International Finance A Practical Perspective 1st Edition Adrian Buckley - Solutions

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A sterling call option exists with a strike price of $1.60 and a 90-day expiration date and it attracts a premium of 3 cents per unit. A sterling put option with an exercise price of $1.60 and a 90-day expiration date has a premium of 2 cents per unit. A US multinational plans to deal options to
Transfer pricing:(a) includes the pricing of goods, services and technology exchanged among associated companies in different countries;(b) is used by multinationals to achieve a number of objectives;(c) is subject to limitations imposed by tax authorities;(d) may influence managerial incentives
A bank raises finance with a preponderance of fixed interest short-term borrowings and lends with a preponderance of longer-term lendings at fixed interest rates. It justifies its policy on the grounds that the term structure of interest rates is upwards sloping. If interest rates increase by 150
Financial theory suggests that achieving which of the following, all other things being equal, is likely to increase shareholder wealth?(a) seeking to profit from capital market distortions;(b) reducing the riskiness of operating cash flows;(c) maintaining the debt to capital employed ratio;(d) all
Ceteris paribus, a firm will benefit from geographical diversifying if:(a) the correlation between country economies is high;(b) the correlation between country economies is low;(c) the correlation between country economies is positive;(d) two of the above are correct.
A multinational based in the United States is due to receive CHF10m in 180 days. The current Swiss franc/dollar spot rate is $0.50; the 180-day forward rate is $0.51. A Swiss franc call option with a strike price of $0.52 and a 180-day expiration date attracts a premium of 2 cents.A Swiss franc put
A US-based multinational is due to receive Sfr8m in 90 days. The current spot rate of the Swiss franc is $0.62 and the 90-day forward rate is $0.635. Managers at the multinational have come up with the following estimate for the spot rate of the US dollar against the Sfr in 90 days:Probability$0.61
Which of the following creates an effective hedge of net payables in US dollars for a UK firm?(a) purchase of a sterling put option;(b) sale of pounds forward for dollars;(c) sale of sterling futures;(d) all of the above;(e) none of the above.
A firm produces goods for which substitutes are universally available. Depreciation of the firm’s home currency should:(a) reduce local sales because foreign competition in the home market is reduced;(b) reduce the firm’s exports denominated in the firm’s home currency;(c) reduce returns
A multinational has one subsidiary in a 45 per cent tax rate country, and another in a 30 per cent tax rate country. To increase its overall after-tax earnings, the headquarters should arrange to:(a) lower the price of supplies from the low-tax-rate subsidiary to the high-tax-rate subsidiary;(b)
When deciding whether or not to back a project finance proposition, what essential features do potential lenders home in on?
Project finance is difficult to define. What are its essential features?
What is cash management essentially concerned with?
What are the objectives of the cash management function?
What is the difference between Eurobonds and foreign bonds?
What is syndicated lending? Why do banks sometimes prefer this form of lending?
Describe the possible conflict of interests between centralised and devolved management.
Briefly describe the role of tax planning by the MNC. What are its key functions?
Explain how transfer pricing can be used to reduce a MNC’s overall tax liability.
What factors might lead the treasurer to hedge anyway? What factors might lead the treasurer to hedge net worth?
Some experts consider the hedging of economic exposure to be the most complicated theoretical and practical problem in cross-border finance. Why?
What motivates governments to establish so many guarantee and insurance schemes to aid international trade?
What is countertrade?
What is forfaiting? Specify the type of traded goods for which forfaiting is applied.
Why might a US-based MNC issue bonds denominated in euros?
Why is it necessary to compute the present value when assessing the cost of financing for two alternatives?
per cent to set up a local production facility. The principal is due for repayment in a bullet at the end of six years. The market interest rate on such a loan is 18. per cent. With a marginal tax rate of 331/3 per cent, how much is this loan worth to the multinational? Assume that tax is paid in
The government of a host country with no exchange controls offers a multinational a ten-year $50m loan at
An international firm preparing to site production facilities in the Far East has been offered direct investment incentives worth US$25m from Thailand and US$15m from Malaysia but Singapore has offered no investment incentives. According to this scenario:(a) it will definitely cost $10m less to
From the viewpoint of a foreign subsidiary, the required nominal rate of return on a project(i.e. the discount rate used to find the NPV):(a) is usually lower than the rate of inflation in that country;(b) should be equal to the required money terms rate of return used in the parent country for a
The cost of capital for a project in Australia but evaluated in home currency on the basis of converted remittable cash flows, should theoretically:(a) equal the parent’s weighted average cost of capital;(b) equal the minimum rate of return necessary to induce investors to buy or hold the
A multinational company based in Switzerland is considering establishing a two-year venture in Malaysia with an initial investment equal to CHF30m. The firm’s weighted average cost of capital is 10 per cent and the required rate of return on this project is 12 per cent. The project is expected to
When trying to establish whether to go ahead or not with an international capital project, which of the following factors is not relevant?(a) future inflation;(b) exchange control blockages;(c) remittance provisions;(d) sales cannibalisation;(e) home and host country taxation;(f) expenditures
A Belgian multinational anticipates cash flows of EUR10m, EUR12m and EUR16m, respectively, for the first three years of a project in Ruritania. The initial investment is EUR79m. The firm expects a perpetuity of EUR20m in years 4 and beyond. If the required return on the investment is 17 per cent,
The degree of political risk faced by a European company operating in an Asian country:(a) may be specified objectively by using a political risk index;(b) depends on the benefits provided by the firm;(c) depends on how the firm has structured and financed its Asian operations;(d) is given by the
A Japanese-based multinational has a German subsidiary that annually remits DM20 million to Japan. If the mark ________ against the yen, the yen amount of remitted funds _______.(a) appreciates; decreases;(b) depreciates; is unaffected;(c) appreciates; is unaffected;(d) depreciates; decreases.
