Questions and Answers of Multinational Business Finance

List the MNC’s key stakeholders and describe their stake in the firm.
What is country risk? Describe several types of country risk.
What opportunities might MNCs enjoy that are not available locally?
What are the characteristics of a perfect financial market?
Describe the International Monetary Fund’s balance-of-payments accounting system.
What factors contribute to currency crises in countries that try to peg their exchange rates at artificially high levels?
Define liquidity.
What is the Eurocurrency market and what is its function?
How do Eurocurrency markets differ from internal credit markets?
What is the London Interbank Offer Rate (LIBOR)?
What are the Basel Accords? How have they affected commercial banks?
What is the difference between spot and forward currency markets?
Citigroup quotes Danish kroner as “DKK5.62/$ Bid and DKK5.87/$ Ask.”a. Which currency is Citigroup buying at the DKK5.62∕$ bid rate, and which currency is Citigroup selling at the DKK5.87∕$
You want to buy Swedish krona (SKr). Your bank quotes “SKr7.5050∕$ Bid and SKr7.5150∕$ Ask.” What would you pay in dollars if you bought SKr10,000,000 at the current spot rate?
S0 C$∕$ is quoted as “C$1.2340∕$ Bid and C$1.2350∕$ Ask.” The six-month forward rate F1 C$∕$ is quoted as “C$1.2382∕$ Bid and C$1.2397∕$ Ask.” Assume you reside in the United
Today’s spot rate is S0 $∕¥ = $0.009057355∕¥. The 90-day forward rate is F1 $∕¥ = $0.008772945∕¥.a. Calculate the forward premium on Japanese yen in basis points and as a percentage
In 1984, the number of German marks required to buy one U.S. dollar was 1.80. In 1987, the U.S. dollar was worth 2.00 marks. In 1992, the dollar was worth 1.50 marks. In 1997, the dollar was again
Describe locational, triangular, and covered interest arbitrage.
What does the international Fisher relation say about interest rate and inflation differentials?
What are real changes in exchange rates?
Are real exchange rates in equilibrium at all times?
Describe the behavior of real exchange rates.
Calculate the following cross exchange rates: a. If exchange rates are S¥∕$ = ¥200∕$ and S$∕SFr = $0.50∕SFr, what is the S¥∕SFr exchange rate?b. The dollar is trading at S¥∕$ =
As a percentage of an arbitrary starting amount, about how large would transaction costs have to be to make triangular arbitrage between the exchange rates SSFr∕$ = SFr1.7223∕$, S$∕¥ =
The Mexican peso is quoted in direct terms at “¥28.74/MXN bid and ¥28.77/MXN ask” in Tokyo. The yen is quoted in direct terms in Mexico City at “MXN0.0341600/¥ bid and MXN0.03420/¥
Industrial Bank of China is earning a nominal yuan return of 7.1 percent on a commercial loan. Expected inflation in CNY is 5 percent. What is the expected real return in yuan? (Be precise.)
A foreign exchange dealer in Tokyo provides the following quotes for spot exchange and 3-month forward exchange between the Malaysian ringgit (MR) and the U.S. dollar. a. In New York, 3-month U.S.
You can trade at the following prices: Is covered interest arbitrage worthwhile? If so, explain the steps and compute the profit based on an initial (time t = 0) transaction of $1 million. Calculate
Currency exchange rates and Eurocurrency interest rates are as follows: In what direction will covered interest arbitrage force the quoted rates to change? Explain the steps and compute the profit
Suppose that at time zero the spot rate equals the 90-day forward rate at S0 $∕S$ = F90 $∕S$ = $0.65∕S$. Assume that the spot rate increases by $0.0002/S$ each day over the ensuing 90 days. You
On September 11, a U.S.-based MNC with a customer in Singapore expects to receive S$3 million. The current spot exchange rate is $0.5950∕S$. The transfer will occur on December 10. The current S$
Snow White Manufacturing makes snowmobiles, some of which it sells to Japan for recreation in the wilderness of the northern islands. Snow White is expecting a payment of ¥9 million in six
Suppose Cotton Bolls does business with companies in Israel and Singapore. Cotton Bolls expects to pay 500,000 new Israeli shekels (ILS) and receive 125,000 Singapore dollars on the Friday before the
What are the differences between exchange-traded and over-the-counter currency options?
