Questions and Answers of Foundations Of Multinational Financial Management

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
Comment on the following statement: “One of the puzzling aspects of central bank intervention is how those who manage our economic affairs think they know what is the ‘right’ price for a dollar
In a widely anticipated move, on August 30, 1990, the Bank of Japan raised the discount rate (the rate it charges on loans to financial institutions) from 5.25% to 6% to reduce inflationary pressures
In the late 1980s, the Bank of Japan bought billions of dollars in the foreign exchange market to prop up the dollar’s value against the yen. What were the likely consequences of this foreign
Countries with high inflation need to keep devaluing their currencies to maintain competitiveness. But countries that try to maintain their competitiveness by devaluing their currencies only end up
The Russian government is trying to figure out how to stabilize the value of its currency. What advice would you offer to it?
“Unsterilized interventions are just open market operations conducted through the foreign exchange market rather than through the U.S. government securities market.” Comment on this statement.
As 1992 began, the Russian government and the central bank tightened credit in an attempt to slow the growth in the supply of rubles. However, the moves weren’t popular with the country’s giant
In January 1991, President Mikhail Gorbachev banned all 50-ruble and 100-ruble bills, while permitting Soviet citizens to change only 1,000 rubles in these large bills into smaller denominations. In
On October 29, 1995, the Mexican government announced a new economic plan that called for the government to boost the economy by cutting taxes and spending. The plan also included an agreement among
Under the Convertibility Act, Argentina’s central bank is allowed to count dollar-denominated bonds issued by the Argentine government as part of its “foreign” reserve assets. What potential
After the Mexican devaluation, investors questioning Argentina’s ability to maintain currency convertibility began pulling their money out of Argentina. In response, the Argentine government took
One recommended approach to strengthen the dollar against the yen is for the U.S. Treasury to issue about $70 billion a year (the Japanese share of the U.S. trade deficit) in yen-denominated bonds.
In 1994, China sought to boost its foreign exchange reserves and stabilize the yuan (which was under pressure to appreciate) by mandating that Chinese enterprises sell all their foreign exchange to
In 1993, President Carlos Salinas de Gortari proposed a bill that would formally grant the Bank of Mexico, Mexico’s central bank, autonomy vis-à-vis the central government. As an investor, how
In August 1994, Alan Blinder, recently appointed as vice chairman of the Federal Reserve Board, gave a talk in which he argued that the Fed should be willing to tolerate somewhat higher inflation to
The People’s Bank of China, China's central bank, is run by bureaucrats whose prime objective seems to be funding loss-making state-owned firms. What is your prediction about the inflation outlook
In the midst of the Asian financial crisis, Malaysia’s Prime Minister Mahathir Mohamad accused an international cabal of Jewish financiers of deliberately provoking the crisis to wreck Malaysia’s
In the 1995 election for the French presidency, the Socialist candidate, Lionel Jospin, vowed to halt all privatizations, raise taxes on business, spend heavily on job creation, and cut the work week
Discuss the pros and cons for Britain of joining EMU.
Why has speculation failed to smooth exchange rate movements?
The central rates for the Spanish and Belgian currencies on March 20, 1997, were Ptas 163.826/ECU and BF 39.7191/ECU. What central cross rate between these two currencies did these central rates
Commentators pointed to the fact that many people in Britain have variable rate mortgages as opposed to the fixed-rate mortgages more common in Europe. Britain also has the most flexible labor
When Britain announced its entry into the exchange rate mechanism of the EMS on October 5, 1990, the price of British gilts (long term government bonds) soared and sterling rose in value.a. What
Some large MNCs warned that they only chose to invest in Britain on the assumption it would ultimately adopt the euro. Why would MNCs be interested in Britain joining the euro?
Gold has been called “the ultimate burglar alarm.” Explain what this expression means.
Is a floating rate system more inflationary than a fixed rate system? Explain.
Since 1979, the price of gold has fallen by more than 60%. What could explain such a steep price decline? Consider the roles of inflation and new financial instruments such as swaps and options that
Why might higher pound interest rates send sterling even higher? Give two possible reasons.
Find a recent example of a nation’s foreign exchange market intervention and note what the government’s justification was. Does this justification make economic sense?
What types of British companies would most likely benefit from joining the EMU?
Will coordination of economic policies make exchange rates more or less stable? Explain.