A US multinational is setting up a subsidiary in France with local operations only and French competition only. Funds from the subsidiary will be regularly sent to the parent. Ceteris paribus , the ideal situation from the parent’s standpoint is:(a) a stable euro after the subsidiary is
In connection with Press Cuttings 26.1 , 26.2 and 26.3 how much do you estimate that J&J has saved, if anything, in terms of its financing of the Synthes acquisition? Explain your reasoning?
You are the treasurer of Development Properties Ltd and are considering the funding of a project due for completion over the next six months. At the end of the six months payment will be received from the client for the total costs and the profit element, although a progress payment of £2m will be
One of the UK divisions of Global Enterprises plc wishes to set up a new manufacturing plant in Indonesia, because this would give it an important foothold in one of the fast growing parts of the world market, and would to a large extent deny this market to its main world competitors. The
Compare and contrast international investment and financing decisions with their domestic counterparts.
The Inter-Continental Company is considering investing in a new chalet hotel at Verbier in Switzerland. The initial investment required is for $2m, or CHF4m at the current exchange rate of $1 = CHF2. Profits for the first ten years will be reinvested, at which time Inter-Continental expects to sell
Explain how simulation can be used in multinational capital budgeting.
What is the limitation of using point estimates of exchange rates within the capital budgeting analysis?
Do you think that a full country risk analysis can replace a capital budgeting analysis of a project in a foreign country? Why?
Once a project is accepted, country risk analysis for the foreign country involved is no longer necessary, assuming that no other proposed projects are being evaluated for that country. Do you agree with this statement? Why or why not?
Explain an MNC’s strategy of diversifying projects internationally to maintain a low level of overall country risk.
From an investor’s standpoint, have small companies, in general over the past, been more profitable than their larger brethren?
Explain how characteristics of MNCs can affect the cost of capital.
List additional factors that deserve consideration in a foreign project analysis but are not relevant for a purely domestic project
Explain debt–equity swaps and how they increase activity in the secondary loan market.
What additional factors deserve consideration in multinational capital budgeting that may not normally be relevant for a purely domestic project?
Why should capital budgeting for projects in an overseas subsidiary be assessed from the parent’s perspective rather than just the subsidiary’s cash flow perspective?
Do you think that, long-term, foreign exchange controls will encourage or discourage inward foreign investment?
Why do you suppose countries impose foreign exchange controls?
Explain the theory of comparative advantage as a motive for foreign trade.
Why do you suppose that foreign governments provide MNCs with incentives to undertake FDI in their countries?
King Company and President Inc. are automobile manufacturers that desire to benefit from economies of scale. King Company has decided to establish distributorship subsidiaries in various countries, while President Inc. has decided to establish manufacturing in various countries. Which firm is more
Which of the following is not a logical tactic for a US firm that will have to pay for a machine in euros in the future and desires to avoid exchange rate risk assuming the firm has no offsetting position in euros?(a) buy a call option on euros;(b) enter into a forward contract to buy euros;(c)
Which of the following is true of foreign exchange markets?(a) The futures market is mainly used by speculators while the forward market is mainly used for hedging.(b) The futures market is mainly used by hedgers while the forward market is mainly used for speculating.(c) The futures market and the
On a Tuesday in January an operator contacts his financial futures broker. He wishes to speculate on the £/$ exchange rate. He sells seven March Sterling contracts at $1.7200. On the Thursday of that week he buys seven March Sterling contracts at 1.7100. Given that the tick size is 0.01 cent and
Which of the following statements is true about designing a good reporting system on foreign exchange exposure?(a) Central control with virtually no input from the local level is essential.(b) Reports should be generated by currency as well as by subsidiary.(c) Reports should concentrate on
Netting achieves all but one of the following:(a) foreign exchange movements between subsidiaries are reduced;(b) transactions costs are lowered;(c) currency conversion costs are reduced;(d) transaction exposure is reduced.
