Questions and Answers of International Financial Management 14th

Assume that the one-year interest rate in the U.K. is 9 percent, whereas the one-year interest in the U.S is 4%. The spot rate of the pound is $1.50. Assume that interest rate parity exists. The
Zemart is a U.S. firm that plans to establish international business in which it will export to Mexico (these exports will be denominated in pesos) and to Canada (these exports will be denominated in
Maine Co., a U.S. firm, measures its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters:SP = b0 + b1e + uwhere SP represents the
Ohio, Inc., considers establishing a manufacturing plant in central Asia, which would be used to cover its exports to Japan and Hong Kong. If Ohio is concerned about possible terrorism, how might
Before the Tax Cuts and Jobs Act of 2017 lowered U.S. corporate income tax rates, some U.S.-based MNCs moved their parent to another country with lower corporate tax rates in an attempt to reduce
1. Describe the capital budgeting steps that would be necessary to determine whether this proposed project is feasible, as related to this specific situation.2. Explain why there is uncertainty
Explain how the financing decision can influence the sensitivity of the net present value to exchange rate forecasts.
Woodsen, Inc., of Pittsburgh, Pennsylvania, considered the development of a large subsidiary in Greece. In the face of Greece’s government-debt crisis, its expected cash flows and earnings from
Capital Budgeting Logic Athens, Inc., established a subsidiary in the United Kingdom that was independent of its operations in the United States. The subsidiary’s performance was well above what
Lehigh Co. established a subsidiary in Switzerland that was performing below the cash flow projections developed before the subsidiary was established. Lehigh anticipated that future cash flows would
Carson Co. is considering a 10-year project in Hong Kong, where the Hong Kong dollar is tied to the U.S. dollar. Carson Co. uses sensitivity analysis that allows for alternative exchange rate
Baxter Co. is considering a project with Thailand’s government. If it accepts the project, it will definitely receive one lump sum cash flow of 10 million Thai baht in five years. The spot rate of
Burton Co., based in the U.S., considers a project in which it has an initial outlay of $3 million and expects to receive 10 million Swiss francs (SF) in one year. The spot rate of the Swiss franc is
Explain why a territorial tax law could encourage U.S.-based MNCs to consider moving their headquarters to another country.
1. Are there any reasons why the business that has been so successful in the United Kingdom might not be successful in other European countries?2. If the business is diversified throughout Europe,
San Gabriel Corp. recently considered divesting its Italian subsidiary but determined that the divestiture was not feasible. The required rate of return on this subsidiary was 17 percent. In the last
Rudecki Co. (a U.S. firm) has a Polish subsidiary that is considering divesting. This subsidiary is completely focused on research and development for Rudecki’s other business. Rudecki has cash
Select a U.S.-based MNC (such as ExxonMobil or Coca-Cola) that does considerable business in Russia. Write a short essay describing the MNC’s business in Russia and how its cash flows are exposed
1. Based on the information provided in the case, do you think the political risk associated with Thailand is higher or lower for a manufacturer of leisure products such as Blades as opposed to, say,
Explain the micro-assessment of country risk.
During a conflict in the Middle East, some MNCs capitalized on opportunities to rebuild the damaged areas. However, some of their employees were kidnapped by local militant groups. How should an MNC
1. What is an advantage of using equity to support the subsidiary? What is a disadvantage?2. If Jim decided to use long-term debt as its primary form of capital to support this subsidiary, should he
Newark Co. is based in the U.S. Approximately 30% of its sales are from exports to Portugal, and the company has no other international business. It finances its operations with 40% equity and the
The Sports Exports Company continues to focus on producing footballs in the U.S. and exporting them to the United Kingdom. Its exports are denominated in pounds, which has continually exposed the
What is the advantage of using simulation to assess the bond financing position?
Katina, Inc., is a U.S. firm that plans to finance with bonds denominated in euros to obtain a lower interest rate than is available on dollar-denominated bonds. What is the most critical point in
Assume that Hurricane, Inc., is a U.S. company that exports products to the U.K., invoiced in dollars. It also exports products to Denmark, invoiced in dollars. It currently has no cash
1. How could Jim use a letter of credit to ensure that he will be paid for the products he exports?2. Jim has discussed the possibility of expanding his export business through a second sporting
1. There is a tradeoff between the higher interest rates in Thailand and the delayed conversion of baht into dollars. Explain what this means.2.
If the United States imposed long‑term restrictions on imports, would the amount of DFI by non‑U.S. MNCs in the United States increase, decrease, or be unchanged? Explain.
Packer, Inc., a U.S. producer of tablet computers, plans to establish a subsidiary in Mexico in an effort to penetrate the Mexican market. Packer’s executives believe that the Mexican peso’s
1. Given the information provided here, what are the advantages to Logan of establishing the firm in the United Kingdom?2.
