It is September 1990 and Detroit Motors of Detroit, Michigan, is consideringestablishing an assembly plant in Latin America for a new utility vehicle it has justdesigned. The cost of the capital expenditures has been estimated at $65,000,000.There is not much of a sales market in Latin America, and virtually all output wouldbe exported to the United States for sale. Nevertheless, an assembly plant in LatinAmerica is attractive for at least two reasons. First, labor costs are expected to behalf what Detroit Motors would have to pay in the United States to union workers.Since the assembly plant will be a new facility for a newly designed vehicle, DetroitMotors does not expect any hassle from its U.S. union in establishing the plant inLatin America. Secondly, the chief financial officer (CFO) of Detroit Motors believesthat a debt-for-equity' data-toggle="tooltip" data-placement="top" title="Click to view definition...">equity swap can be arranged with at least one of the Latin Americancountries that has not been able to meet its debt service on its sovereign debt withsome of the major U.S. banks. The September 10, 1990, issue of Barron’s indicated the following prices (cents onthe dollar) on Latin American bank debt: Brazil ……………………21.75 Mexico ………………….43.12 Argentina ………………14.25 Venezuela ……………..46.25 Chile ……………………..70.25 The CFO is not comfortable with the level of political risk in Brazil and Argentina, andhas decided to eliminate them from consideration. After some preliminary discussionswith the central banks of Mexico, Venezuela, and Chile, the CFO has learned thatall three countries would be interested in hearing a detailed presentation about thetype of facility Detroit Motors would construct, how long it would take, the numberof locals that would be employed, and the number of units that would be manufacturedper year. Since it is time-consuming to prepare and make these presentations,the CFO would like to approach the most attractive candidate first. He has learnedthat the central bank of Mexico will redeem its debt at 80 percent of face value in adebt-for-equity swap, Venezuela at 75 percent, and Chile 100 percent. As a first step,the CFO decides an analysis based purely on financial considerations is necessary todetermine which country looks like the most viable candidate. You are asked to assistin the analysis. What do you advise?
> 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.
> Explain how to compute the overall balance and discuss its significance.
> What three basic documents are necessary to conduct a typical foreign commerce trade? Briefly discuss the purpose of each.
> It is, generally, not possible to completely eliminate both translation exposure andtransaction exposure. In some cases, the elimination of one exposure will alsoeliminate the other. But in other cases, the elimination of one exposure actuallycreates the
> Describe the remeasurement and translation process under FASB 52 of a whollyowned affiliate that keeps its books in the local currency of the country in which itoperates, which is different than its functional currency.
> Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBORplus a lending margin of 1.25 percent per annum on a six-month rollover basisfrom a London bank. If six-month LIBOR is 41⁄2 percent over the first six-monthinterval and 53⁄8 percen
> Using the quotations in Exhibit 7.3, note that the September 2013 Mexican pesofutures contract has a price of $0.07713 per MXN. You believe the spot pricein September will be $0.08365 per MXN. What speculative position would youenter into to attempt to p
> Identify some instances under FASB 52 when a foreign entity’s functionalcurrency would be the same as the parent firm’s currency.
> How are translation gains and losses handled differently according to the currentrate method in comparison to the other three methods, that is, the current/ noncurrent method, the monetary/nonmonetary method, and the temporal method?
> Cray Research sold a supercomputer to the Max Planck Institute in Germany oncredit and invoiced €10 million payable in six months. Currently, the six-monthforward exchange rate is $1.10/€ and the foreign exchange adviser for CrayResearch predicts that th
> A corporation enters into a five-year interest rate swap with a swap bank in whichit agrees to pay the swap bank a fixed rate of 9.75 percent annually on a notionalamount of €15,000,000 and receive LIBOR. As of the second reset date, determinethe price o
> A bank is quoting the following exchange rates against the dollar for the Swissfranc and the Australian dollar: SFr/$ = 1.5960–70 A$/$ = 1.7225–35 An Australian firm asks the bank for an A$/SFr quote. What cross-rate wouldthe bank quote?
> Assume the time from acceptance to maturity on a $2,000,000 banker’s acceptanceis 90 days. Further assume that the importing bank’s acceptance commission is1.25 percent and that the market rate for 90-day B/As is 7 percent. Determine theamount the export
> Suppose that your firm is operating in a segmented capital market. What actions would you recommend to mitigate the negative effects?
> Explain the conditions under which the forward exchange rate will be an unbiasedpredictor of the future spot exchange rate.
