James Clark is a currency trader with Wachovia. He notices the following quotes: Spot exchange rate ……………………………………………….SFr1.2051/$ Six-month forward exchange rate ………………………….SFr1.1922/$ Six-month dollar interest rate ……………………………….2.50% per year Six-month Swiss franc interest rate ……………………….2.0% per year a. Is the interest rate parity holding? You may ignore transaction costs. b. Is there an arbitrage' data-toggle="tooltip" data-placement="top" title="Click to view definition...">arbitrage opportunity? If yes, show what steps need to be taken to make arbitrage profit. Assuming that James Clark is authorized to work with $1,000,000, compute the arbitrage profit in dollars.
> Discuss how the advent of the euro would affect international diversification strategies.
> Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditurein South Africa. The initial cost of the project is ZAR10,000. The annual cashflows over the five-year economic life of the project in ZAR are estimated to be3,000, 4,000, 5,
> IBM purchased computer chips from NEC, a Japanese electronics concern, andwas billed ¥250 million payable in three months. Currently, the spot exchangerate is ¥105/$ and the three-month forward rate is ¥100/$. The three-month moneymarket interest rate is
> Zeda, Inc., a U.S. MNC, is considering making a fixed direct investment in Denmark. The Danish government has offered Zeda a concessionary loan of DKK 15,000,000 at a rate of 4 percent per annum. The normal borrowing rate for Zeda is 6 percent in dollars
> The Alpha Company plans to establish a subsidiary in Hungary to manufactureand sell fashion wristwatches. Alpha has total assets of $70 million, of which$45 million is equity financed. The remainder is financed with debt. Alpha consideredits current capi
> With regard to the Centralia case application in the chapter, how would the APV change if: a. The forecast of (dand/or (f are incorrect? b. Deprecation cash flows are discounted at Kudinstead of id? c. The host country did not provide the concessionary l
> The Eastern Trading Company of Singapore ships prepackaged spices to Hong Kong,the United Kingdom, and the United States, where they are resold by sales affiliates.Eastern Trading is concerned with what might happen in Hong Kong now thatcontrol has been
> Discuss the criteria for a “good” international monetary system.
> The Strik-it-Rich Gold Mining Company is contemplating expanding its operations.To do so it will need to purchase land that its geologists believe is rich in gold. Strikit-Rich’s management believes that the expansion will allow it to mine and sell anadd
> How would you incorporate political risk into the capital budgeting process of foreign investment projects?
> Answer problems 1, 2, and 3 based on the stock market data given by the following table. The above table provides the correlations among Telmex, a telephone/communicationcompany located in Mexico, the Mexico stock market index, and the world marketinde
> How is international financial management different from domestic financialmanagement?
> Dorchester, Ltd. is an old-line confectioner specializing in high-quality chocolates.Through its facilities in the United Kingdom, Dorchester manufactures candies thatit sells throughout Western Europe and North America (United States and Canada).With it
> Airbus sold an A400 aircraft to Delta Airlines, a U.S. company, and billed $30 millionpayable in six months. Airbus is concerned about the euro proceeds from internationalsales and would like to control exchange risk. The current spot exchange rateis $1.
> What were the weaknesses of Basel II that became apparent during the globalfinancial crisis that began in mid-2007?
> Explain the random walk model for exchange rate forecasting. Can it be consistentwith technical analysis?
> Explain cross-hedging and discuss the factors determining its effectiveness.
> Using an example, discuss the possible effect of hedging on a firm’s tax obligations.
> There are arguments for and against the alternative exchange rate regimes. a. List the advantages of the flexible exchange rate regime. b. Criticize the flexible exchange rate regime from the viewpoint of the proponentsof the fixed exchange rate regime.
> The public corporation is owned by a multitude of shareholders but run by professionalmanagers. Managers can take self-interested actions at the expense of shareholders.Discuss the conditions under which the so-called agency problem arises.
> What is a collateralized debt obligation and what effect did they have on the credit crunch?
