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foundations of multinational financial management
Questions and Answers of
Foundations Of Multinational Financial Management
Ruritania is calculating its BOP for the year. As usual, its data are perfectly accurate. All of the transactions for the year are listed below (in Rur$ millions).i) Ruritania received weapons worth
Suppose that during the year the won rose by 8% against the dollar and that the Bank of Korea kept 100% of its reserves in dollars. At a current exchange rate of W1,011/$, what would that do to the
Suppose the U.S. imposes import restrictions on Japanese steel. What is likely to happen to the U.S. current account deficit? What else is likely to happen?
What are some possible costs of Mr. Buffett’s plan?
According to popular opinion, U.S. trade deficits indicate any or all of the following: a lack of U.S. competitiveness owing to low productivity or low-quality products and/or lower wages, superior
The following transactions (expressed in U.S. $ billions) take place during a year. Calculate the U.S. merchandise-trade, current-account, capital-account, and financial-account balances.i) The U.S.
Select a country and undertake an analysis of that country’s BOP for 8 to 12 years, subject to availability of data. The analysis must include examinations (presentation of statistical data with
What happens to Mexico’s ability to repay its foreign loans if the U.S. restricts imports of Mexican agricultural produce?
Suppose that the trade imbalances of the 1990s largely disappear during the 2000s. What is likely to happen to the huge global capital flows of the 1980s? What is the link between the trade
In the early 1990s, Japan underwent a recession that brought about a prolonged slump in consumer spending and capital investment (it was estimated that in 1994 only 65% of Japan’s manufacturing was
Currently, social security is minimal in Japan. Suppose Japan institutes a comprehensive social security system. How is this policy switch likely to affect Japan's trade surplus?
In 1992, Japan entered a recession. However, at the same time, its current-account surplus hit a record. Is there a contradiction between Japan’s large trade surplus and a weak national economy?
What will strong economic growth do for the U.S. current account balance? A U.S. recession?
In 1965, about 34% of all adult workers were under the age of 34, compared with almost 47% by 1980. Meanwhile, the share of the workforce between 35 years and 59 years shrank from about 60% to 49%.
In 1990, Japan’s Ministry of International Trade and Investment (MITI) proposed that firms be given a tax credit equal to 5% of the value of its increased imports. The purpose of this tax subsidy
It has been argued that with freer markets, Third World nations are now able to attract capital and technology from the advanced nations. As a result, they can achieve productivity close to Western
In the early 1990s, interest rates worldwide fell. As a net debtor nation, how should this affect the U.S. current-account balance?
In 1990, Germany’s current account surplus exceeded $50 billion. However, it is estimated that the reunification process will require that Germany invest several hundred billion dollars in its
“The U.S. trade deficit is a consequence of the unwillingness of the current generation of American taxpayers to pay fully for the goods and services they want from government.” Comment.
On June 23, 1997, Japanese Prime Minister Ryutaro Hashimoto spooked Wall Street. At a Columbia University luncheon, he appeared to warn that the Japanese might sell U.S. Treasury bills unless the
The devastating earthquake that hit Kobe, Japan on January 17, 1995, was estimated to cause about $100 billion in damage to the Japanese economy. What is the likely effect of this earthquake on
Spot rate - rate at which foreign exchange can be bought or sold for immediate delivery.a. Actual rates are given in pairs: a bid (buy) rate and ask (sell) rateb. Cross rates:c. Measuring currency
Answer the following questions based on data.a. How many Swiss francs can you get for one dollar?b. How many dollars can you get for one Swiss franc?c. What is the three month forward rate for the
The $: € exchange rate is €1 = $1.35, and the €/SFr exchange rate is SFr 1 = €0.61. What is the SFr/$ exchange rate?
Suppose the direct quote for sterling in New York is 1.9880 5.a. How much would £500,000 cost in New York?b. What is the direct quote for dollars in London?
What risks confront dealers in the foreign exchange market? How can they cope with these risks?
Suppose the quote on pounds is $1.624-31.a. If you converted $10,000 to pounds and then back to dollars, how many dollars would you end up with?b. Suppose you could buy pounds at the bid rate and
Compute the profit from a $5 million transaction associated with each arbitrage opportunity.
Using the following data, calculate the 30 day, 90 day, and 180 day forward premiums for the British pound. Spot: 30-day forward: 90-day forward: 180-day forward: £1 = $1.4487 £1 = $1.4498 £1 =
Forward rate rate at which foreign exchange can be bought or sold today for delivery at a fixed future date, typically in multiples of 30 days, e.g., 30, 60, 90, or 180 days.a. Forward quotationsb.
Suppose a currency increases in volatility. What is likely to happen to its bid ask spread? Why?
The spot and 90 day forward rates for the pound are $1.1376 and $1.1350, respectively. What is the forward premium or discount on the pound?
Who are the principal users of the forward market? What are their motives?
An investor wishes to buy euros spot (at $1.3480) and sell euros forward for 180 days (at $1.3526).a. What is the swap rate on euros?b. What is the premium on 180 day euros?
