Questions and Answers of Foundations Of Multinational Financial Management

Given the resources available to them, countries A and B can produce the following combinations of steel and corn:a. Do you expect trade to take place between countries A and B? Why?b. Which country
In response to a falling Turkish lira the President of Turkey Recep Tayyip Erdoğan on May 11, 2018 called for lower interest rates and described interest rates as the “mother and father of all
On July 19, 2018, the president of the United States Donald Trump commented that a strong dollar “puts us at a disadvantage,” which marked another example of the U.S. president commenting
Between January 1, 2018 and August 14, 2018, the Turkish lira tumbled dramatically from TL3.786/USD to TL6.955/USD.a. What was the original U.S. dollar value of the Turkish lira? What is the new
On February 2, 2018, one U.S. dollar bought €0.799. A few months later on August 16, 2018, the same U.S. dollar bought €0.882.a. What was the dollar value of the euro in February 2018? What was
On June 22, 2016, the day before the brexit vote, the British pound was worth $1.467. Two weeks later, on the July 7, the British pound was worth $1.292.a. By what percentage has the pound
Argentina, once the world’s seventh-largest economy, has long been considered one of Latin America’s worst basket cases. Starting with Juan Peron, who was first elected president in 1946, and for
From base price levels of 100 in January 2000, Japanese and U.S. price levels in December 2017 stood at 123 and 191, respectively.a. If the January 2000 $:¥ exchange rate was $0.007692, what should
In early 2018, the short-term interest rate in the Japan was −0.1%, and forecast Japanese inflation was 1.2%. At the same time, the short-term South Korean interest rate was 1.68% and forecast
Suppose Lufthansa buys $400 million worth of Boeing jets in 2018 and is financed by the U.S. Eximbank with a five-year loan that has no principal or interest payments due until 2019. What is the net
Current-account balance in China.a. In 2010, China’s overall saving rate was nearly 51.5% of GDP, the highest in the world. China’s domestic investment rate, at 43%, was also high, but not as
The $/€ exchange rate is €1 = $1.45, and the €/CHF exchange rate is CHF 1 = €0.71. What is the CHF/$ exchange rate?
According to the Wall Street Journal, on May 8, 2009, a BNY Mellon foreign exchange desk bought €4 million on behalf of an L.A. pension fund at a rate of $1.3625, just below the high for the day of
Using the data in Table 6.1, calculate the 30-day, 90-day, and 180-day forward premiums for the British pound.Table 6.1 Foreign Exchange Rates, Friday, November 30, 2018 Source: Bloomberg. Currency 1
Suppose that the forward ask price for March 20 on euros is $0.9127 at the same time that the price of CME euro futures for delivery on March 20 is $0.9145. How could an arbitrageur profit from this
A trader executes a “bear spread” on the Japanese yen consisting of a long PHLX 103 March put and a short PHLX 101 March put. If the price of the 103 put is
What is a currency swap?
In “The Big Short: Inside the Doomsday Machine” Michael Lewis writes “a credit default swap was confusing mainly because it wasn’t really a swap at all. It was an insurance policy, typically
AQR Capital Management an investment management firm recently bought $100,000,000 worth of A-rated GE bonds but following a downgrade of the bonds to BBB the portfolio manager is increasingly worried
Ford exports SUV’s from the United States to Europe in competition with the Japanese. Similarly, Apple exports computers to Europe. However, all of Apple’s biggest competitors are American
On August 1, 2012, France implemented a “Tobin tax” or Financial Transaction Tax (FTT), which consists in a 0.2% tax on stock purchases of French publicly traded companies with a market value
A Novo Nordisk A/S ADR is trading on the New York Stock Exchange for $49.78. The ADR ratio is 1:1 and the current exchange rate is $1=DKK 6.57. What ought to be the Danish kroner price of Novo
Sweden’s Oasmia Pharmaceutical AB is trading on the Nadaq in New York for $2.90 and on the Nasdaq OMX in Stockholm for SEK 9. If the exchange rate is currently $1=SEK 9.30 then what is the ADR
Suppose that Argentina bonds are yielding more than 13% annually. Does this high yield make them suitable for American investors looking to raise the return on their portfolios? Explain.
