Doug Bernard specializes in cross-rate arbitrage' data-toggle="tooltip" data-placement="top" title="Click to view definition...">arbitrage. He notices the following quotes: Swiss franc/dollar = SFr1.5971/$ Australian dollar/U.S. dollar = A$1.8215/$ Australian dollar/Swiss franc = A$1.1440/SFr Ignoring transaction costs, does Doug Bernard have an arbitrage opportunitybased on these quotes? If there is an arbitrage opportunity, what steps wouldhe take to make an arbitrage profit, and how much would he profit if he has$1,000,000 available for this purpose?
> Explain the mechanism that restores the balance-of-payments equilibrium when it is disturbed under the gold standard.
> A CAD/$ bank trader is currently quoting as mall figure bid-ask of 35–40, whenthe rest of the market is trading at CAD1.3436–CAD1.3441. What is impliedabout the trader’s beliefs by his prices?
> Banks find it necessary to accommodate their clients’ needs to buy or sell FXforward, in many instances for hedging purposes. How can the bank eliminate thecurrency exposure it has created for itself by accommodating a client’s forwardtransaction?
> Discuss the advantages and disadvantages of the gold standard.
> Why does most interbank currency trading worldwide involve the U.S. dollar?
> Many companies grant stock or stock options to managers. Discuss the benefitsand possible costs of using this kind of incentive compensation scheme.
> Discuss the basic motivations for a counterparty to enter into a currency swap.
> Discuss some of the pros and cons of countertrade from the country’s perspective and the firm’s perspective.
> How are foreign exchange transactions between international banks settled?
> Who are the market participants in the foreign exchange market?
> Company A is an AAA-rated firm desiring to issue five-year FRNs. It findsthat it can issue FRNs at six-month LIBOR +1 .125 percent or at three-monthLIBOR +1 .125 percent. Given its asset structure, three-month LIBOR is the preferredindex. Company B is an
> The Eastern Trading Company of Singapore purchases spices in bulk from around theworld, packages them into consumer-size quantities, and sells them through salesaffiliates in Hong Kong, the United Kingdom, and the United States. For a recent month,the fo
> What is the difference between the retail or client market and the wholesale orinterbank market for foreign exchange?
> Assume that interaffiliate cash flows are uncorrelated with one another. Calculatethe standard deviation of the portfolio of cash held by the centralized depositoryfor the following affiliate members: Expected Transactions Standard Affiliate Deviatio
> Discuss the implications of interest rate parity for exchange rate determination.
> What is triangular arbitrage? What is a condition that will give rise to a triangulararbitrage opportunity?
> Using the spot and outright forward quotes in problem 4, determine the correspondingbid-ask spreads in points. Information from Problem 4: Restate the following one-, three-, and six-month outright forward European term bid-ask quotes in forward points.
> Explain “the wedge” between control and cash flow rights and discuss its implicationsfor corporate governance.
> On August 3, 1995, the Maharashtra state government of India, dominated bythe nationalist, right-wing Bharatiya Janata Party (BJP), abruptly canceled Enron’s$2.9 billion power project in Dabhol, located south of Bombay, the industrialhe
> Explain Gresham’s law.
> Restate the following one-, three-, and six-month outright forward European termbid-ask quotes in forward points. Spot …………………………………1.3431–1.3436 One-Month ……………………….1.3432–1.3442 Three-Month …………………….1.3448–1.3463 Six-Month………………………….1.3488–1.3508
> What is the necessary condition for a fixed-for-floating interest rate swap to bepossible?
> Using the American term quotes from Exhibit 5.4, calculate the one-, three-, and six-month forward cross-exchange rates between the Australian dollar and theSwiss franc. State the forward cross-rates in “Australian” te
> The current spot exchange rate is $1.95/£ and the three-month forward rate is$1.90/£. On the basis of your analysis of the exchange rate, you are pretty confidentthat the spot exchange rate will be $1.92/£ in three months. Assume that youwould like to bu
> Briefly discuss the various types of international banking offices.
> Assume you are a trader with Deutsche Bank. From the quote screen on yourcomputer terminal, you notice that Dresdner Bank is quoting €0.7627/$1.00 andCredit Suisse is offering SF1.1806/$1.00. You learn that UBS is making a directmarket between the Swiss
> Using the market data in Exhibit 7.6, show the net terminal value of a long position inone 100 Aug Japanese yen European put contract at the following terminal spot prices,cents per yen: 91, 95, 100, 105, and 109. Ignore any time value of money effect.
> The majority of major corporations are franchised as public corporations. Discussthe key strength and weakness of the “public corporation.” When do you think thepublic corporation as an organizational form is unsuitable?
> Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates forX and Y are 20 percent and 30 percent, respectively. The transfer price per unit iscurrently set at $1,000, but it can be set as high as $1,250. Calculate the increasein an
> Explain “free cash flows.” Why do managers like to retain free cash flows insteadof distributing it to shareholders? Discuss what mechanisms may be used to solvethis problem.
