Questions and Answers of Introduction To Corporate Finance

The treasurer of E.I. DuPont de Nemours has a $500 million cash balance to invest over the next six months. She has been instructed to play it safe and to avoid unduly speculative risks. She has
Indian rupee forward contracts. The Indian rupee (INR) is currently trading at INR 50 = US$1. With 90-day Indian-rupee and U.S. dollar treasury bills currently yielding 10 percent and 2 percent per
Interest rate parity for asset managers and hedge fund arbitrageurs. You have been given the following information:Taking the perspective from a U.S.-based asset manager or hedge fund arbitrageur:a.
Covered interest rate arbitrage with withholding tax. On September 1, 2013, the treasurer of Volvo, the Swedish automotive manufacturer, is faced with the following investment dilemma: he could
Covered interest rate arbitrage. As a trader for the London-based money market Commonwealth Fund, you see the following quotes:a. From Barclays Bank, one-year sterling deposits/loans at 6. 0 percent
Selecting a construction loan. Italthai, the Bangkok-based construction company, has recently been awarded a baht (THB) 2,500 million contract for the renovation of Phuket International Airport. The
Speculating on the collapse of Argentina’s currency board. Dr. Lawrence Krohn is the New York–based lead currency strategist for Latin American currencies at Standard Bank. On the eve of its
Fuji Life Insurance Co. global money management (advanced). Hiko Yamamoto, the deputy treasurer of Fuji Life Insurance Co. (FLI), was reviewing one-year investment opportunities for the 100 billion
Yen carry trade at the Conan Doyle Galaxy Fund. Dr. Watson is the chief trader at the currency arbitrage desk of the U.S.-based Conan Doyle Galaxy Fund. He is considering arbitrage opportunities
Carry trade at a macro hedge fund. Ms. Ivanhoe is the chief strategist of Caran d’Ache—the Fribourg-based (Switzerland) macro hedge fund. Newly issued oneyear Greek government zero-coupon (Z)
Yen carry trade with investment in U.S. dollars/Icelandic króna. Louise is an associate with Charlemagne, a hedge fund domiciled in Luxembourg, who is considering the following arbitrages:Two
Covered interest rate arbitrage with transaction costs (advanced). Assume that U.S.-based potential arbitrageurs do not hold cash, but hold dollar-denominated securities. Covered investment in
Covered interest rate arbitrage with a two-tier exchange market (advanced).Monsieur Dassault, the treasurer of Renault-Finance S.A.—the Geneva-based international finance subsidiary of the French
Interest rate arbitrage with bid-ask spreads (advanced). Consider the configuration of bid-ask spot and 90-day forward US$/£ exchange rate on June 12, 2013, keeping in mind that the lower rate is
What are the key differences between currency forwards and futures contracts?
How is counterparty risk mitigated in a currency futures contract? Explain how the daily marking to market of currency futures reduces the risk of trading this derivative.
Compare counterparty risk for over-the-counter forward contracts with exchange-traded futures. Why is the secondary market for futures more liquid than it is for forwards?
What are the differences between currency put and call options?
What is the nature of credit or counterparty risk when trading options?
What is the difference between writing and buying a currency option?
Compare futures margins with options premiums.
Identify the key parameters that determine the value of a currency option.
Explain how the put-call parity ties the currency options market to the forwards market.
What is an option straddle strategy? How does it take advantage of exchange rate volatility?
What is meant by the intrinsic value and the time value of an option?
What are zero-premium options? Why are they more attractive to risk managers than plain-vanilla options?
Why does the net value of a cross-currency swap fluctuate continuously?
Why are cross-currency swaps compared to series of long-dated forward contracts?
