International Finance 5th Edition Maurice D Levi - Solutions

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12. Under what conditions might the emergence of a limited number of free-trade blocs lower global standards of living?
1. Why are letters of credit used less often in domestic trade than in international trade?
13. How does the World Trade Organization differ from its predecessor, the GATT?
8. Are letters of credit and export credit insurance perfect substitutes? If not, why not?
9. In what way does Table 22.2 suggest little discrimination against foreign financial firms? Can you find any apparent examples of discrimination?
4.a. What is the Eurodollar creation from a deposit of $2 million when the offshore banks maintain a 5 percent reserve? Assume that the $2 million is deposited in a London office of Barclays Bank,which makes a loan to British Holdings Ltd.,which uses the funds to pay for goods from British Auto
10. The chaebol in South Korea and the keiretsu in Japan have been said to influence corporate capital structure in those countries.Why has this been argued?
9. Why does having an income in foreign currency reduce required borrowing risk premiums? Which type of risk – translation/transaction risk or operating risk – is reduced?
8. If r$ = 12.50 percent,r£ = 14.00 percent, and S($/£) = 2.25,what must the actual exchange rate after ten years, S10($/£), be in order to make borrowing in pounds a good idea?
2. Under what condition(s) can the availability of savings and the opportunities for investment influence the cost of capital in different countries?
4. What role do market imperfections play in foreign direct investment?
2. What are the limitations of licenses as an alternative to foreign direct investment?
10. Do you think the standard of living overseas has been raised by the direct investments of multinationals? Does this provide a reason for offering MNCs concessionary loans?
9. In what ways might country risk be influenced by a country’s political and economic associations and its geography?
8. Why might country risk depend on the diversity of exports as well as on the value of exports versus debt-service payments?
7. Why are risk premiums on bonds a useful way of ranking risks for direct investments, but not very useful for making bond purchasing decisions?
6. How can conflicts exist when a firm sets transfer prices for maximizing overall profits? Could these conflicts arise from differential tax rates, import tariffs, imminent changes in exchange rates, and political risks?
5. Under what circumstances are market prices appropriate to use as transfer prices?
4. What are the pros and cons of setting transfer prices equal to marginal costs?
3. Which explanation(s) of the growth of MNCs is/are supported by the evidence that MNCs are relatively capital intensive?
2. Which of the reasons for the growth of MNCs do you think are the primary reasons for the development of multinationals in the following industries?a. Pharmaceutical development and manufacturingb. Automobile manufacturingc. Metal refiningd. Hotel operatione. Commercial bankingf. Energy
1. What examples can you list of foreign multinationals operating in the United States?
6. How would you include depreciation allowances in the calculation of adjusted present value when the effective corporate income tax is that of the foreign country in which an investment is located? Consider both the exchangerate issue and the appropriate discount rate.
5. How would you allow for lost income due to displaced sales from a subsidiary located in another foreign country, rather than from domestic, parent operations? Consider both exchange-rate and tax problems.
4. Compare the treatments of tax shields from debt in using the NPV and APV approaches to foreign investments.
3. Which items in the previous question are contractual and which are non-contractual? Could you discount the cash flows with a real rate of interest?
2. A US automobile manufacturer, National Motors, is considering building a new plant in Britain to produce its sports car, the Sting.The estimated construction cost of the plant is £50,000,000, and construction should be completed in a year.The plant will raise borrowing capacity by about
1. Will withholding taxes that are at rates below domestic corporate tax rates affect direct investment when full withholding tax credit is available? How will withholding tax rates affect the distribution of total tax revenues between countries?
12. What discount rate should be used for calculating the pressent value of interest payments on a concessionary loan, where the payments are in terms of the foreign currency?
11. In what way is the handling of contractual foreign currency cash flows different from the handling of noncontractual foreign currency cash flows?
10. What is a “contractual” cash flow?
9. If cash flows are converted into the investor’s domestic currency, and are adjusted for inflation so they are real, what discount rate should be used?
8. What is the nature of the discount rate that is used for cash flows in the APV approach?
7. What amount of risk, total or only systematic, should be included in the all-equity discount rate used in the APV calculation?
6. How do the levels of corporate tax rates influence whether an investor’s home country rate or the rate in the country of investment is used for calculating after-tax cash flows?
5. What is meant by “borrowing capacity” or “debt capacity,” and how is the tax shield from this incorporated into a project’s APV?
4. If blocked, or not fully repatriable, funds can be liberated by a new foreign project, how should the value of these funds to the investor be factored into a project’s APV?
3. What does concessionary lending imply for the cost of capital of a corporation enjoying the favorable terms, versus the opportunity cost of capital to shareholders?
2. Which of the two perspectives in Question 1 is the correct perspective for judging foreign direct investments?
1. It what ways can the view of a foreign investment project differ according to whether it is viewed from the perspective of the investor or from the perspective of a project manager in the country where investment occurs?
10. What impact might global custodians have on capital markets if they do their job cheaply and effectively?
9. How is the expected equilibrium return on bonds likely to vary with the covariance between the local currency market value of bonds and the exchange rate?
8. Could multinationals provide a vehicle for overcoming market segmentation?
7. How might we calculate the relative importance of currency risk versus the total risk on:a. An individual foreign stock?b. A portfolio of foreign stocks?
6. Why might an investor who is able to diversify globally benefit if, for most other investors, capital markets are segmented?