> Assume that FASB 8 is still in effect instead of FASB 52. Construct a translationexposure report for Centralia Corporation and its affiliates that is the counterpartto Exhibit 10.6 in the text. Centralia and its affiliates carry inventory and fixedassets
> What is a forfaiting transaction?
> George Johnson is considering a possible six-month $100 million LIBOR-based,floating-rate bank loan to fund a project at terms shown in the table below. Johnsonfears a possible rise in the LIBOR rate by December and wants to use theDecember Eurodollar fu
> Recall the FRA problem presented as Example 11.2. Show how the bank canalternatively use a position in Eurodollar futures contracts to hedge the interestrate risk created by the maturity mismatch it has with the $3,000,000 sixmonthEurodollar deposit and
> Jacob Bower has a liability that: • has a principal balance of $100 million on June 30, 2008, • accrues interest quarterly starting on June 30, 2008, • pays interest quarterly, • has
> Suppose that you are a U.S.-based importer of goods from the United Kingdom.You expect the value of the pound to increase against the U.S. dollarover the next 30 days. You will be making payment on a shipment of importedgoods in 30 days and want to hedge
> Explain how Eurocurrency is created.
> Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium or discountfor the U.S. dollar versus the British pound using European term quotations. Forsimplicity, assume each month has 30 days. What is the interpretation of your results?
> Your firm has just issued five-year floating-rate notes indexed to six-monthU.S. dollar LIBOR plus 1/4 percent. What is the amount of the first coupon paymentyour firm will pay per U.S. $1,000 of face value, if six-month LIBOR iscurrently 7.2 percent?
> Consider 8.5 percent Swiss franc/U.S. dollar dual-currency bonds that pay$666.67 at maturity per SF1,000 of par value. It sells at par. What is the implicitSF/$ exchange rate at maturity? Will the investor be better or worse off at maturityif the actual
> The Centralia Corporation is a U.S. manufacturer of small kitchen electrical appliances.It has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, tomanufacture microwave ovens for sale in the European Union. The plant is expec
> A five-year, 4 percent Euroyen bond sells at par. A comparable risk five-year,5.5 percent yen/dollar dual-currency bond pays $833.44 at maturity. It sells for¥110,000. What is the implied ¥/$ exchange rate at maturity? Hint: The par valueof the bond is n
> In Example 10.2, a forward contract was used to establish a derivatives “hedge” toprotect Centralia from a translation loss if the euro depreciated from €1.1000/ $1.00 to€1.1786/$1.00.
> Discuss what factors motivated Novo Industri to seek U.S. listing of its stock.What lessons can be derived from Novo’s experiences?
> Use the binomial option-pricing model developed in the chapter to value the callof problem 9. The volatility of the Swiss franc is 14.2 percent.
> Explain the internalization theory of FDI. What are the strengths and weaknesses of the theory?
> Sara Lee Corp. is serving up a brand name and a shorter maturity than other recentcorporate borrowers to entice buyers to its first-ever dollar Eurobonds. The U.S.maker of consumer products, from Sara Lee cheesecake to Hanes pantyhose and HillshireFarm m
> Comment on the following statement: “Since the United States imports more thanit exports, it is necessary for the United States to import capital from foreign countriesto finance its current account deficits.”
> Exhibit 13.11 presents a listing of major national stock market indexes as displayeddaily in the print edition of the Financial Times. At www.ft.com , you canfind an online tracking of these national stock market indexes that shows performanceover the pa
> Assess the possibility for the euro to become another global currency rivaling theU.S. dollar. If the euro really becomes a global currency, what impact will it haveon the U.S. dollar and the world economy?
> Sigma Corporation of Boston is contemplating establishing a wholly owned subsidiaryoperation in the Mediterranean. Two countries under consideration are Spain andCyprus. Sigma intends to repatriate all after-tax foreign-source income to the UnitedStates.
> Why do you think the empirical studies about factors affecting equity returns basicallyshowed that domestic factors were more important than international factors,and, secondly, that industrial membership of a firm was of little importance inforecasting
> Why might it be easier for an investor desiring to diversify his portfolio internationallyto buy depository receipts rather than the actual shares of the company?
> Why do you think closed-end country funds often trade at a premium or discount?
> Discuss any benefits you can think of for a company to (a) cross-list its equityshares on more than one national exchange, and (b) to source new equity capitalfrom foreign investors as well as domestic investors.
> Assume that FASB 8 is still in effect instead of FASB 52. Construct a consolidated balancesheet for Centralia Corporation and its affiliates after a depreciation of the euro from€1.1000/$1.00 to €1.1786/$1.00 that is the counterpart to Exhibit 10.7 in th
> Briefly discuss the cause and the solution(s) to the international bank crisisinvolving less-developed countries.