Suppose nations attempt to pursue independent monetary and fiscal policies. How will exchange rates behave?
Despite official parity between the DM and the Ostmark, the black market rate in early 1990 was about ten Ostmarks for one DM. What problems might setting the exchange rate at one Ostmark for each DM
In 1996, Chancellor Kenneth Clarke called for a national debate on whether Britain should join the EMU. Discuss the pros and cons for Britain of joining EMU.
What potential costs might be associated with the decision to widen the margins within which some currencies in the ERM can float?
In discussing EMU, a recent government report stressed a need to make the central bank accountable to the “democratic process.” What are the likely consequences for price stability and exchange
Comment on the following headline in The Wall Street Journal (January 11, 1993): “Germany’s Rate Cut Takes Pressure Off French Franc, and the Rest of the EMS.”
The French franc was the main target of speculators during the August 1993 assault on the EMS despite the fact that France was running a 2% inflation rate while Germany had a 4.3% inflation rate. Why
In early 1996, in response to growing doubts about the ability of EC nations to meet the Maestricht criteria and move toward monetary union by the 1999 deadline, yields on European bonds jumped. What
“For a fixed exchange rate system to work, the government must be able to make tight budget and monetary policies stick from the outset.” Comment.
On taking office in October 1993, the Bundesbank’s new president, Hans Tietmeyer, said, “Forced reductions in central bank interest rates which are contrary to stability policies can neither
Comment on the following statement: “Wage flexibility is a substitute, albeit an imperfect one, for exchange rate flexibility.”
From base price levels of 100 in 2000, Japanese and U.S. price levels in 2006 stood at 98 and 109, respectively.a. If the 2000 $:¥ exchange rate was $0.00928, what should the exchange rate be in
In February 1985, Bolivian inflation reached a monthly peak of 182%. What was the annualized rate of inflation in Bolivia for that month?
If the dollar is appreciating against the Polish zloty in nominal terms but depreciating against the zloty in real terms, what do we know about Polish and U.S. inflation rates?
The inflation rate in Great Britain is expected to be 4% per year, and the inflation rate in France is expected to be 6% per year. If the current spot rate is £1 = FF 12.50, what is the expected
Suppose the nominal peso/dollar exchange rate is fixed. If the inflation rates in Mexico and the U.S. are constant (but not necessarily equal), will the real value of the peso/dollar exchange rate
If expected inflation is 100% and the real required return is 5%, what will the nominal interest rate be according to the Fisher Effect?
If the $:¥ spot rate is $1 = ¥218 and interest rates in Tokyo and New York are 6% and 12%, respectively, what is the expected $:¥ exchange rate one year hence?
Suppose the dollar/rupiah rate is fixed but Indonesian prices are rising faster than U.S. prices. Is the Indonesian rupiah appreciating or depreciating in real terms?
If the average rate of inflation in the world rises from 5% to 7%, what will be the likely effect on the U.S. dollar’s forward premium or discount relative to foreign currencies?
Why do firms from each of the following categories become MNCs? Identify the competitive advantages that a firm in each category must have to be a successful MNC.a. Raw-materials seekers b. Market
Set up the double-entry accounts showing the appropriate debits and credits associated with the following transactions:a. ConAgra, a U.S. agribusiness, exports $80 million of soybeans to China and
In late 1990, the U.S. government announced that it might try to reduce the budget deficit by imposing a 0.5% transfer tax on all sales and purchases of securities in the U.S., with the exception of
In 1991, the U.S. government imposed a stiff import tariff on the active-matrix LCD screens that now appear in next-generation laptop computers.a. Assess the likely consequences of the import duty
An economic analysis firm has just published projected inflation rates for the U.S. and Germany for the next five years. U.S. inflation is expected to be 10% per year, and German inflation is
The interest rate in England is 12%, while in Switzerland it is 5%. What are possible reasons for this interest rate differential? What is the most likely reason?
Suppose that in Japan the interest rate is 8% and inflation is expected to be 3%. Meanwhile, the expected inflation rate in France is 12%, and the English interest rate is 14%. To the nearest whole
Suppose three year deposit rates on Eurodollars and Eurofrancs (Swiss) are 12% and 7%, respectively. If the current spot rate for the Swiss franc is $0.3985, what is the spot rate implied by these
How would each of the following transactions show up on the U.S. BOP accounts?a. Payment of $50 million in Social Security to U.S. citizens living in Costa Rica.b. Sale overseas of 125,000 Elvis
The spot rate on the euro is $0.91 and the 180 day forward rate is $0.93. What are possible reasons for the difference between the two rates?