1. Identify and discuss some of the benefits that Blades, Inc., could obtain from DFI.2. Do you think Blades should wait until next year to undertake DFI in Thailand? What is the tradeoff if Blades
Nelson Co. is a U.S. firm with annual export sales to Singapore of about S$800 million. Its main competitor is Mez Co., also based in the United States, with a subsidiary in Singapore that
Carlton Co. and Palmer, Inc., are U.S.-based MNCs with subsidiaries in Mexico that distribute medical supplies (produced in the United States) to customers throughout Latin America. Both
Explain how a U.S.‑based MNC's consolidated earnings are affected by depreciation of foreign currencies.
1. How could Logan adjust his operations to reduce his economic exposure? What is a possible disadvantage of such an adjustment?2. Offer another solution to hedging the economic exposure in the long
1. How will Blades be negatively affected by the high level of inflation in Thailand if the Thai customer renews its commitment for another three years?2. Holt believes that the Thai importer will
Assume that interest parity exists. Today, the one-year interest rate in Japan is the same as the one-year interest rate in the U.S. You use the international Fisher effect when forecasting how
You own a U.S. exporting firm that will receive 10 million Swiss francs in one year. Assume that interest parity exists. Assume zero transactions costs. Today, the one-year interest rate in the U.S.
(See the chapter appendix.) Brooks, Inc. imports wood from Morocco. The Moroccan exporter invoices these products in Moroccan dirham. The current exchange rate of the dirham is $.10. Brooks just
Assume that interest parity exists. Today, the one-year interest rate in Canada is the same as the one-year interest rate in the U.S. Utah Co. uses the forward rate to forecast the future spot rate
Virginia Co. has subsidiaries in both Hong Kong and Thailand. Assume that the Hong Kong dollar is pegged at $.13 per Hong Kong dollar and it will remain pegged. The Thai baht fluctuates against the
Your firm exports of goods to the United Kingdom, and you believe that today’s forward rate of the British pound substantially underestimates the future spot rate. Company policy requires you to
Why should an MNC identify net exposure before hedging?
1. Using a spreadsheet, compare the hedging alternatives for the Thai baht with a scenario under which Blades remains unhedged. Do you think Blades should hedge or remain unhedged? If Blades should
Write a short essay briefly summarizing the advantages and disadvantages of currency options as compared to forward contracts when hedging payables. Explain the conditions (regarding your
Explain the relationship between hedging measuring exposure.
Spencer Co., a U.S. firm, has a large subsidiary in Singapore, which generates a large amount of earnings. Spencer's stock is usually valued at approximately 16 times its reported earnings per share.
Zebra Co. is a U.S. firm that obtains products from a U.S. supplier and then exports them to Canadian firms. Its exports are denominated in U.S. dollars. Its main competitor is a local company in
Assume the euro’s spot rate is presently equal to $1.00. All of the following firms are based in New York and are the same size. Although these firms concentrate on business in the U.S., their
Raton Co. is a U.S. company that has net inflows of 100 million Swiss francs and net outflows of 100 million British pounds. The present exchange rate of the Swiss franc is approximately $.70
In 2016, the United Kingdom decided to leave the EU (referred to as Brexit). Many analysts have made arguments about how this event will affect firms in the U.K. Assume that the pound’s value
Erie Co. has most of its business in the U.S., but it exports some products to Belgium. Its exports were invoiced in euros (Belgium’s currency) last year. It has no other economic exposure to
Memphis Co. hires you as a consultant to assess its degree of economic exposure to exchange rate fluctuations. How would you handle this task? Be specific.
Why are the cash flows of a purely domestic firm exposed to exchange rate fluctuations?
Your employer, a large MNC, has asked you to assess its transaction exposure. Its projected cash flows are as follows for the next year: Danish krone inflows equal DK50,000,000, while outflows equal
1. Would you describe the exposure of the Sports Exports Company to exchange rate risk as transaction exposure? Economic exposure? Translation exposure?2. Logan is considering a change in the Sports
1. What type(s) of exposure (i.e., transaction, economic, or translation exposure) is Blades subject to? Why?2. Using a spreadsheet, perform a consolidated net cash flow assessment of Blades, Inc.,
Assume that interest rate parity exists. One year ago, the spot rate of the euro was $1.40 whereas the spot rate of the Japanese yen was $.01. At that time, the one-year interest rate of the euro and
Assume that interest rate parity exists. Today, the one-year U.S. interest rate is equal to 8%, whereas Mexico’s one-year interest rate is equal to 10%. Today, the two-year annualized U.S. interest
Bolivia currently has a nominal one-year risk-free interest rate of 40 percent, which is primarily due to the high level of expected inflation. The U.S. nominal one-year risk-free interest rate
The September 11, 2001 terrorist attacks on the U.S. were quickly followed by lower interest rates in the U.S. How would this affect a fundamental forecast of foreign currencies? How would this
Royce Co. is a U.S. firm with future receivables one year from now denominated in Canadian dollars and British pounds. Its pound receivables are known with certainty, but its estimated Canadian
Explain the technical approach forecasting exchange rates. What are some limitations of using technical forecasting to predict these rates?