Investors should avoid investing in the United Kingdom, given its problematic outlook now that Britain is exiting the European Union. Comment.
During the year, the price of British gilts (government bonds) went from £102 to £106, while paying a coupon of £9. At the same time, the exchange rate went from £1:$1.40 to £1:$1.25. What was
During 2018, Toyota Motor Company shares went from ¥7,500 to ¥6,500, while paying a dividend of ¥220. At the same time, the exchange rate went from $1 = ¥113 to $1 = ¥109.a. What was the total
On January 1st, 2019, the dollar was worth €1.147. If one-year German bunds are yielding −0.55% and one-year U.S. Treasury bonds are yielding 2.55%, at what end-ofyear exchange rate will the
In 1998, Daimler-Benz bought 100% of Chrysler Corp. for $36 billion. In 2007, DaimlerChrysler announced it was selling 80.1% percent of Chrysler to the private-equity firm Cerberus Capital Management
The CFO of Amazon.com Inc. is thinking of borrowing Japanese yen because of its low interest rate, currently at 1%. The current interest rate on U.S. dollars is 3%. What is your advice to the CFO?
FMC Corporation, a Philadelphia-based specialty chemicals company, traditionally finances its Brazilian operations from outside that country because it is “too expensive” to borrow local currency
Switzerland-based Glencore is the world’s largest producer of cobalt, which is mined alongside copper at its Katanga and Mutanda mines in the Democratic Republic of Congo. It is currently
Suppose that a foreign project has a beta of 0.95, the risk-free return is 3%, and the required return on the market is estimated at 12%. What is the cost of capital for the project?
On March 28, 2019, Netflix had an equity beta of 1.56 calculated over the last three years using monthly returns on Netflix and the S&P 500 as the market proxy. The S&P 500 and Netflix had a standard
Suppose that one of the inducements provided by Thailand to woo Scandisk into setting up a local production facility is a 10-year, $10 million loan at 3% interest. The principal is to be repaid at
Group PSA, headquartered in the outskirts of Paris, France is the second largest European-based auto-manufacturer in the world. Its brands include Peugeot, Citroën, DS, Opel, and Vauxhall (the last
In 2017, the Japanese company Takeda Pharmaceutical Company acquired the U.S. company ARIAD Pharmaceuticals at leader in oncology therapies for $5.2 billion. What economic advantages might the two
Carrier Air Conditioner, a division of United Technologies, is thinking of shifting virtually all the labor-intensive portion of its production from Indiana to Mexico. What risks is Carrier likely to
Germany’s $95 billion in revenue electronics giant, Siemens AG, sells medical and telecommunications equipment, power plants, automotive products, and computers. Siemens has been operating in the
Comment on the following statement: “Middle East airlines have not been popular with the U.S. legacy carriers. This is because the Gulf airlines in the past have been heavily subsidized, with the
Suppose England raised its corporate tax rate by one percentage point. How would this increase affect the economics of the IDC-U.K. project?
Suppose a firm earns $1 million before tax in Spain. It pays Spanish tax of $0.25 million and remits the remaining $0.75 million as a dividend to its U.S. parent.a. Under U.S. tax law prior to the
Bornholms Kildevand produces natural spring water on the small island of Bornholm, Denmark in the Baltic sea. A 1 liter bottle retails for about 30 Danish kroner or roughly $4.50. On its bottles it
Problems 1 and 2 are based on the Spectrum Manufacturing AB case (scenarios 1, 2, and 3) presented in the chapter. Calculate Spectrum’s economic exposure under the following new scenarios:Scenario
Problems 1 and 2 are based on the Spectrum Manufacturing AB case (scenarios 1, 2, and 3) presented in the chapter. Calculate Spectrum’s economic exposure under the following new scenarios:Scenario
The value of the call option is shown as approaching its intrinsic value as the option goes deeper and deeper in the money or further and further out of the money. Explain why this is so.