> Following such high-profile corporate scandals as Enron and WorldCom in the UnitedStates, European business executives smugly proclaimed that the same could not happenon their side of the Atlantic as Europe does not share America’s lais
> Define balance of payments.
> What are the advantages of a currency options contract as a hedging tool comparedwith the forward contract?
> Why is it important to study international financial management?
> What is the purpose of the Export-Import Bank?
> Why would it be useful to examine a country’s balance-of-payments data?
> Discuss the possible strengths and weaknesses of SDRs versus the dollar as themain reserve currency. Do you think the SDR should or could replace the U.S.dollar as the main global reserve currency?
> Describe the difference between a swap broker and a swap dealer.
> The Fisher effect (Chapter 6) suggests that nominal interest rates differ betweencountries because of differences in the respective rates of inflation. Accordingto the Fisher effect and your examination of the one-year Eurocurrency interestrates presente
> Suppose there exists a nontradable asset with a perfect positive correlation with a portfolio T of tradable assets. How will the nontradable asset be priced?
> Construct a balance-of-payments table for Germany for the year 2010 which iscomparable in format to Exhibit 3.1, and interpret the numerical data. You mayconsult International Financial Statistics published by IMF or search for usefulwebsites for the dat
> Using the market data in Exhibit 7.6, show the net terminal value of a long position inone 100 Aug Japanese yen European call contract at the following terminal spot prices,cents per yen: 91, 95, 100, 105, and 109. Ignore any time value of money effect.
> Explain how each of the following transactions will be classified and recorded in the debit and credit of the U.S. balance of payments: a. A Japanese insurance company purchases U.S. Treasury bonds and pays out of its bank account kept in New York City.
> Explain and derive the international Fisher effect.
> Exhibit 3.6 indicates that in 1999, Germany had a current account deficit and atthe same time a capital account deficit. Explain how this can happen. Exhibit 3.6: Balances on the Current (BCA) and Capital (BKA) Accounts of Five Major Countries: 1982
> Emphasizing the importance of voluntary compliance, as opposed to enforcement,in the aftermath of such corporate scandals as those involving Enron andWorldCom, U.S. President George W. Bush stated that while tougher laws mighthelp, “ultimately, the ethic
> Describe the balance-of-payments identity and discuss its implications under thefixed and flexible exchange rate regimes.
> Rone Company asks Paula Scott, a treasury analyst, to recommend a flexible wayto manage the company’s financial risks. Two years ago, Rone issued a $25 million (U.S.$), five-year floating-rate note(FRN). The FRN pays an annual coupon equal to one-year LI
> What are the advantages of investing via international mutual funds?
> In 1995, a working group of French chief executive officers was set up by theConfederation of French Industry (CNPF) and the French Association of PrivateCompanies (AFEP) to study the French corporate governance structure. The groupreported the following
> A “three against nine” FRA has an agreement rate of 4.75 percent. You believesix-month LIBOR in three months will be 5.125 percent. You decide to take aspeculative position in a FRA with a $1,000,000 notional value. There are183 days in the FRA period. D
> Ross Perot, a former presidential candidate of the Reform Party, which was a thirdpolitical party in the United States, had strongly objected to the creation of theNorth American Free Trade Agreement (NAFTA), which nonetheless was inauguratedin 1994. Per
> Discuss how the cost of capital is determined in segmented versus integrated capital markets.
> Briefly discuss some of the services that international banks provide their customersand the marketplace.
> What are multinational corporations (MNCs) and what economic roles do theyplay?
> What considerations might limit the extent to which the theory of comparativeadvantage is realistic?
> If the cost advantage of interest rate swaps would likely be arbitraged away incompetitive markets, what other explanations exist to explain the rapid developmentof the interest rate swap market?
> How is a country’s economic well-being enhanced through free international tradein goods and services?
> Discuss the major trends that have prevailed in international business during thelast two decades.
> The theory of comparative advantage was originally advanced by the 19th-centuryeconomist David Ricardo as an explanation for why nations trade with one another.The theory claims that economic well-being is enhanced if each country’s cit
> Briefly discuss the various types of countertrade.
> Studies show that the legal protection of shareholder rights varies a great dealacross countries. Discuss the possible reasons why the English common law traditionprovides the strongest protection of investors and the French civil law traditionthe weakes
> Nike, a company headquartered in Beaverton, Oregon, is a major force in the sportsfootwear and fashion industry, with annual sales exceeding $12 billion, more thanhalf of which now come from outside the United States. The company was co-foundedin 1964 by
> Discuss and compare hedging transaction exposure using the forward contractversus money market instruments. When do alternative hedging approaches producethe same result?
> Assume the settlement rate in problem 2 is 61⁄8 percent. What is the solution now?
