Questions and Answers of Foundations Of Multinational Financial Management

Fire King International, an Indiana manufacturer of fire resistant filing cabinets and disk storage units, has sought to protect itself from currency risk by pricing its export sales in dollars and
Thomasville Plastics Corp. has contracted to buy $1.1 million worth of Japanese plastic-injection molding machines. The contract price is set in dollars. Does Thomasville bear any currency risk
Matsushita exports about half of its TV set production to the U.S. under its Panasonic, Quasar, and Technics brand names. It prices its products in yen. Suppose the yen moves from ¥130 = $1 to ¥110
South Korea’s Korean Air Lines (KAL) is the world’s 12th largest passenger airline and its second-largest cargo carrier. It has borrowed $5 billion (much of it denominated in dollars) to finance
Boeing Commercial Airplane Co. manufactures all its planes in the U.S. and prices them in dollars, even the 50% of its sales destined for overseas markets. Assess Boeing’s currency risk. How can it
Over the past year, Thailand has experienced an inflation rate of about 7%, in contrast to U.S. inflation of about 2.5%. At the same time, the exchange rate for the Thai baht (B) has gone from
How might a government budget deficit lead to inflation?
What political realities underlie a government budget deficit?
What obstacles do Third World countries like Argentina, Brazil, and Ghana face in becoming developed nations with strong economies?
What is the link between a controlled exchange rate system and political risk?
Milton Friedman has suggested that public-sector firms in Latin American countries should simply be given away, possibly to their employees. How do you think workers would feel about being given (for
How did capital flight contribute to the international debt crisis?
Suppose the Swiss government imposes an interest rate ceiling on Swiss bank deposits. What is the likely effect on Eurofranc interest rates of this regulation?
Suppose that Zimbabwe has a choice of two possible $100 million, five-year Eurodollar loans. The first loan is offered at LIBOR + 1% with a 2.5% syndication fee, whereas the second loan is priced at
What is securitization? What forces underlie it and how has it affected MNC financing policies?
What factors account for the rise and recent decline of the Eurobond market as a source of financing for American companies?
Suppose that the current 180 day interbank Eurodollar rate is 9% (all rates are stated on an annualized basis). If next period’s rate is 9.5%, what will a Eurocurrency loan priced at LIBOR plus 1%
Midwestern Bank has lent $10 million to finance an equipment sale to Thailand by Lasertech, a major exporter located in Michigan. Both the loan and the sale are priced in U.S. dollars.a. Is
Aldridge Washmon Co. is one of the largest distributors of heavy farming equipment in Brownsville, Texas, located on the border with Mexico. The time is late 1981. Sales have increased dramatically
Why should managers focus on marketing and production strategies to cope with foreign exchange risk?
Assess the likely consequences of a declining dollar on Fluor Corporation, the international construction engineering contractor based in Irvine, California. Most of Fluor's value added involves
In what sense is the boost in profits of American companies due to a falling dollar artificial?
The European chemical industry pays for an estimated 79% of its oil based feedstock in dollars. Thus, its costs are declining sharply because of the drop in the price of oil combined with the sharp
How does a shorter product cycle time help companies reduce the exchange risk they face?
Why do exchange rate changes bring feast or famine for Volvo, but neither feast nor famine for Ford? Consider the distribution and concentration of their production facilities worldwide.
Over the past year, China has experienced an inflation rate of about 22%, in contrast to U.S. inflation of about 3%. At the same time, the exchange rate has gone from Y8.1/U.S.$1 to Y7.6/U.S.$1.a.
It had been said that if other European interest rates converged toward German rates, ECU bonds would soar in value. Explain why this would occur.
Citibank offers to syndicate a Eurodollar credit for the government of Poland with the following terms:a. What are the net proceeds to Poland from this syndicated loan?b. Assuming that six-month
British Telecom (BT) has issued $1 billion in Euro-CP maturing in 75 days and priced to yield 5.8% annually based on a 360-day year.a. What are BT’s proceeds from the issue?b. What is the discount
Many financial commentators believe that bond owners and traders today have an enormous collective influence over a nation's economic policies. Explain why this might be correct.
Why are large MNCs located in small countries such as Sweden, Holland, and Switzerland interested in developing a global investor base?
Why are many U.S. MNCs seeking to improve their visibility with foreign investors, even going so far as to list their shares on foreign stock exchanges?
List some reasons a U.S. based corporation might issue debt denominated in a foreign currency.
Why have Eurobonds traditionally yielded less than comparable domestic bonds?
List the pros and cons of Deutsche Bank listing on the NYSE as a global share instead of an ADR.
An alternative to investing in foreign stocks is to invest in the shares of domestic multinationals. Are MNCs likely to provide a reasonable substitute for international portfolio investment?
