports. As Wal-Mart generates earnings beyond what it needs in Shanzen, it may remit those earnings
Why do interest rates vary among countries? Why are interest rates normally similar for those European countries that use the euro as their currency? Offer a reason why the government interest rate of one country could be slightly higher than the government interest rate of another country, even
Today you notice the following exchange rate quotations:(a) $1 = 3.00 Argentine pesos and(b) 1 Argentine peso = .50 Canadian dollars.You need to purchase 100,000 Canadian dollars with U.S. dollars. How many U.S. dollars will you need for your purchase?
1. One point of concern for you is that there is a tradeoff between the higher interest rates in Thailand and the delayed conversion of baht into dollars. Explain what this means.2. If the net baht received from the Thailand operation are invested in Thailand, how will U.S. operations be affected?
1. Explain how the Sports Exports Company could utilize the spot market to facilitate the exchange of currencies. Be specific.2. Explain how the Sports Exports Company is exposed to exchange rate risk and how it could use the forward market to hedge this risk.Each month, the Sports Exports Company
How Can Persistently Weak Currencies Be Stabilized?Point The currencies of some Latin American countries depreciate against the U.S. dollar on a consistent basis. The governments of these countries need to attract more capital flows by raising interest rates and making their currencies more
Assume the spot rate of the British pound is $1.73. The expected spot rate one year from now is assumed to be $1.66. What percentage depreciation does this reflect?
Explain why a public forecast by a respected economist about future interest rates could affect the value of the dollar today. Why do some forecasts by well respected economists have no impact on today’s value of the dollar?
What factors affect the future movements in the value of the euro against the dollar?
Assume that there are substantial capital flows among Canada, the United States, and Japan. If interest rates in Canada decline to a level below the U.S. interest rate, and inflationary expectations remain unchanged, how could this affect the value of the Canadian dollar against the U.S. dollar?
Every month, the U.S. trade deficit figures are announced. Foreign exchange traders often react to this announcement and even attempt to forecast the figures before they are announced.a. Why do you think the trade deficit announcement sometimes has such an impact on foreign exchange trading?b. In
Explain why the value of the British pound against the dollar will not always move in tandem with the value of the euro against the dollar.
In the 1990s, Russia was attempting to import more goods but had little to offer other countries in terms of potential exports. In addition, Russia’s inflation rate was high. Explain the type of pressure that these factors placed on the Russian currency.
Analysts commonly attribute the appreciation of a currency to expectations that economic conditions will strengthen. Yet, this chapter suggests that when other factors are held constant, increased national income could increase imports and cause the local currency to weaken. In reality, other
If the Asian countries experience a decline in economic growth (and experience a decline in inflation and interest rates as a result), how will their currency values (relative to the U.S. dollar) be affected?
Why do you think most crises in countries (such as the Asian crisis) cause the local currency to weaken abruptly? Is it because of trade or capital flows?
The terrorist attacks on the United States on September 11, 2001, were expected to weaken U.S. economic conditions and reduce U.S. interest rates. How do you think the weaker U.S. economic conditions would have affected trade flows? How would this have affected the value of the dollar (holding
Tarheel Co. plans to determine how changes in U.S. and Mexican real interest rates will affect the value of the U.S. dollar.a. Describe a regression model that could be used to achieve this purpose. Also explain the expected sign of the regression coefficient.b. If Tarheel Co. thinks that the
Mexico tends to have much higher inflation than the United States and also much higher interest rates than the United States. Inflation and interest rates are much more volatile in Mexico than in industrialized countries. The value of the Mexican peso is typically more volatile than the currencies
Assume that the United States invests heavily in government and corporate securities of Country K. In addition, residents of Country K invest heavily in the United States. Approximately $10 billion worth of investment transactions occur between these two countries each year. The total dollar value
Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $.15 to $.14 in 10 days. The following interbank lending and borrowing rates exist:Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 70 million pesos in the interbank
Diamond Bank expects that the Singapore dollar will depreciate against the U.S. dollar from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist:Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market and investing the
Assume that the level of capital flows between the United States and the country of Zeus is negligible (close to zero) and will continue to be negligible. There is a substantial amount of trade between the United States and the country of Zeus. The main import by the United States is basic clothing
1. How are percentage changes in a currency’s value measured? Illustrate your answer numerically by assuming a change in the Thai baht’s value from a value of $.022 to $.026.2. What are the basic factors that determine the value of a currency? In equilibrium, what is the relationship between
1. Given Jim’s expectations forecast whether the pound will appreciate or depreciate against the dollar over time.2. Given Jim’s expectations, will the Sports Exports Company be favorably or unfavorably affected by the future changes in the value of the pound?Because the Sports Exports Company
Should Speculators Use Currency Futures or Options?Point Speculators should use currency futures because they can avoid a substantial premium. To the extent that they are willing to speculate, they must have confidence in their expectations. If they have sufficient confidence in their expectations,
Compare and contrast forward and futures contracts.
a. How can currency futures be used by corporations?b. How can currency futures be used by speculators?