> Evaluate a home country’s multinational corporations as a tool for international diversification.
> What are the various means the taxing authority of a country might use to determine if a transfer price is reasonable?
> Would exchange rate changes always increase the risk of foreign investment?Discuss the condition under which exchange rate changes may actually reduce the risk of foreign investment.
> A speculator is considering the purchase of five three-month Japanese yen call optionswith a striking price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen.The spot price is 95.28 cents per 100 yen and the 90-day forward rate is 95.71 cent
> San Pico is a rapidly growing Latin American developing country. The country isblessed with miles of scenic beaches that have attracted tourists by the thousands inrecent years to new resort hotels financed by joint ventures of San Pico businessmenand mo
> Explain the concept of the Sharpe performance measure.
> Security returns are found to be less correlated across countries than within a country. Why can this be?
> In contrast to the United States, Japan has realized continuous current account surpluses.What could be the main causes for these surpluses? Is it desirable to havecontinuous current account surpluses?
> Discuss the advantages and disadvantages of closed-end country funds (CECFs) relative to American depository receipts (ADRs) as a means of international diversification.
> Explain how exchange rate fluctuations affect the return from a foreign market, measured in dollar terms. Discuss the empirical evidence for the effect of exchange rate uncertainty on the risk of foreign investment.
> Assume today’s settlement price on a CME EUR futures contract is $1.3140/EUR.You have a short position in one contract. Your performance bond account currentlyhas a balance of $1,700. The next three days’ settlement prices are $1.3126, $1.3133,and $1.304
> Explain the concept of the world beta of a security.
> Sundance Sporting Goods, Inc., is a U.S. manufacturer of high-quality sportinggoods—principally golf, tennis, and other racquet equipment, and also lawn sports,such as croquet and badminton—with administrative offices
> American Machine Tools is a mid-western manufacturer of tool-and-die-making equipment.The company has had an inquiry from a representative of the Moldovan governmentabout the terms of sale for a $5,000,000 order of machinery. The salesmanager spoke with
> AffiliateA sells 5,000 units to Affiliate B per year. The marginal income tax ratefor Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is40 percent. The transfer price per unit is currently $2,000, but it can be set atany level
> Discuss the twin objectives of taxation. Be sure to define the key words.
> Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium ordiscount for the Canadian dollar versus the U.S. dollar using American term quotations.For simplicity, assume each month has 30 days. What is the interpretationof your results
> Define and discuss indirect world systematic risk.
> What factors are responsible for the recent surge in international portfolio investment (IPI)?
> Compare and contrast the various types of secondary market trading structures.
> The Eastern Trading Company of Singapore presently follows a decentralized systemof cash management where it and its affiliates each maintain their own transactionand precautionary cash balances. Eastern Trading believes that it and its affiliatesâ
> Consider a U.S.-based company that exports goods to Switzerland. The U.S. Companyexpects to receive payment on a shipment of goods in three months. Becausethe payment will be in Swiss francs, the U.S. Company wants to hedge against adecline in the value
> Why do investors invest the lion’s share of their funds in domestic securities?
> Mr. James K. Silber, an avid international investor, just sold a share of Nestlé,a Swiss firm, for SF5,080. The share was bought for SF4,600 a year ago. Theexchange rate is SF1.60 per U.S. dollar now and was SF1.78 per dollar a year ago.Mr. Silber receiv
> Rebecca Taylor, an international equity portfolio manager, recognizes that anoptimal country allocation strategy combined with an optimal currency strategyshould produce optimal portfolio performance. To develop her strategies, Taylorproduced the followi
> The United States has experienced continuous current account deficits since theearly 1980s. What do you think are the main causes for the deficits? What wouldbe the consequences of continuous U.S. current account deficits?
> Explain official reserve assets and its major components.
> Suppose we obtain the following data in dollar terms: The correlation coefficient between the two markets is 0.58. Suppose that you invest equally, that is, 50 percent in each of the two markets. Determine the expected return and standard deviation ris
> A foreign exchange trader with a U.S. bank took a short position of £5,000,000when the $/£ exchange rate was 1.55. Subsequently, the exchange rate has changedto 1.61. Is this movement in the exchange rate good from the point of view ofthe position taken
> Japan Life Insurance Company invested $10,000,000 in pure-discount U.S. bonds in May 1995 when the exchange rate was 80 yen per dollar. The company liquidated the investment one year later for $10,650,000. The exchange rate turned out to be 110 yen per d