A well-known U.S. firm has a reinvoicing center (RC) located in Geneva. The reinvoicing center handles an annual sales volume of $1.2 billion – $700 million in interaffiliate sales and the rest in
Jim Toreson, CEO of Xebec Corp., a California, manufacturer of disk drive controllers, must decide whether to switch to offshore production. Given Xebec’s well developed engineering and marketing
Refer to the example of Exxon’s zero coupon Eurobond issue in the section titled The Euromarkets.a. How much would Exxon have earned if the yield on the stripped Treasurys had been 12.10%?
For the country selected in additional problem 4, analyze the exchange rate against the dollar during the same period.a. Is there any observable relationship between the BOP accounts and the exchange
Suppose that three-month interest rates (annualized) in Japan and the U.S. are 7% and 9%, respectively. If the spot rate is ¥142:$1 and the 90-day forward rate is ¥139:$1:a. Where would you
On February 15, 1993, President Clinton previewed his State of the Union message to Congress in a toughly worded speech about how the growing federal budget deficit made tax increases necessary.
Comment on the following statement: “A system of floating exchange rate fails when governments ignore the verdict of the exchange markets on their policies and resort to direct controls over trade
Describe the chief differences between a currency board and a central bank with a nominal exchange rate target.
On May 11, 1995, the House Budget Committee approved a plan to slash federal spending through 2002 and thereby end the persistent U.S. budget deficits. How do you think the dollar responded to this
Currently the yuan is not a convertible currency, meaning Chinese individuals cannot exchange their yuan for dollars to invest abroad. Moreover, companies operating in China must convert all their
On February 1, the euro is worth $1.2966. By May 1, it has moved to $1.3634.a. By how much has the euro appreciated or depreciated against the dollar over this 3-month period?b. By how much has the
Between 1988 and 1991, the price of a room at the Milan Hilton rose from Lit 346,400 to Lit 475,000. Concurrently, the exchange rate went from Lit 1,302 = $1 in 1988 to Lit 1,075 = $1 in 1991.a. By
On January 1, 1975, the Mexican peso/U.S.$ exchange rate was Ps 12.5 = $1. By 1985, the exchange rate stood at Ps 208.9 = $1.a. By how much has the Mexican peso appreciated or depreciated against the
How is the nature of IBM’s competitive advantages related to its becoming an MNC?
If capital markets were perfect, i.e., capital could move freely across national borders, would MNCs still exist? Why? Or, why not?
A memorandum by Labor Secretary Robert Reich to President Clinton suggests that the government penalize U.S. firms that invest overseas rather than at home. According to Reich, this kind of
In a satirical petition on behalf of French candlemakers, French economist Frederic Bastiat called attention to cheap competition from afar: sunlight. A law requiring the shuttering of windows during
Explain how globalization may affect even a small business in your local area.
a. What are the various categories of MNCs?b. What is the motivation for international expansion of firms within each category?
Opponents of globalization and outsourcing argue that locating manufacturing activities abroad causes a loss of U.S. jobs. However, total employment figures reveal that rather than resulting in a net
a. How does foreign competition limit the prices domestic companies can charge and the wages and benefits workers can demand?b. What political solutions can help companies and unions avoid the
Elaborate on the benefits of a proactive approach to globalization and global competition.
What are the various reasons for the emergence of multinational firms?
Given the added political and economic risks that appear to exist overseas, are MNCs more or less risky than purely domestic firms in the same industry? Consider whether a firm that decides not to
a. What is the capital asset pricing model?b. What is the basic message of the CAPM?c. How might an MNC use the CAPM?