5. What possible reasons exist for the segmentation of capital markets?
4. Why does the calculation of the risk-free rate for the ICAPM involve the use of forward contracts? Could we use any one country’s risk-free rate if covered interest parity holds?
3. Could we judge whether markets are segmented or integrated by examining rules governing the international flow of capital?
2. Why are there gains from international diversification without hedging exchange-rate risk even though exchange rates contribute a substantial proportion of overall risk?
1. Why are the benefits from international diversification overstated if efficient portfolios are constructed on the basis of past investment returns?
12. What do global custodians do?
11. How might multinational firms offer a vehicle for overcoming segmented capital markets?
10. How would you interpret the conclusion that returns are more closely related to systematic risk in the domestic market than to systematic risk in the international market?
9. How can the level of information cause international capital market segmentation?
8. What is meant by “home equity bias”?
7. How would you characterize the gains from international portfolio diversification?
6. What assumptions must be made to apply the international capital asset pricing model to an explanation of the pricing of securities?
5. What do we mean by “integrated capital markets”?
4. What are the different components of volatility from investment in stocks of an individual foreign country?
3. How could different compositions of stock market indexes reduce the correlation between returns on different countries’ markets?
2. Why are the correlation coefficients between different countries’ stock markets and stocks relevant for the potential benefit from international portfolio diversification?
1. What types of investment are included in “international portfolio investment”?
10. Why do many governments restrict the maximum length of time over which firms can practice leading and lagging of accounts receivable and payable?
9. Why do multinational firms tend to use multinational banks, rather than local banks in their local markets?
8. Why might we be suspicious that any apparent covered interest arbitrage opportunity must be due to not considering transaction costs, political risk, taxes, or liquidity?
7. Will allowance for co-movement between currencies allow a firm to eliminate foreign exchange risk or foreign exchange exposure?
6. What are the differences and similarities between the gain from centralization of cash management via pooling, and the gain via diversification of different currencies?
5. Which of the gains from centralization of cash management are related to foreign exchange transaction costs?
4. What is the connection between the size of the gain from netting and the nature of long and short positions of the different divisions of a multinational firm?
3. Suppose that you face the situation in Question 2, except that the effective tax rate on interest income is 50 percent, and the effective tax rate on capital gains is 30 percent. In which currency-denominated securities would you wish to invest?
2. Suppose that as the money manager of a US firm you face the following situation:Here rB $ and rI $ are the one-year interest rates at which you can respectively borrow and invest in US dollars, and rB C$ and rI C$ are the one-year borrowing and investing interest rates in Canadian dollars.a. If
1. Assume that you face the following money-market and exchange-rate quotations:a. If r$ and rC$ are respectively the per annum six-month US dollar and Canadian dollar borrowing rates facing a US firm that wishes to remain hedged, should that firm borrow in US or Canadian dollars?b. If r$ and rC$
8. How does liquidity preference affect international cash management decisions?
7. How can “pooling” provide benefits for international cash management?
6. What are the advantages of centralized cash management?
5. What is meant by “leading” and “lagging”?
4. What is meant by “netting”?
3. Why do transaction costs on spot and forward exchange reduce the incentive to borrow in a foreign currency?
2. Why do transaction costs on spot and forward exchange reduce the incentive to invest in foreign currency securities?
1. What are the objectives of international cash management?
9. What different interpretations can be given to the shifting of the probability distribution of beliefs about a policy regime?10. Do huge profits by an individual speculator such as George Soros necessarily imply markets are inefficient?
8. How might low correlations of individual variables with exchange rates hide a strong relationship of many variables when included together?
7. Why can we test for market efficiency without including any variables which might influence exchange rates in our test?
6. How might you speculate on the exchange rate being less volatile than the market as a whole believes?
5. How does forward bias relate to risk aversion?
4. Why might foreign exchange markets be efficient even if it is possible to make a positive return from using forecasting techniques?
3. If foreign exchange markets were very efficient,what would this imply about the profitability of foreign exchange cash management?
2. What is the advantage of speculating with options?
1. Why might a speculator prefer speculating on the futures market to speculating with forward exchange contracts?
20. What might you deduce about what has happened to different people’s opinions on exchange rates from an increase in the volume of foreign exchange transactions?
19. What type of information is used in “technical” forecasting?
18. What problem is presented by “changing regimes” in a study of market efficiency?
17. What is an “event study” and how could it be applied to learning about what influences exchange rates?
16. Why might anticipated changes in variables appear statistically insignificant when related to exchange rates?
15. Is the theoretical correlation coefficient between the ratio of US to Japanese price levels, and the exchange rate of the Japanese yen per dollar, likely to be positive or negative?
14. Why might you compare the performance of a spot exchange-rate forecasting model with the ability of forward exchange rates to predict eventually realized spot rates?
13. What is meant by “rational” forecasts?
12. Is it possible to test for the omission of important factors in the pricing of foreign currencies without any measures of these factors?
11. What type of regression equation could you use to test the efficiency of the foreign exchange market and the existence of forward bias simultaneously?
10. Are there any “insiders” in the foreign exchange markets?

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International Finance 5th Edition Maurice D Levi - Solutions

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