Suppose the spot quote on the euro is $0.9302 18, and the spot quote on the Swiss franc is $0.6180 90.a. Compute the percentage bid ask spreads on the euro and franc.b. What is the direct spot quote
How does a company pay for the foreign exchange services of a commercial bank?
Suppose the euro is quoted at 0.6786-98 in London, and the pound sterling is quoted at 1.4724-70 in Frankfurt.a. Is there a profitable arbitrage situation? Describe it.b. Compute the percentage bid
Assuming no transaction costs, suppose £1 = $2.4110 in New York, $1 = FF 3.997 in Paris, and FF 1 = £0.1088 in London. How could you take profitable advantage of these rates?
Suppose Dow Chemical receives quotes of $0.008242-45 for the yen and $0.03023-27 for the Taiwan dollar (NT$).a. How many U.S. dollars will Dow Chemical receive from the sale of ¥50 million?b. What
Suppose you observe the following direct spot quotations in New York and Toronto, respectively: 0.8000 50 and 1.2500 60. What are the arbitrage profits per $1 million?
Assume that back in 1995 the pound sterling is worth FF9.80 in Paris and SFr5.40 in Zurich.a. Show how British arbitrageurs can make profits given that the Swiss franc is worth two French francs.
Suppose the euro is quoted at $0.8782-92, while the yen is quoted at $0.001760-69.a. Given these quotes for the euro and yen, what is the maximum bid-ask spread in the ¥/DM rate for which there is
As a foreign exchange trader at Sumitomo Bank, one of your customers would like a yen quote on Australian dollars. Current market rates are:a. What bid and ask yen cross rates would you quote on spot
On checking the Reuters screen, you see the following exchange rate and interest rate quotes:a. Can you find an arbitrage opportunity?b. What steps must you take to capitalize on it?c. What is the
On April 1, the spot price of the British pound was $1.96 and the price of the June futures contract was $1.95. During April the pound appreciated so that by May 1 it was selling for $2.01. What do
What is the last day of trading and the settlement day for the IMM Australian dollar futures for September of the current year?
On Monday morning, an investor takes a long position in a pound futures contract that matures on Wednesday afternoon. The agreed on price is $1.95 for £62,500. At the close of trading on Monday, the
On Monday morning, an investor takes a short position in a euro futures contract that matures on Wednesday afternoon. The agreed on price is $0.9370 for €125,000. At the close of trading on Monday,
What are the basic differences between forward and futures contracts? Between futures and options contracts?
Which contract is likely to be more valuable, an American or a European call option? Explain.
Suppose that the forward ask price for March 20 on euros is $1.3327 at the same time the price of IMM euro futures for delivery on March 20 is $1.3345. How could an arbitrageur profit from this
Biogen expects to receive royalty payments totaling £1.25 million next month. It is interested in protecting these receipts against a drop in the value of the pound. It can sell 30 day pound futures
On August 6, you go long one IMM yen futures contract at an opening price of $0.00812 with a performance bond of $4,590 and a maintenance performance bond of $3,400. The settlement prices for August
Suppose DEC buys a Swiss franc futures contract (size is SFr 125,000) at a price of $0.83. If the spot rate for the Swiss franc at the date of settlement is SFr 1 = $0.8250, what is DEC’s gain or
During September 1992, options on ERM currencies with strike prices outside the ERM bands had positive values. At the same time, actual currency volatility was close to zero.a. Is there a paradox
On January 10, Volkswagen agrees to import auto parts worth $7 million from the U.S. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar
Citigroup sells a call option on euros (contract size is €500,000) at a premium of $0.04 per euro. If the exercise price is $1.34 and the spot price of the euro at expiration is $1.36, what is
Apex Corporation must pay its Japanese supplier ¥125 million in three months. It is thinking of buying 20 yen call options (contract size is ¥6.25 million) at a strike price of $0.00800 to protect
What factors underlie the economic benefits of swaps?
Company A, a low rated firm, desires a fixed rate, long term loan. Company A currently has access to floating-rate funds at a margin of 1.5% over LIBOR. Its direct borrowing cost is 13% in the fixed
Comment on the following statement. “During the period 1987 1989, Japanese companies issued some $115 billion of bonds with warrants attached. Nearly all were issued in dollars. The dollar bonds
Square Corp. has not tapped the Swiss franc public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating rate dollar borrower, which it can be
Comment on the following statement. “For one party to a swap to benefit, the other party must lose.”
Explain how Cisco Systems can use arbitrage to create a forward forward to fix the interest rate on a three-month $10 million loan to be taken out in nine months. The loan will be priced off LIBOR.
Nestle rolls over a $25 million loan priced at LIBOR3 on a three-month basis. The company feels that interest rates are rising and that rates will be higher at the next roll over date in three
The Swiss Central Bank bans the use of Swiss francs for Eurobond issues. Explain how currency swaps can be used to enable foreign borrowers who want to raise Swiss francs through a bond issue outside
Why do governments provide subsidized financing for some investments?