In what sense is a currency call option also a currency put option?
What are the six determinants of a currency option value?
Construct an option position (i.e., some combination of calls and/or puts) with the same risk profile (ΔCall$∕A$ versus ΔS$∕A$) as a forward contract to buy A$ at a forward price of F1 $∕A$ =
Suppose you believe that the market has underestimated the volatility of the yen-per-dollar exchange rate. You are not sure whether the dollar will rise or fall in value, only that it is likely to
Suppose the yen value of a dollar is ¥100/$ and that this exchange rate has an equal probability of moving to either ¥90.484∕$ or ¥110.517/$ in one period. To what continuously compounded rates
Suppose the spot rate is ¥105/$ and there is an equal chance that it will fall to ¥70.38∕$ or rise to ¥156.64∕$. To what continuously compounded rates of return do these changes correspond?
How are swaps related to forward contracts?
Little Prince (LP) has 100 million Brazilian reals (BRL) of 2-year fixed rate debt with a bond equivalent yield of 8.25 percent compounded semiannually. LP prefers floating rate BRL debt, and the
A swap bank quotes the following pricing schedule for a Polish zloty coupon (interest rate) swap. This schedule assumes nonamortizing debt and semiannual rates (sa). Quotes are against 6-month LIBOR
Consider the following swap pricing schedule for currency coupon swaps of yen and pounds. Deduct 5 bps if the bank is paying a fixed rate. Add 5 bps if the bank is receiving a fixed rate. All quotes
As VP Finance (Europe) at GE Capital, you manage GE’s European exposures to currency risk. GE’s light bulb plant in Poland generates Polish zloty (Z) after-tax operating cash inflows of Z10
Why use a freight shipper?
What is discounting, and how is it used in international trade?
How is factoring different from forfaiting?
Are small, medium, or large firms most likely to use derivatives to hedge currency risk? How do such firms benchmark their hedges?
Fruit of the Loom has a banker’s acceptance drawn on Banque Paribas with a face value of $10 million due in 90 days. Paribas will withhold an acceptance fee of $10,000 at maturity. Fruit of the
Fruit of the Loom sells $10 million in accounts receivable to a factor. The receivables are due in 90 days. The factor charges a 2 percent per month factoring fee, as well as the face amount, for
Savvy Fare has a banker’s acceptance drawn on Credit Lyonnais with a face value of $1 million due in six months. Credit Lyonnais receives an acceptance fee of $2,000 at maturity. A U.S. bank is
Suppose Savvy Fare sells a $1 million receivable to a factor. The receivable is due in six months. The factor charges an upfront fee of 4 percent for purchasing the receivable on a nonrecourse basis,
What is transaction exposure to currency risk?
What are leading and lagging? Why do multinational corporations use them?
Is risk reduction the most common objective in evaluating the risk management performance of a corporate treasury?
Draw a new set of transactions to identify which division pays and which division receives funds after multinational netting of transactions. US parent $400 $800 $600 Canada $100 $300 $900 Mexico
You recently graduated and accepted a position in the receivables division of Ex-Im-Age Corporation, a software company located in California and specializing in icon-based software. Ex-Im-Age has
It is February 14. Rupert Taylor has an obligation to pay ABI $5 million on May 13. A bank quotes “A$1.6010/$ Bid and A$1.6020/$ Ask” in the spot market and “A$1.6025/$ Bid and A$1.6035/$
What is operating exposure to currency risk, and why is it important?
In a discounted cash flow framework, in what ways can operating risk affect the value of the multinational corporation?
Suppose the correlation of a share of stock with a foreign currency value is ρr,s = +0.10. Calculate r-square. What does it tell you?
Define net monetary assets. Define the net exposure of monetary assets and liabilities to currency risk. Why are these measures important?
List operating strategies for hedging operating exposures, and compare their advantages and disadvantages with those of financial market hedges.