> Discuss some of the reasons why international trade is more difficult and risky from the exporter’s perspective than is domestic trade.
> Evaluate the following statement: “A firm can reduce its currency exposure bydiversifying across different business lines.”
> In what sense do firms with nontradable assets get a free ride from firms whose securities are internationally tradable?
> Karla Ferris, a fixed income manager at Mangus Capital Management, expects thecurrent positively sloped U.S. Treasury yield curve to shift parallel upward.Ferris owns two $1,000,000 corporate bonds maturing on June 15, 2014, one witha variable rate based
> Discuss the advantages and disadvantages of maintaining multiple manufacturingsites as a hedge against exchange rate exposure.
> What are the advantages and disadvantages to a firm of financial hedging of itsoperating exposure compared to operational hedges (such as relocating its manufacturing site)?
> Do problem 4 again assuming you believe the September 2013 spot price will be$0.07061 per MXN. Data from Problem 4: Using the quotations in Exhibit 7.3, note that the September 2013 Mexican peso futures contract has a price of $0.07713 per MXN. You belie
> Show how double taxation on a taxpayer may result if all countries were to tax the worldwide income of their residents and the income earned within their territorial boundaries.
> Discuss the implications of purchasing power parity for operating exposure.
> Explain contingent exposure and discuss the advantages of using currency optionsto manage this type of currency exposure.
> Explain the competitive and conversion effects of exchange rate changes on thefirm’s operating cash flow.
> Explain the following statement: “Exposure is the regression coefficient.”
> Do problem 1 over again, this time assuming more realistically that a swap bankis involved as an intermediary. Assume the swap bank is quoting five-year dollarinterest rate swaps at 10.7–10.8 percent against LIBOR flat.
> How would you define economic exposure to exchange risk?
> General Motors exports cars to Spain, but the strong dollar against the euro hurtssales of GM cars in Spain. In the Spanish market, GM faces competition fromItalian and French car makers, such as Fiat and Renault, whose operating currenciesare the euro.
> Since the early 1980s, foreign portfolio investors have purchased a significant portionof U.S. Treasury bond issues. Discuss the short-term and long-term effects offoreigners’ portfolio investment on the U.S. balance of payments.
> What were the main objectives of the Bretton Woods system?
> Discuss the determinants of operating exposure.
> Suppose that your company has an equity position in a French firm. Discuss thecondition under which dollar/euro exchange rate uncertainty does not constituteexchange exposure for your company.
> Given the following information, what are the NZD/SGD currency against currencybid-ask quotations? American Terms European Terms Bank Quotations Bid Ask Bid Ask .7265 .6135 New Zealand dollar .7272 1.3751 1.3765 Singapore dollar .6140 1.6287 1.6300
> Describe the key factors contributing to effective cash management within a firm. Why is the cash management process more difficult in a MNC?
> The time from acceptance to maturity on a $1,000,000 banker’s acceptance is120 days. The importer’s bank’s acceptance commission is 1.75 percent and themarket rate for 120-day B/As is 5.75 percent. What amount will the exporterreceive if he holds the B/A
> What is the difference between a buy-back transaction and a counterpurchase?
> DVR, Inc. can borrow dollars for five years at a coupon rate of 2.75 percent. Alternatively,it can borrow yen for five years at a rate of .85 percent. The five-year yenswap rates are 0.64–0.70 percent and the dollar swap rates are 2.41–2.44 percent.The c
> Comment on the proposition that the Bretton Woods system was programmed toan eventual demise.
> Exchange rate uncertainty may not necessarily mean that firms face exchange riskexposure. Explain why this may be the case.
> A bank sells a “three against six” $3,000,000 FRA for a three-month period beginningthree months from today and ending six months from today. The purposeof the FRA is to cover the interest rate risk caused by the maturity mismatchfrom having made a three
> Suppose that you hold a piece of land in the city of London that you may want tosell in one year. As a U.S. resident, you are concerned with the dollar value of theland. Assume that if the British economy booms in the future, the land will be worth£2,000
> Suppose you are a British venture capitalist holding a major stake in an e-commercestart-up in Silicon Valley. As a British resident, you are concerned with the poundvalue of your U.S. equity position. Assume that if the American economy booms inthe futu
> A U.S. firm holds an asset in France and faces the following scenario: In the above table, P * is the euro price of the asset held by the U.S. firm and P isthe dollar price of the asset. a. Compute the exchange exposure faced by the U.S. firm. b. What
> Economic Exposure of Albion Computers PLCConsider Case 3 of Albion Computers PLC discussed in the chapter. Now, assume thatthe pound is expected to depreciate to $1.50 from the current level of $1.60 perpound. This implies that the pound cost of the impo
> Compare and contrast the three basic types of taxation that governments levy within their tax jurisdiction.
> How does a time draft become a banker’s acceptance?
> Under what conditions would you recommend that the foreign subsidiary conform to the local norm of financial structure?
> Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method.