1. Explain how Jim can use technical forecasting to forecast the future value of the pound. Based on the information provided, do you think that a technical forecast will predict future
1. Considering both Blades’ current practices and future plans, how can the company benefit from forecasting the baht-dollar exchange rate?2. Which forecasting technique (i.e., technical,
You believe that the future value of the Australian dollar will be determined by purchasing power parity (PPP). You expect that inflation in Australia will be 6% next year, whereas inflation in the
The one-year Treasury (risk-free) interest rate in the U.S. is presently 6%, whereas the one-year Treasury interest rate in Switzerland is 13%. The spot rate of the Swiss franc is $.80. Assume that
The nominal (quoted) U.S. one-year interest rate is 6%, whereas the nominal one-year interest rate in Canada is 5%. Assume you believe in purchasing power parity. You believe the real one-year
Today, a U.S. dollar can be exchanged for 3 New Zealand dollars. The one-year CD (deposit) in New Zealand is 7% and the one-year CD rate in the U.S. is 6%. Interest rate parity exists between the
Assume that Mexico has a one-year interest rate that is higher than the U.S. one-year interest rate. Assume that you believe in the international Fisher effect (IFE), and interest rate parity. Assume
Compare and contrast interest rate parity and the IFE.
Explain the rationale underlying PPP theory.
Odessa Co., Midland Co., and Roswell Co. are U.S. firms in the same industry and have the same valuation as of yesterday, based on the present value of the future cash flows of each company. Odessa
1. Is Logan’s interpretation of the IFE theory correct?2. If you were in Logan’s position, would you spend time trying to decide whether to hedge the receivables each month, or do you
1. What is the relationship between the exchange rates and the relative inflation levels of the two countries? How will this relationship affect Blades’ Thai revenue and costs given that the baht
Assume that interest rate parity exists. Also assume that you have payables in Argentine pesos. You have noticed that historically, the forward rate of the Argentine peso quoted by the banks exhibits
Assume that interest rate parity exists and will continue to exist. As of this morning, the 1-month interest rate in the U.S. was higer than the 1-month interest rate in the eurozone. Assume that as
Assume that interest rate parity exists, along with the following information:Spot rate of Swiss franc = $.806-month forward rate of Swiss franc = $.7812-month forward rate of Swiss franc =
Today, the one-year U.S. interest rate is 4% while the corresponding one-year interest rate in Argentina is 17%. The spot rate of the Argentine peso (AP) is $.44. The one-year forward rate of the AP
Assume that interest rate parity exists. The 6-month forward rate of the Swiss franc has a premium whereas the 12-month forward rate of the Swiss franc has a discount. What does this tell you about
You are given these quotes by the bank:You can sell Canadian dollars (C$) to the bank for $.70. You can buy Canadian dollars from the bank for $.73. The bank is willing to buy dollars for
Assume that interest rate parity exists. The one-year nominal interest rate in the U.S. is 7%, while the one-year nominal interest rate in Australia is 11%. The spot rate of the Australian dollar is
The following information is available:·You have $500,000 to invest·The current spot rate of the Moroccan dirham is $.110.·The 60-day forward rate of the Moroccan dirham is $.108.·The 60-day
Assume that the forward rate premium of the euro was higher last month than it is today. What does this imply about interest rate differentials between the United States and Europe today compared to
Why do you think currencies of countries with high inflation rates tend to have forward discounts?
Assume the following information:
1. Do you think Jim will be able to find a bank that provides him with a more favorable spot rate than his local bank? Explain.2. Do you think that Jim’s bank is likely to provide more reasonable
1. The first arbitrage opportunity relates to locational arbitrage. Holt has obtained spot rate quotations from two banks in Thailand, Minzu Bank and Sobat Bank, both located in Bangkok. The bid and
Assume that France wants to change the prevailing spot rate of its currency (euro) so as to improve its economy; likewise, Switzerland wants to change the prevailing value of its currency (Swiss
The inflation rate in Yinland was 14% last year. The government of Yinland just devalued its currency (the yin) by 40 % against the dollar. Even though Yinland produces similar types of products as
As of 10:00 a.m., the premium on a specific one-year call option on British pounds is $.04. Assume that the Bank of England had not been intervening in the foreign exchange markets in the last
Why might a country suddenly decide to peg its currency to the dollar or some other currency? When a currency is unable to maintain the peg, which forces usually act to break the peg?
Suppose that the government of Chile reduces one of its key interest rates. The values of several other Latin American currencies are expected to change substantially against the Chilean peso in
U.S. bond prices are usually inversely related to U.S. inflation. If the Fed planned to use intervention to weaken the dollar, how might bond prices be affected?
1. Was the depreciation of the Asian currencies during the Asian crisis due to trade flows or capital flows? Why do think the degree of movement over a short period may depend on whether the reason
1. Forecast whether the British pound will weaken or strengthen based on the information provided.2. How would the performance of the Sports Exports Company be affected by the Bank of England’s
1. Did the intervention effort by the Thai government constitute direct or indirect intervention? Explain.2. Did the intervention by the Thai government constitute sterilized or nonsterilized
Select a currency in a country that has experienced a crisis in the last year using an online search term such as “currency crisis.” Write a short essay to describe the underlying reasons for the

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