Differentiate between a currency call option and a currency put option.
Compute the forward discount or premium for the Mexican peso whose 90-day forward rate is $.102 and spot rate is $.10. State whether your answer is a discount or premium.
How can a forward contract backfire?
When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging?
When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?
List the factors that affect currency call option premiums and briefly explain the relationship that exists for each. Do you think an at-the-money call option in euros has a higher or lower premium than an at-the-money call option in Mexican pesos (assuming the expiration date and the total dollar
List the factors that affect currency put option premiums and briefly explain the relationship that exists for each.
Randy Rudecki purchased a call option on British pounds for $.02 per unit. The strike price was $1.45, and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units in a British pound option. What was Randy’s net profit on this option?
Alice Duever purchased a put option on British pounds for $.04 per unit. The strike price was $1.80, and the spot rate at the time the pound option was exercised was $1.59. Assume there are 31,250 units in a British pound option. What was Alice’s net profit on the option?
Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was $.76, and the spot rate at the time the option was exercised was $.82. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that there are 50,000 units in a Canadian dollar
Brian Tull sold a put option on Canadian dollars for $.03 per unit. The strike price was $.75, and the spot rate at the time the option was exercised was $.72. Assume Brian immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in
What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros? Explain why an MNC may use forward contracts to hedge committed transactions and use currency options to hedge contracts that
Assume that the euro’s spot rate has moved in cycles over time. How might you try to use futures contracts on euros to capitalize on this tendency? How could you determine whether such a strategy would have been profitable in previous periods?
Assume that the transactions listed in the first column of the table below are anticipated by U.S. firms that have no other foreign transactions. Place an “X” in the table wherever you see possible ways to hedge each of the transactions.
Assume that on November 1, the spot rate of the British pound was $1.58 and the price on a December futures contract was $1.59. Assume that the pound depreciated during November so that by November 30 it was worth $1.51.a. What do you think happened to the futures price over the month of November?
Assume that a March futures contract on Mexican pesos was available in January for $.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $.092 per peso. How could speculators capitalize on this situation, assuming zero transaction costs? How
LSU Corp. purchased Canadian dollar call options for speculative purposes. If these options are exercised, LSU will immediately sell the Canadian dollars in the spot market. Each option was purchased for a premium of $.03 per unit, with an exercise price of $.75. LSU plans to wait until the
Auburn Co. has purchased Canadian dollar put options for speculative purposes. Each option was purchased for a premium of $.02 per unit, with an exercise price of $.86 per unit. Auburn Co. will purchase the Canadian dollars just before it exercises the options (if it is feasible to exercise the
Bama Corp. has sold British pound call options for speculative purposes. The option premium was $.06 per unit, and the exercise price was $1.58. Bama will purchase the pounds on the day the options are exercised (if the options are exercised) in order to fulfill its obligation. In the following
Bulldog, Inc. has sold Australian dollar put options at a premium of $.01 per unit, and an exercise price of $.76 per unit. It has forecasted the Australian dollar’s lowest level over the period of concern as shown in the following table. Determine the net profit (or loss) per unit to Bulldog,
A U.S. professional football team plans to play an exhibition game in the United Kingdom next year. Assume that all expenses will be paid by the British government, and that the team will receive a check for 1 million pounds. The team anticipates that the pound will depreciate substantially by the
Currency futures markets are commonly used as a means of capitalizing on shifts in currency values, because the value of a futures contract tends to move in line with the change in the corresponding currency value. Recently, many currencies appreciated against the dollar. Most speculators
One year ago, you sold a put option on 100,000 euros with an expiration date of one year.You received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that one year ago, the spot rate of the euro was $1.20, the one-year forward rate exhibited a discount of 2
Myrtle Beach Co. purchases imports that have a price of 400,000 Singapore dollars, and it has to pay for the imports in 90 days. It can purchase a 90-day forward contract on Singapore dollars at $.50 or purchase a call option contract on Singapore dollars with an exercise price of $.50. This
Reska, Inc. has constructed a long euro straddle. A call option on euros with an exercise price of $1.10 has a premium of $.025 per unit. A euro put option has a premium of $.017 per unit. Some possible euro values at option expiration are shown in the following table.a. Complete the worksheet and
Refer to the previous question, but assume that the call and put option premiums are $.02 per unit and $.015 per unit, respectively.a. Construct a contingency graph for a long euro straddle.b. Construct a contingency graph for a short euro straddle.
The current spot rate of the Singapore dollar (S$) is $.50. The following option information is available:• Call option premium on Singapore dollar (S$) = $.015.• Put option premium on Singapore dollar (S$) = $.009.• Call and put option strike price = $.55.• One option contract represents
Maggie Hawthorne is a currency speculator. She has noticed that recently the euro has appreciated substantially against the U.S. dollar. The current exchange rate of the euro is $1.15. After reading a variety of articles on the subject, she believes that the euro will continue to fluctuate

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