DKNY owes Mex$7 million in 30 days for a recent shipment from Mexico. It faces the following interest and exchange rates:What hedging options are available to DKNY? Spot rate: Forward rate (30
Ford has a $20 million Eurodollar deposit maturing in two months that it plans to roll over for a further six months. The company's treasurer feels that interest rates will be lower in two months
What factors affect an MNC’s translation exposure? What can the company do to affect its degree of translation exposure?
Suppose that on January 1, American Golf’s French subsidiary, Golf du France, had a balance sheet that showed current assets of FF1 million; current liabilities of FF300,000; total assets of FF2.5
DKNY owes Mex$7 million in 30 days for a recent shipment from Mexico. It faces the following interest and exchange rates:What is the hedged cost of DKNY's payable using a money market hedge? Spot
Paragon U.S.’s Japanese subsidiary, Paragon Japan, has exposed assets of ¥8 billion and exposed liabilities of ¥6 billion. During the year, the yen appreciates from ¥125/$ to ¥95/$.a. What is
What is translation exposure? Transaction exposure?
Why was FASB 8 so widely criticized? How did the Financial Accounting Standards Board respond to this criticism?
DKNY owes Mex$7 million in 30 days for a recent shipment from Mexico. It faces the following interest and exchange rates:What is the hedged cost of DKNY's payable using a forward market hedge? Spot
A U.S. firm has fully hedged its sterling receivables and has bought credit insurance to cover the risk of default. Has this firm eliminated all risk on these receivables? Explain.
Rolls-Royce, the British jet engine manufacturer, sells engines to U.S. airlines and buys parts from U.S. companies. Suppose it has accounts receivable of $1.5 billion and accounts payable of $740
Madison Inc. imports olive oil from Chilean firms and the invoices are always denominated in drachma (Dr). It currently has a payable in the amount of Dr 250 million that it would like to hedge.
Eastman Kodak gives its traders bonuses if their selective hedging strategies are less expensive than the cost of hedging all transaction exposure. What are the problems with this bonus plan?
What is the basic translation hedging strategy? How does it work?
Hilton International is considering investing in a new Swiss hotel. The required initial investment is $1.5 million (or SFr1.875 million at the current exchange rate of $0.8 = SFr1). Profits for the
Liz Claiborne contracts out much of its production to foreign manufacturers. As such, the company faces currency risk.a. What currency risk does Liz Claiborne face?b. How might Liz Claiborne go about
Sumitomo Chemical has one week in which to negotiate a contract to supply products to a U.S. company at a dollar price fixed for one year. What advice would you give Sumitomo?
a. Buy the required 20,000 metric tons of copper and incur storage costs in London. Payment occurs on April 1, so the present value of the cost is the same as the actual cost.b. Cover both commodity
Please answer the following questions.a. Define exposure, differentiating between accounting and economic exposure. What role does inflation play?b. Describe at least three circumstances under which
About two thirds of all California almonds are exported. The ups and downs of the U.S. dollar, therefore, cause headaches for almond growers. To avoid these problems, a grower decides to concentrate
In late 1990, following Britain’s entry into the exchange rate mechanism of the European Monetary System, 10 year British Treasury bonds yielded 11.5% and the German equivalent offered a yield of
Which is likely to be higher, a 150% ruble return in Russia or a 15% dollar return in the U.S.?
The empirical evidence shows that there is no consistent relationship between the spot exchange rate and the nominal interest rate differential. Why might this be?
Middle American Corp. (MAC) produces a line of corn silk cosmetics. All of the inputs are purchased domestically and processed at the factory in Iowa. Sales are only in the U.S.a. Is there any sense
To cut costs when the dollar was at its peak, Caterpillar shifted production of small construction equipment overseas. By contrast, Caterpillar's main competitors in that area, Deere & Co. and J.I.
When the dollar was strong and it could not earn a reasonable profit on European sales, Osmose International gave up its government permits to sell its chemical wood preservatives in much of Europe.
A common complaint leveled against the Japanese government is that it deliberately holds down the value of the yen to boost exports of Japanese products. American steelmakers have been particularly
Nissho Iwai American Corporation is the American arm of a large Japanese trading company that deals in everything from steel to tuna fish. Assess the credit risk implications for Nissho Iwai of a 30%
To avoid speculation, Honda hedges only the sales it has clinched, not the ones it expects. Comment on Honda's currency risk strategy.
Monsanto Co., the St. Louis chemical firm, is a major seller of herbicides. Its two brand name herbicides, Roundup and Lasso, have a large share of the U.S. and foreign markets. It's major
Suppose Embraer's $608 million in dollar receivables mentioned above were outstanding at the beginning of the second quarter and that payment for $397 million was not received until the end of the
The president of Brazil has just appointed you to work with the country’s cabinet ministers to launch a radical restructuring of the Brazilian economy. Inflation is running at over 1,000% annually,
Texas Instruments (TI) manufactures integrated circuits and memory chips that it sells around the world. It has major markets in Europe. TI’s primary competitors are Japanese companies.a. What
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