Consider the balance sheet of a U.S. firm exporting to Europe. Euro denominated accounts (shown in italics) have been translated into U.S. dollars at the current exchange rate.This firm considers
Sterling & Company is a silverware manufacturer based in the town of Sevenoaks in the United Kingdom. Although Sterling exports to companies around the world, its biggest customers are in the
Studies have found that corporations based in the United States typically have low exposures to other currencies. In contrast, studies have found that a much higher percentage of firms in other
Advanced problem on pricing strategy. Dow of the United States makes bungee cords for sale in the United Kingdom. Dow charges $6 per cord, or £4 at the $1.50/£ spot rate. At this price, Dow expects
What does the acronym IFRS stand for? Why is it important?
List the translation accounting rules of the current rate method.
For which accounts does the current rate translation method do a good job?For which accounts is it less reliable?
According to theory, what determines whether an exposure to currency risk should be hedged?
Describe four basic rules of ASC 815 Derivatives and Hedging.
Why is it difficult to distinguish hedging from speculation? How does a hedge qualify for hedge accounting rules under ASC 815 in the United States?
Finlandiva, a furniture manufacturer based in Finland, is owned by U.S.-based Couch Potato, Inc. Finlandiva’s balance sheet at the current exchange rate of $1.00/€ is shown in the following
Vincent’s Folly, a yo-yo manufacturer based in Canada, is owned by YoBeta, Inc., of the United States. Vincent’s balance sheet at the current exchange rate of C$1.60/$ is shown as
Here’s a balance sheet for Silver Saddle Motel of Santa Fe, New Mexico. Silver Saddle’s accounts payable balance is a 300,000 Mexican peso (MXN) purchase of authentic Mexican rugs for use in the
Describe entry modes into international markets. Which mode requires the largest resource commitment? Which has the greatest risks?
What factors contribute to country risk? Give examples.
Expropriation occurs when a host government confiscates the assets of a corporation doing business in that country. Can expropriation occur in other ways? Explain.
What is protectionism, and how can it affect the MNC?
What are blocked funds? How might they arise?
Select a country (e.g., Brazil) of interest to you. Perform a search using the country name and restrictive keywords such as credit risk, country risk, expropriation, copyright, patent, investment
You work for an Israeli company that is considering an investment in China’s Sichuan province. The investment yields expected after-tax Chinese new yuan cash flows (in millions) as
Consider the example of blocked funds in the chapter’s Neverland project. Again, assume blocked funds (50 percent of operating cash flow) earn zero interest in Hook’s treasure chest. Suppose an
Discuss the evidence on the determinants of capital structure?
The systematic risk (beta) of France’s L’Occitane Corporation is 1.2 when measured against a world stock market index and 1.4 against a French stock index. The annual risk-free rate in France is
The systematic risk (beta) of Grand Pet is 0.8 when measured against the Morgan Stanley Capital International (MSCI) world market index and 1.2 against the London Financial Times 100 (or FTSE 100)
As the People’s Republic of China evolves toward a market economy, capital markets will begin to displace the government as the primary source of funds for investment. Nevertheless, the Chinese
Costa Rica’s currency is the colon (CRC) and Chile’s currency is the peso (CLP). Costa Rica’s tax rate is 30 percent. Chile’s tax rate is 20 percent. If pretax returns in Chile are 7 percent,
U.S.-based Swift Solutions, Inc. has manufacturing facilities in Poland and New Zealand. Each facility earns the equivalent of $10 million in foreign-source income before tax. Corporate income taxes
Quack Concepts produces its patented drug Metafour (a duck extract used as an antioxidant) in both Hong Kong and the United States. The effective marginal tax rate is 35 percent in the United States
Why is the timing option important in investment decisions?
In what ways are the investment and abandonment options similar?
What are assets-in-place? What are growth options?
A proposed brewery in the Central European country of Dubiety will produce a beer— the “Dubi Dubbel”— for Grolsch N.V. of the Netherlands. A number of other European brewers have announced
In what ways can one firm gain control over the assets of another firm?
What is synergy?
In what ways are the winners and losers in cross-border mergers and acquisitions different than in domestic U.S. mergers and acquisitions?
How are gains to bidding firms related to exchange rates?

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