How would Mr. Buffett’s plan likely affect savings, investment, and interest rates in the U.S.? The value of the U.S. dollar?
Assume the interest rate is 11% on pounds and 8% on euros. If the euro is selling at a one-year forward premium of 4% against the pound, is there an arbitrage opportunity? Explain.
One idea to curb potentially destabilizing international movements of capital has been devised by James Tobin, a Nobel Prize-winning economist. He proposes putting a small tax on foreign exchange
During 1988, the U.S. prime rate (the rate of interest banks charge on loans to their best customers) stood at 9.5% while Japan’s prime rate was about 3.5%. Given that discrepancy, a number of
If the Swiss franc is $0.68 on the spot market and the 180 day forward rate is $0.70, what is the annualized interest rate in the U.S. over the next six months? The annualized interest rate in
In what way is Warren Buffett’s plan the equivalent of a tariff? What will be its likely impact on American consumers?
The interest rate in the U.S. is 8%; in Japan the comparable rate is 2%. The spot rate for the yen is $0.007692. If IRP holds, what is the 90 day forward rate on the Japanese yen?
In the late 1960s, Firestone Tire decided that Swiss francs at 2% were cheaper than U.S. dollars at 8% and borrowed about SFr 500 million. Comment on this choice.
Comment on the following quote from the Wall Street Journal (August 27, 1984, p. 6) that discusses the improving outlook for Britain's economy: “Recovery here will probably last longer than in the
During the Reagan era, 1981-1988, the U.S. current account moved from a tiny surplus to a large deficit. The following table provides U.S. macroeconomic data for that period.a. Based on these data,
What factors might lead to persistent covered interest arbitrage opportunities among countries?
Comment on the following headline that appeared in the Wall Street Journal (December 19, 1990, p. C10): “Dollar Falls Across the Board as Fed Cuts Discount Rate to 6.5% From 7%.” (The discount
In 1998, China’s current account had a surplus of $29.3 billion, its capital account had a zero balance, its financial account aside from official reserves had a deficit of $6.3 billion, and its
Suppose the Eurosterling rate is 15%, and the Eurodollar rate is 11.5%. What is the forward premium on the dollar? Explain.
What will be the likely effect of Mr. Buffett’s plan on U.S. exports?
It has been argued that the U.S. government’s economic policies, particularly as they affect the U.S. budget deficit, are severely constrained by the world’s financial markets. Do you agree or
Suppose the spot rates for the euro, pound sterling, and Swiss franc are $0.92, $1.13, and $0.38, respectively. The associated 90 day interest rates (annualized) are 8%, 16%, and 4%; the U.S. 90 day
“High real interest rates can be a cause for celebration, not alarm.” Discuss.
In an integrated world capital market, will higher interest rates in, say Japan, mean higher interest rates in, say, the U.S.?
Suppose today’s exchange rate is $1.35/€. The six-month interest rates on dollars and euros are 6% and 3%, respectively. The six-month forward rate is $1.3672. A foreign exchange advisory service
In France in 1994, short-term interest rates and bond yields remained higher than in Germany, despite a better outlook for inflation in France. Does this situation indicate a violation of the Fisher
Lufthansa buys $400 million worth of Boeing jets in 2008 and is financed by the U.S. Eximbank with a five year loan that has no principal or interest payments due until 2009. What is the net impact
At the same time that it was talking down the dollar, the Clinton Administration was talking about the need for low interest rates to stimulate economic growth. Comment.
Suppose Patagonia has a government surplus of $10 billion. At the same time, private investment in Patagonia exceeds private savings by $15 billion. What can you conclude about Patagonia's balance on
Suppose the U.S. expropriates all foreign holdings of American assets. What will happen to the U.S. current account deficit? What will likely happen to U.S. savings and investment? Why?
In a freely floating exchange rate system, if the current account is running a deficit, what are the consequences for the nation’s balance on capital account and its overall BOP?
How does a trade deficit affect the current account balance?
For Brazil to service its foreign debts without borrowing more money, what must be true of its trade balance?
On which BOP account does tourism show up?
Mr. Buffett’s plan focuses on the U.S. trade deficit. What would be its likely impact on the U.S. current-account deficit?

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