On February 14, 1994, the dollar fell from ¥106.85 to ¥102.65. Meanwhile, the Tokyo stock market fell 1.63% as measured in yen. What was the one-day dollar return on the Tokyo stock market?
Are these pros and cons of a GSR issue likely to change over time? In which direction?
Why did Latin American stocks perform so well in recent years? Is this performance likely to continue? Explain.
Suppose during the first half of the year, government bonds yielded a local currency return of 1.6%. However, the Swiss franc rose by 8% against the dollar over this six month period. Corresponding
Here are data on stock market returns and exchange rate changes during 1988 for 12 stock markets.Determine the dollar return on each of these markets. Country Australia Belgium Canada France West
During 1997, the Korean Stock Exchange’s composite index fell by 42%, while the won lost half its value against the dollar. What was the combined effect of these two declines on the dollar return
Would you expect emerging markets on average to outperform developed country markets in the future? Explain.
The Brazilian stock market rose by 165% during 1988. Are American investors likely to be pleased with that performance? Explain.
During 1989, the Mexican stock market climbed 112%in peso terms while the peso depreciated by 28.6% against the U.S. dollar. What was the dollar return on the Mexican stock market during the year?
Suppose over a ten-year period the annualized peseta return of a Spanish bond has been 12.1%. If a comparable dollar bond has yielded an annualized return of 8.3%, what cumulative devaluation of the
Persian Gulf countries receive virtually all their income from oil revenues denominated in dollars. At the same time, they buy substantial amounts of goods and services from Japan and Western Europe.
MNCs can always reduce the foreign exchange risk faced by their foreign affiliates by borrowing in the local currency. True or false? Why?
DKNY owes Mex$7 million in 30 days for a recent shipment from Mexico. It faces the following interest and exchange rates:At what exchange rate is the cost of the put option just equal to the cost of
To eliminate all risk on its exports to Japan, an MNC decides to hedge both its actual and anticipated sales. What risk is the MNC exposing itself to? How could this risk be managed?
A foreign exchange trader assesses the euro exchange rate three months hence as follows:a. Will the trader buy or sell euros forward against the dollar if she is concerned solely with expected
Can hedging provide protection against expected exchange rate changes? Explain.
DKNY owes Mex$7 million in 30 days for a recent shipment from Mexico. It faces the following interest and exchange rates:How can DKNY construct a currency collar? What is the net premium paid for the
International Worldwide would like to execute a money market hedge to cover a ¥250,000,000 shipment from Japan of sound systems it will receive in six months. The current exchange rate is ¥124 =
What is the domestic counterpart to exchange risk? Explain.
An investment manager hedges a portfolio of Bunds (German government bonds) with a 6-month forward contract. The current spot rate is €0.75:$1 and the 180-day forward rate is €0.72:$1. At the end
Instead of its previous policy of always hedging its foreign currency receivables, Sun Microsystems has decided to hedge only when it believes the dollar will strengthen. Otherwise, it will go
An importer has a payment of £8 million due in 90 days.a. If the 90 day pound forward rate is $1.4201, what is the hedged cost of making that payment?b. If the spot rate expected in 90 days is
Walt Disney expects to receive a Mex$16 million theatrical fee from Mexico in 90 days. The current spot rate is $0.0915/Mex$ and the 90-day forward rate is $0.0903/Mex$.a. What is Disney’s peso
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 put option? Spot
Halon France, the French subsidiary of a U.S. company, Halon, Inc., has the following balance sheet:a. At the current spot rate of $0.21/FF, calculate Halon France’s accounting exposure under the
A French corporate treasurer expects to receive a DM11 million payment in 90 days from a German customer. The current spot rate is DM0.29870:FF1 and the 90-day forward rate is DM0.29631:FF1. In
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 preferred alternative? Spot rate: Forward rate (30 days): 30-day
If a currency that a company is long in threatens to weaken, many companies will sell that currency forward. Comment on this policy.
Plantronics owes SKr50 million, due in one year, for some electrical equipment it recently bought from ABB Asea Brown Boveri. At the current spot rate of $0.1480/SKr, this payable is $7.4 million. It
DKNY owes Mex$7 million in 30 days for a recent shipment from Mexico. It faces the following interest and exchange rates:Suppose that DKNY expects the 30-day spot rate to be Mex$11.25/$. Should it
Studies have shown that in trade dealings between nations that have high and volatile inflation rates, most export prices are quoted in dollars. What might account for this finding?