What are the various ways in which domestic firms enter international markets? What are the benefits and risks of each strategy of foreign market entry?
a. Are MNCs riskier than purely domestic firms?b. What data would you need to address this question?
In seeking to predict tomorrow’s exchange rate, are you better off knowing today’s exchange rate or the exchange rates for the past 100 days?
Why might setting up production facilities abroad lead to expanded sales in the local market?
a. How might total risk affect a firm’s production costs and its ability to sell? Give some examples of firms in financial distress that saw their sales drop.b. What is the relation between the
Describe how these three typical transactions should affect present and future exchange rates.a. Seagram imports a year's supply of French champagne. Payment in euros is due immediately.b. MCI sells
Why is China trying to hold down the value of the yuan? What evidence suggests that China is indeed pursing a weak currently policy?
On August 1, 2006, Zimbabwe changed the value of the Zim dollar from Z$101/U.S.$ to Z$250/U.S.$.a. What was the original U.S. dollar value of the Zim dollar? What is the new U.S. dollar value of the
Suppose prices start rising in the U.S. relative to prices in Japan. What would we expect to see happen to the dollar: yen exchange rate? Explain.
If a foreigner purchases a U.S. government security, what happens to the supply of and demand for dollars?
The maintenance of money's value is said to depend on the monetary authorities. What might the monetary authorities do to a currency that would cause its value to drop?
In the second half of 1997, the Indonesian rupiah devalued by 84% against the U.S. dollar. By how much has the dollar appreciated against the rupiah?
In 2002, one dollar bought ¥125. In 2006, it bought about ¥115.a. What was the dollar value of the yen in 2005? What was the yen’s dollar value in 2006?b. By what percent has the yen risen in
In 1987, the British government cut taxes significantly, raising the after tax return on investments in Great Britain. What would be the likely consequence of this tax cut on the equilibrium value of
During 1997, the U.S. dollar appreciated by 104% against the South Korean won. By how much did the won depreciate against the U.S. dollar during the year?
Comment on the following headlines in The Wall Street Journal:a. “Sterling Drops Sharply Despite Good Health of British Economy: Oil Price Slump Is Blamed” (January 17, 1985)b. “Dollar Surges
Some economists have argued that a lower government deficit could cause the dollar to drop by reducing high real interest rates in the U.S. What does the asset view of exchange rates predict will
Suppose the Russian ruble devalues by 75% against the dollar. What is the percentage appreciation of the dollar against the ruble?
Suppose the dollar appreciates by 500% against the Russian ruble. How much has the ruble devalued against the dollar?
On March 29, 2007, the Indian rupee (Rs) was worth $0.023270. The next day, it was worth $0.022980.a. By how much has the rupee devalued against the dollar?b. By how much has the dollar appreciated
In early August 2002 (the exact date is a state secret), North Korea reduced the official value of the won from $0.465 to $0.0067. The black market value of the won at the time was $0.005.a. By what
What is there about fiat money that makes its exchange rate especially volatile?
Comment on the following news from the Wall Street Journal (April 3, 2007, p. C12): “The dollar was little changed against the euro and yen, but weakened versus the currencies of Australia and the
Does an undervalued yuan impose any cost on the Chinese economy? If so, what are they?
On June 14, 2001, Domingo Cavallo, Argentina’s treasury secretary announced a new exchange rate policy designed to stimulate Argentina’s slumping economy. Under the new policy, exporters and
In 1993, the Brazilian cruzeiro lost 95% of its dollar value. What happened to the cruzeiro value of the dollar during 1993?
Suppose the Chinese government ceased its foreign exchange market intervention and the yuan climbed to five to the dollar. What would be the percentage gain to the dollar investor?
Suppose a new Russian government makes threatening moves against Western Europe. How is this threat likely to affect the dollar's value? Why?
On the day that the Chancellor of the Exchequer announced independence for the Bank of England along with a boost in the base lending rate of one-quarter of a percentage point, the British stock

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