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business
introduction to corporate finance
Questions and Answers of
Introduction To Corporate Finance
On December 1, 1970, the European monetary unit (EMU) was first used as a contractual device for the denomination of a bond issue floated by the European Coal and Steel Community.The value of the EMU
The market for peso-denominated bonds issued outside of Mexico was initiated in 2004. The peso Eurobond market began with the issuance of a MXN $3,000 MM bond by the Inter-American Development Bank
Televisa (TV)—the Mexican media conglomerate—was contemplating the issuance of peso-denominated Euro-notes. It would be the first such issue by a Mexican corporation in a market that was barely
What are the risks faced by exporters?
What is the relationship between credit and currency risk?
What is different about gauging the credit risk of a foreign buyer?
What are letters of credit? Distinguish between revocable and irrevocable letters of credit.
Explain how letters of credit are used for international trade financing purposes.
Why are confirmed letters of credit an effective hedge against country risk?
What is the nature of currency risk in international trade?
Identify the key documents accompanying an export transaction. Which specific functions do they perform?
What is the difference between a bank loan collateralized with A/Rs and factoring?
What is international leasing?
Explain why governments subsidize national exports.
Discuss the function performed by the bill of lading, commercial invoice, insurance certificate, and consular invoice.
Discuss the principal forms of government assistance provided by governments to their exporters.
Cisco Systems (U.S.) has sold to France-Telecom Internet servers for the amount of €10 million to be paid in three months. The transaction is secured by a trade acceptance from France-Telecom.a.
Cisco Systems has sold to Dhaka’s municipal water and sewer company an integrated computer system to modernize its citywide billing procedure. The trade acceptance in the amount of US$5 million has
BSI has sold to Cambodia’s Angkor Wat Entertainment Inc.(CAWE) INR 10 million licensing rights to 10 of its recent films. Payment is due in six months. BSI can simply finance its exports by drawing
BSI has been approached by a factor that offers to purchase the Angkor Wat Entertainment Inc.exports receivable at a 15 percent per annum discount plus a 150 basis points charge for a nonrecourse
What is the role that government-directed finance played in the economic development of Asia?
What are the functions performed by the main bank in Japanese finance?
What are the differences between the Japanese keiretsu and the South Korean chaebol?
What is the difference between relationship-based governance and rules-based governance? Why is it important to the development of capital markets?
What is meant by relationship banking? Why is it prevalent in East Asia?
Why is the absence of well-functioning bond markets in Asia a hindrance to the development of a complete derivatives market?
What is the logic of several classes of shares in Chinese stock exchanges?
What have been the major governance reforms promulgated in the aftermath of the Asian financial crisis?
Explain what ijara or leasing is and how it can be reconciled with the principles of Islamic finance. Is it appropriate to refer to ijara as debt-like financing?
Is there such a thing as an Islamic bond?
Explain how the concept of a diminishing musharaka is used in Shariahcompliant real estate finance.
How is the sukuk construct used in Shariah-compliant long-term financing?
What is the key financial innovation that has greatly facilitated the growth of Islamic-style asset management?
Is private equity–style investing consistent with the cardinal principles of Islamic finance?
Why did Islamic financial institutions escape relatively unscathed from the 2008 subprime crisis? What are the key lessons that financial regulators should draw from this episode?
What is foreign exchange risk?
How does the firm’s level of risk aversion impact its propensity to hedge currency risk?
What is the rationale for hedging currency risk?
Why is hedging value-creating?
Which type of firms are the best candidates for hedging currency risk?
Under what assumptions is hedging currency risk redundant?
What are the principal steps of the foreign exchange risk management process?
What are exchange rate forecasts used for?
What are market-based forecasts?
What is different about forecasting pegged yet adjustable foreign exchange rates?
How do you reconcile the efficient market hypothesis with the existence of model-based foreign exchange rate forecasting services?
What does it mean for forward rates to be unbiased forecasters of future spot exchange rates? What are the implications in risk management situations?
What is the difference between fundamental forecasting models and technical forecasting models?
What is the chartist approach to forecasting exchange rates?
How do you gauge the accuracy of a foreign exchange forecasting model?
What are econometric foreign exchange forecasting models?
What are composite forecasts?
South Korean treasury bonds maturing in seven years currently trade at 91 percent and pay an annual coupon of 7. 5 percent while similar U.S. Treasuries paying an annual coupon of 4. 25 percent
Pernod-Ricard—the French distiller—is exporting to Thailand and is concerned about the euro value of its Thai baht–denominated sales revenue. It considers two forecasts for the 90-day baht/euro
As the chief economist of the Lusitania country fund with extensive holdings in Brazil, you have been approached by Third Eye, a professional currency forecasting firm that claims to have superior
The chief economist of the Lusitania country fund believes that the firm will be better served in the long term by using a composite forecasting model combining the forward rate and the Third Eye
As the Mumbai-based currency analyst for Infosys, you have been approached by 20/20, a professional currency forecasting firm that claims to have superior forecasting accuracy on the US$/INR. Its
You are the chief investment strategist for the Tiger Emerging Market Fund, which has approximately 20 percent of its assets invested in the Buenos Aires Bolsa. It is January 2001 and Argentina will
Consider the case of Greece in the spring of 2010; its national currency, the drachma, was abolished when it joined the euro-zone and it officially adopted the euro as its currency. Apply the
What is transaction exposure to foreign exchange risk?