Cooper Inc., a U.S. firm, has just invested £500,000 in a note that will come due in 90 days and is yielding 9.5% annualized. The current spot value of the pound is $1.9612 and the 90-day forward
Dow Chemical has sold SFr 25 million in chemicals to Ciba-Geigy. Payment is due in 180 days.a. What is the hedged value of Dow’s receivable using the forward market hedge? The money market hedge?b.
Kemp & Beatley is a New York importer of table linens and accessories. It hedges all its import orders using forward contracts. Does Kemp & Beatley face any exchange risk? Explain
Metalgesselschaft, a leading German metal processor, has scheduled a supply of 20,000 metric tons of copper for October 1. On April 1, copper is quoted on the London Metals Exchange at £562 per
Suppliers of the equipment used to make semiconductors, such as Applied Materials and LAM Research, who produce in the U.S. but are heavily dependent on sales to Asia, saw their share prices plummet
In contrast to southern Europe, northern Europe, especially Germany, exports more complex and brand-name manufactured items, such as automobiles, machine tools, and specialty chemicals. Would you
Malaysian palm oil producers export more than 90% of their product for sale in dollars. Virtually all their costs, however, are in Malaysian ringgit.a. How would the 30% fall in the value of the
Saint-Gobain, a French firm, and Pilkington PLC, a British firm, are arch rivals in the European flat-glass business. After Britain's exit from the ERM in September 1992, the pound fell by 15%
Many business people and the business press believe that a devalued dollar offers a significant advantage to foreign bidders for American companies and real estate. Comment on this position.
The average exchange rate during 2001:Q2 was R8.04/$; in 2004:Q2, it was R6.60/$. By how much would Harmony have to reduce its rand costs per ounce in 2004:Q2 in order to make the same rand profit
You are asked to lend money for a major commercial real estate development in Calexico, which is on the California side of the Mexican border. There is some talk about a further devaluation of the
Bakrie, an Indonesian conglomerate, is assessing the likely consequences of the rupiah’s precipitous decline on its different businesses. These businesses include a telecommunications company that
Cooper Industries is a maker of compressors, pneumatic tools, and electrical equipment. It does not face much foreign competition in the U.S., and exports account for only 7% of its sales. Does it
In an attempt to diversify your portfolio internationally, you must decide how to invest in Brazil. You can invest in an index fund that replicates the Brazilian stock market, or you can buy shares
Under what circumstances should IDC‑U.S. earnings on lost export sales to the United Kingdom and the rest of the Common Market countries be treated as a cost of the project?
Suppose that the dollar is now worth €0.7423. If one-year German bunds are yielding 9.8% and one-year U.S. Treasury bonds are yielding 6.5%, at what end-of-year exchange rate will the dollar
The standard deviations of U.S. and Mexican returns over the period 1989-1993 were 12.7% and 29.7%, respectively. In addition, the correlation between the U.S. and Mexican markets over this period
In deciding where to invest your money, you read that Germany looks like it’s well positioned to capitalize on the opening of Eastern Europe. But Britain is troubled by weak growth and high
As more U.S. investors shift funds into emerging markets, what will drive expected returns?
Suppose the real value of the pound declines. How would this decline likely affect the economics of the IDC U.K. project?
Does the high volatility of emerging markets lead to high expected returns for investors?
A foreign project that is profitable when valued on its own will always be profitable from the parent firm’s standpoint. True or false. Explain.
During 1995, the Morgan Stanley Capital International world index of developed country stock markets rose by 18.7% in dollar terms. In contrast, the IFC emerging markets index fell by just over 17%
Should the cost of capital for the IDC U.K. project be higher, lower, or the same as the cost of capital for a similar project to manufacture and sell diesel engines in the U.S.? Explain.
When should these lost export earnings be ignored when evaluating the project?
Suppose that a foreign project has a beta of 0.85, the risk free return is 12%, and the required return on the market is estimated at 19%. What is the cost of capital for the project?
Describe the alternative ways to treat the interest subsidy provided by the British government.
Some economists have stated that too many companies are not calculating the cost of not investing in new technology, world class manufacturing facilities, or market position overseas. What are some
Suppose the cost of borrowing restricted euros is 7% annually, whereas the market rate for these funds is 12%. If a firm can borrow €10 million of restricted funds, how much will it save annually
Eastman Kodak’s CFO is thinking of borrowing Japanese yen because of the low interest rate, currently 4.5%. The interest rate on U.S. dollars is 9%. What is your advice to the CFO?
Suppose one of the inducements provided by Taiwan to Xidex to set up a local production facility is a ten year, $12.5 million loan at 8%. The principal is to be repaid at the end of the tenth year.
To “meet the competition” from its counterparts overseas, Eximbank will mechanically match the terms of a loan provided by a rival export financing agency – including the interest rate – when
What are the principal cash outflows associated with the IDC U.K. project?

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