Refer to Exhibit 7. 2 for futures prices.a. What is the March 2012 futures price for Australian dollars and Japanese yen?b. What is the cross-rate for March 2012 Japanese yen price of the Australian
Soledad McArthur is the chief currency trader at the Magna Carta macro hedge fund. She decides on January 15 to go long by buying Mexican peso (MXN) March and June futures currently trading at
A trader for Prometheus Partners—a macro hedge fund—is debating how to structure his bet that the euro-zone will break up in the next six to nine months, resulting in a massive capital flight
A hedge fund manager anticipates a weaker euro over the next 180 days. Both six-month put and call options on the euro are available with strike price at the money of US$1.33 = €1.a. Would you
Referring to problem 3, Prometheus Partners is considering currency options as alternative instruments to speculate on the possible demise of the euro. March 2013 European put and call options are
A trader at Credit Suisse First Boston is speculating on the movement of the Swedish krona (SEK). She is prepared to invest US$10 million in the transaction. The current spot rate between the krona
Assuming that Allied-Lyons was relying on a straddle strategy (refer to International Corporate Finance in Practice 7. 3 for background information), explain graphically and numerically under what
Writing a strangle (advanced). Assuming that Allied-Lyons would write a strangle as a speculative strategy, rather than a straddle as in problem 7, would you consider it to be more or less
Assuming (1) that you can buy a pound sterling call with strike price of $1.50 for 3 cents, (2) that you can sell a sterling put at the same strike price for 4 cents, (3) that the prevailing forward
On June 15 the premium on a September CAD put option is US$0.017 per CAD at a strike price of US$1.07. If the quarterly U.S. interest rate is 1. 25 percent, what is the price of a September CAD call
Show graphically that writing a covered call option on sterling amounts to writing a naked put option on sterling.
Currency swaps and the cost of debt. Michelin S.A., the French multinational tire manufacturer, needs to borrow $300 million to expand its U.S. plant in Georgia.It can issue a US$-denominated
With reference to the NSP/KLM currency swap, answer the following questions:a. What is the implied forward exchange rate used throughout the life of the swap for exchanging cash flows?b. At the end
Japan Airlines International (JAI) issues a fiveyear U.S. dollar−denominated 250 million bond yielding 5 percent. Preferring to keep its liabilities in its domestic currency, JAI immediately swaps
The Water & Sewer Department (WSD) of the City of Sacramento(California) has issued a floating rate note (FRN) maturing in seven years with an interest rate pegged to the U.S. dollar six-month LIBOR
What are the principal sources of financing available to firms that find themselves in a cash-deficit situation?
What are the principal functions performed by the financial sector?
What does it mean to describe financing as a global procurement decision?
What are financial intermediaries?
What is financial disintermediation? Is it desirable?
What are the conditions for successful disintermediation?
What is the role played by commercial paper in financial disintermediation?
What is securitization? Why does it lower the cost of consumer financing?
What are the unique risks inherent in an international securitization transaction?
What makes emerging capital markets emerge?
Toro, the Wisconsin-based AA-rated manufacturer of snowblowers and lawn mowers, anticipates that because of the seasonal nature of its business it will require an additional US$250 million for
Weyerhaeuser, the lumber multinational company, is comparing the cost of alternative methods for financing its exports trade. US$500 million is needed for 180 days and can be sourced from Chicago
Mellon Bank sold a credit default swap to MetLife for the protection of seven-year US$375 million mortgage-backed securities requiring a semiannual payment of 65 basis points. In case of default,
Ian Maxwell is the chief investment officer for Glasgow’s municipal workers’ pension funds (GMWF). He is intrigued by the high-yielding sovereign debt issued by PIIGS countries. Most notably,
Germany’s new issue of comparable five-year treasury bonds offers a much lower coupon of 3. 10 percent than Spain’s 6. 25 percent. Germany is AAA-rated.a. Can the Spanish and German bonds be
In 1999 Pemex—the Mexican state-owned oil company—is rated AA in Mexico for domestic bond issues but constrained in its international financing by Mexico’s B country rating.a. What is the
By issuing US$500 million of BBBrated future exports-backed securities through an offshore special purpose vehicle(SPV), Pemex was able to lower its cost of debt by 337.5 basis points as compared to
By accessing the IMF monthly Financial Statistics and other pertinent websites:a. Compute for 2012 the ratio of the market capitalization of the Caracas (Venezuela)stock exchange to the country
The Argentine peso (ARS) is officially trading at ARS 4. 65 = US$1, with increasing volume of forex transactions channeled through the black market at ARS 6 = US$1. Interest rates on bank loans under
Explain the concept of “mildly segmented” capital markets.
How can one measure degrees of segmentation across national equity markets?
Why was Novo’s P/E ratio so much smaller than its key competitors’ P/Es? What were the implications for Novo’s ability to compete in world markets?
Is the inverse of a firm’s P/E ratio a reasonable proxy for its equity cost of capital?