A US firm has CHF10 million receivables due in 60 days. The firm’s management is certain that the Swiss franc will depreciate substantially over this period. Assuming the firm’s expectation turns out to be correct, it will make the greatest gain by:(a) selling Swiss francs forward;(b) buying
A US firm is bidding for a contract required by the Swiss government. The firm will not know until three months from now, whether the bid is accepted. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is awarded the contract. The US firm can
You purchase a put option on Swiss francs for a premium of 2 cents with an exercise price of $0.61. The option will not be exercised until the expiration date, if then. Should the spot rate on the expiration date be $0.58, your net profit or loss per unit is likely to be:(a) 3¢ loss;(b) 1¢
If one anticipates that the pound sterling is going to appreciate against the US dollar, one might speculate by _______ pound call options or ______ pound put options.(a) buying; selling;(b) buying; buying;(c) selling; selling;(d) selling; buying.
Which of the following is the most logical policy for a US firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk assuming the firm has no offsetting position in Swiss francs?(a) Buy a call option on Swiss francs.(b) Sell a futures contract on Swiss
What were the sources of problems for the weaker members of the eurozone?
Distinguish between the originate-to-hold and originate-to-distribute models of lending.Why did banks prefer to move to the latter model and what were some of the consequences?
List and briefly discuss the major factors that underpinned the financial crisis of 2007–8.
Discuss why it might be the case that the Gaussian distribution seems to fail when crises occur. What are the causes and effects?
How did packages of relatively poor quality debt and CDSs achieve the status of AAA ratings by credit rating agencies?
Compare and contrast credit default swaps and credit insurance.
Banks pay big salaries to financial engineers. What traits do the financial engineers need to succeed?
Some companies have come unstuck dealing financially engineered instruments. Why do you suppose this is?
Describe the essentials of financial engineering.
How might a bank attempt to reduce interest rate risk?
How might a company attempt to reduce interest rate risk?
(a) How does a company become exposed to interest rate risk?(b) How does a bank become exposed to interest rate risk?
Why should a firm consider hedging net payables or net receivables with currency options rather than forward contracts? What are the disadvantages of hedging with currency options as opposed to forward contracts?
When should a firm consider purchasing a put option for foreign currency hedging?
When should a firm consider purchasing a call option for foreign currency hedging?
What is an in-the-money option? When is a call versus a put in the money?
Why is the price of an option always greater than its intrinsic value?
What are the components of an option premium?
Assume that, on 1 November, the spot rate of the £/US$ was $1.58 and the price on a December futures contract was $1.59. Assume that the pound depreciates over November, so that by 30 November it is worth $1.51.(a) What do you think would happen to the futures price over the month of November?
What is basis risk? How does a cross-hedge (where the cash flow exposure being hedged has different characteristics to the future used as a hedge – hence the expression across markets– hence the expression cross-hedge) create basis risk? How does a mismatch in maturities between the asset being
Explain how a US corporation could hedge net receivables in British pounds with futures contracts.
If you expect short-term interest rates to rise more than the yield curve suggests, would you rather pay a fixed long-term rate and receive a floating short-term rate, or receive a fixed long-term rate and pay a floating short-term rate?
How can multinational companies utilise a currency swap to reduce borrowing costs?
Explain both interest rate swaps and currency swaps. Which instrument has a greater credit risk: an interest rate swap or a currency swap?
What would be the amount of the exchange gain or loss in the following situation? The exchange rate changes from 1 peso = $1.00 to 1 peso = 75c. Translate using the temporal approach. Inventory is valued at cost, this being lower than market value.’000 pesos ’000 pesos Owners’ equity 1,000
A strong pound sterling places ______ pressure on UK inflation, which in turn places _______ pressure on the pound:(a) upward; upward;(b) downward; upward;(c) upward; downward;(d) downward; downward.
If inflation in the United States is expected to be 5 per cent annually and the Danish krone is expected to depreciate by 3 per cent per annum relative to the US dollar, Danish krone prices of raw materials imported by a Danish company from the United States and priced in dollars can be expected
If inflation is expected to be 5 per cent higher in the United Kingdom than in Switzerland:(a) the theory of purchasing power parity would predict a drop in nominal interest rates in the United Kingdom of approximately 5 per cent;(b) purchasing power parity would predict that the UK spot rate
Suppose the spot New York indirect quotes for the Batavian drac and Swedish krona are 1249.25–75 and 5.9925–75, respectively. What is the direct quote for the Swedish krona in Batavia?(a) 0.0047969–0.0048008;(b) 208.30–47;(c) 208.30–55;(d) 208.47–55;(e) none of the above
The US$ five-year interest rate is 5 per cent annualised, and the Danish krone (DKK) fiveyear rate is 8 per cent annualised. Today’s spot rate is USD/DKK = 5.00. If the international Fisher effect holds, what is the best estimate of the Danish krone spot rate against the US dollar spot rate in
Translation exposure reflects the exposure of a firm’s:(a) ongoing international transactions to exchange rate fluctuations;(b) local currency value to transactions between foreign exchange traders;(c) financial statements to exchange rate fluctuations;(d) cash flows to exchange rate fluctuations.
Assume that both US and UK investors require a real return of 3 per cent. If the nominal Eurodollar interest rate is 11 per cent and the nominal Eurosterling rate is 9 per cent, then according to the Fisher effect, UK inflation is expected to be about _______ US inflation, and the UK pound is

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International Finance A Practical Perspective 1st Edition Adrian Buckley - Solutions

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