Why is hedging transaction exposure generally warranted?
What are the benefits of netting transaction exposures?
When is the establishment of a reinvoicing center warranted?
What is the difference between hedging with forward contracts and with money market hedges? When would you expect their respective costs to be somewhat different?
Compare the pros and cons of using forwards and currency options versus forward protection agreements for hedging transaction exposures.
Why should firms consider financing international trade in a third currency that is neither the exporter’s nor the importer’s currency? Show how financing and hedging can be effectively bundled.
What is different about hedging long-term transaction exposures?
Why do firms generally hedge less than their full exposure? What does it say about their attitude toward risk?
What is different about hedging contingent transaction exposures? What are the most appropriate instruments and techniques for hedging transaction exposures?
Electrolux transaction exposure. The Swedish manufacturer of home appliances exports €175 million of vacuum cleaners every month to Carrefour, the French retailer. Payment is due at the end of each
Bombardier’s exports receivables (A). Bombardier—Canada-based defense contractor—signed a sales contract for the delivery by the end of 2008 of five Dash 8 twin-engine turboprops to Alaska
Bombardier’s exports receivables (B). Royal Bank of Canada had just revised its forecast, saying that the CAD would further rise to CAD 1 = US$1.08 before declining below parity by the middle of
Sony’s royalties payment. The U.S. sales subsidiary of the Japanese consumer electronics giant Sony Inc. is committed to paying a fixed lump sum of money(royalties) set at 2. 5 percent of its U.S.
Currency risk in the travel industry. Ulysses Travel Ltd (UTL) is a Boston-based travel operator that specializes in tour and holiday packages with destinations in Spain, Italy, and Greece where
John Deere’s Chinese acquisition. The U.S. farming equipment giant just won approval from the Chinese authorities for the acquisition of Shen-Zhen Excavators Ltd.—a medium-sized Chinese
Dinky Toys’ cross-border acquisition. Dinky Toys, Inc. (DTI) of Pennsylvania has just purchased a Thai company that manufactures plastic beams and sockets for children’s construction toys. The
Moulinex exports financing. On February 15, 2013, Moulinex, a French manufacturer of kitchen utensils, concluded a major exports contract with British retailer Tesco. It expects export proceeds of
Zanussi exports financing. The Italian manufacturer of household appliances Zanussi is exporting dishwashers to Canada and extending 180 days credit to its Canadian wholesaler. The exports proceeds
Hedging helicopter exports with collars. Eurocopter—the European defense contractor—exports 25 single-engine light helicopters known as Ecureuil (squirrel)to the Japanese Coast Guard with payment
Currency and commodity price risk. Metallgesellschaft (MG), a leading German metal processor, has scheduled the delivery of 20,000 metric tons of copper for August 10, 2013, to Quelle, a German
Lufthansa hedges the purchase of 20 Boeing jets (A). In January 1985, Lufthansa German Airlines purchased 20 Boeing 737 long-distance aircraft for US$500 million payable to Boeing exactly one year
Lufthansa hedges the purchase of 20 Boeing jets (B). Heinz Ruhnan could have considered the use of currency options.a. What would be the advantage of using a currency option to hedge currency risk?
Boeing finances the sale of 20 Boeing jets to Lufthansa (C). Boeing is seeking short-term financing for its export sales to Germany. The Overseas Private Investment Corporation (OPIC) offers
Merck (U.S.) acquires Banyu (Japan). On August 3, 1983, Merck, the giant U.S.-based pharmaceutical company, reached an agreement with Banyu for the friendly acquisition of 50 percent of Banyu’s
What is translation exposure? How does it differ from transaction exposure?
Is hedging translation exposure warranted when financial markets are efficient?
Spell out specific conditions when translation exposure hedging is warranted.
Compare the three principal translation methods: Where are resulting gains and losses reported?
What is a functional currency? How does its choice determine applicable translation rules under FASB Statement No. 52?
Do translation losses negatively impact the firm’s cost of capital?
How can forwards and options be used to hedge translation exposure?
What is the true cost of translation exposure hedging?
How can a company alter its translation exposure?
What is the cost of translation hedging when currency options are used?
Pax Americana measures its Mexican peso translation exposure (A). The U.S.-based multinational Pax Americana Inc. is concerned by the impact of the anticipated Mexican peso devaluation upon its net
Pax Americana hedges its Mexican peso translation exposure (B). Referring to Pax Americana’s translation exposure described in problem 1:a. Identify the alternative hedging methods available to Pax
Firestone’s euro exposure. On July 1, 2014, the Dutch subsidiary of Firestone Company–USA has a projected net translation exposure of €50,000,000 for July 1, 2015. Because of the euro-zone’s
Motorola’s Argentine peso translation exposure. U.S.-based Motorola has a wholly owned subsidiary in Argentina that assembles consumer electronics products for sale there. The net worth of the
Archimedes SA’s money market hedge. On December 31, 2014, Archimedes SA, the Philippine affiliate of a U.S. irrigation equipment manufacturing company, is projecting its Philippines peso
Sun Microsystems’ functional currency. Referring to Sun Microsystems’ French subsidiary, Marianne S.A., assume that due to the close production integration between U.S. and French operations the
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