How do you explain why firms often list their shares on foreign equity markets?Which equity markets are the primary hosts to foreign listing?
What is the difference between “sponsored” and “unsponsored” American depositary receipts programs?
Why do firms sponsor ADR or GDR programs?
What is an ADR?
What is the difference between Level I, Level II, and Level III ADR programs?
What does it mean for a firm to internationalize its cost of capital?
Honda shares trade on the Tokyo Stock Exchange and on the NYSE as an ADR.a. Assuming that Honda stock closed at ¥2,177 and that ¥76.55 = US$1, at what price would you expect Honda to trade on the
Ciments Lafarge trades on the Paris Bourse and on the NYSE as an ADR. If its shares trade for €80.40–81.20 on the Paris Bourse, what would you expect to be the quoted price of its ADR to a
On November 28, 2012, MegaFon—the Russian telecom company—raised £1 billion on the London Stock Exchange. The controversial Uzbeck oligarch Alisher Usmanov owns 55. 8 percent of MegaFon, which
Referring to the information presented in problem 3:a. Explain MegaFon’s principal motivations in raising equity capital in London rather than in Moscow.b. Is the fact that MegaFon is almost
MegaFon stock on the Moscow Stock Exchange trades with a beta of β = 1. 71 while the risk-free rate and risk premium are, respectively, 6 percent and 7 percent.a. Compute MegaFon’s cost of equity
Salgacoar is an Indian shipping company that owns and operates 12 bulk dry cargo freighters. Headquartered in Goa (India), it specializes in shipping coal and iron ore primarily to South Korea. Its
Salgacoar Shipping’s CFO was preparing a final presentation to the firm’s board of directors and wanted to bring additional validation to the decision reached in problem 6.a. Explain how the
Salgacoar Shipping’s CEO expressed reservations about the equity financing recommendation that the firm’s CFO was finalizing for presentation to the board (see problems 6 and 7). He generally
What are the key decisions firms face in establishing their debt financing policies?How do they differ between a domestic and a multinational firm?
Identify the principal sources of foreign debt financing. Are they available only to multinational corporations?
What are the differences between domestic bonds, foreign bonds, and Eurobonds?
Define what is meant by the offshore or Eurobond market.
What is the difference between a bearer and a nominal bond?
What is the difference between the euro bond market and the Eurobond market?
What are Yankee, samurai, or bulldog bonds?
What is meant by bond market segmentation?
What is the difference between the nominal and effective cost of foreign debt?
Explain how currency swaps can be used to compute the effective cost of foreign debt.
Discuss the key factors that should guide firms in determining which currency to borrow in.
Royal Dutch Shell—the Anglo-Dutch oil company—issues a dollar-denominated seven-year zero-coupon Eurobond in the amount of US$1 billion at an annual yield of 6. 5 percent.a. Where would the funds
Consider the following two bond investment opportunities and compare their yields:a. Compute the yield to maturity (YTM) of a zero-coupon bond with a face value of €1,000 with nine years to
An investor is considering investing in one-year zero-coupon Eurobonds. He is comparing investment in either a British pound–denominated bond with a yield of 6. 2 percent or a euro denominated bond
PepsiCo Overseas issues dollar denominated zero-coupon Eurobonds at a price of 67. 25 percent. The bonds are to be repaid at 100 percent three years hence.a. What is the bonds’ yield to maturity?b.
Black & Decker—a U.S. multinational manufacturer of small power tools—is considering financing a plant expansion in France with euro (€) Eurobonds. The bond issue would be a five-year maturity
Nokia—the Finnish manufacturer of cell phones—is considering alternative financing options to fund the$1 billion acquisition of U.S.-based Magic Telecommunications.■ A €-denominated Eurobond
On August 28, 2010, IBM International Finance NV—the Dutch Antilles–based international finance subsidiary of IBM Corporation—issued four $100 million equivalent tranches of Eurobonds
Conoco-Norway—a subsidiary of Houston-based Conoco—christened the world’s first floating oil-production platform built from concrete, which will also be the world’s largest floating
R.J. Reynolds is considering a 25-billion yen debenture to be issued at 101. 50 percent of par. The five-year, annual coupon bond would pay an interest rate of 73∕4 percent denominated in yen, but

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