> Suppose your company has purchased a put option on the euro to manageexchange exposure associated with an account receivable denominated in that currency.In this case, your company can be said to have an “insurance” policy on itsreceivable. Explain in wh
> Explain the pricing-to-market phenomenon.
> Ashton Bishop is the debt manager for World Telephone, which needs €3.33 billionEuro financing for its operations. Bishop is considering the choice between issuanceof debt denominated in: • Euros (€), o
> It is Tuesday afternoon, February 14, 2012. Richard May, Assistant Treasurer atAmerican Digital Graphics (ADG), sits in his office on the thirty-fourth floor of thebuilding that dominates Rockefeller Plaza’s west perimeter. Itâ
> Discuss the pros and cons of a MNC having a centralized cash manager handle allinvestment and borrowing for all affiliates of the MNC versus each affiliate havinga local manager who performs the cash management activities of the affiliate.
> Explain the basic differences between the operation of a currency forward marketand a futures market.
> List the arguments (variables) of which an FX call or put option model price is afunction. How do the call and put premiums change with respect to a change in thearguments?
> What is meant by the terminology that an option is in-, at-, or out-of-the-money?
> Explain purchasing power parity, both the absolute and relative versions. Whatcauses deviations from purchasing power parity?
> What is the major difference in the obligation of one with a long position in afutures (or forward) contract in comparison to an options contract?
> How can the FX futures market be used for price discovery?
> Discuss and compare the costs of hedging by forward contracts and optionscontracts.
> Suppose Morgan Guaranty, Ltd. is quoting swap rates as follows: 7.75–8.10 percentannually against six-month dollar LIBOR for dollars and 11.25–11.65 percentannually against six-month dollar LIBOR for British pound sterling. At what rateswill Morgan Guara
> Discuss different ways that dominant investors may establish and maintain controlof a company with relatively small investments.
> What is the difference between the Euronote market and the Eurocommercialpaper market?
> Why are most futures positions closed out through a reversing trade rather thanheld to delivery?
> If Honda ADRs were trading at $44 when the underlying shares were trading inTokyo at ¥3,945, what could you do to earn a trading profit? Use the informationin problem 1 to help you, and assume that transaction costs are negligible.
> In order for a derivatives market to function most efficiently, two types ofeconomic agents are needed: hedgers and speculators. Explain.
> Explain how special drawing rights (SDRs) are constructed. Also, discuss the circumstancesunder which the SDRs were created.
> Suppose you are interested in investing in shares of Samsung Electronics of Korea,which is a world leader in mobile phones, TVs, and home appliances. But beforeyou make an investment decision, you would like to learn about the company. Visitthe website o
> Use the European option-pricing models developed in the chapter to value the call ofproblem 9 and the put of problem 10. Assume the annualized volatility of the Swissfranc is 14.2 percent. This problem can be solved using the FXOPM.xls spreadsheet.
> Explain the following three concepts of purchasing power parity (PPP): a. The law of one price. b. Absolute PPP. c. Relative PPP.
> How would you define transaction exposure? How is it different from economicexposure?
> Discuss the risks confronting an interest rate and currency swap dealer.
> Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 toinvest for six months. The six-month interest rate is 8 percent per annum in theUnited States and 7 percent per annum in Germany. Currently, the spot exchangerate is €1.01 per
> When the euro was introduced in January 1999, the United Kingdom was conspicuouslyabsent from the list of European countries adopting the common currency.Although the previous Labour government led by Prime Minister Tony Blair appearedto be in favor of j
> Suppose you conduct currency carry trade by borrowing $1,000,000 at the start ofeach year and investing in the New Zealand dollar for one year. One-year interestrates and the exchange rate between the U.S. dollar ($) and New Zealand dollar(NZ$) are provi
> How does the deposit-loan rate spread in the Eurodollar market compare with thedeposit-loan rate spread in the domestic U.S. banking system? Why?
> After studying Iris Hamson’s credit analysis, George Davies is consideringwhether he can increase the holding period return on Yucatan Resort’s excess cashholdings (which are held in pesos) by investing those cash holdings in the Mexicanbond market. Alth
> Lured by extremely low labor costs in Bangladesh, many MNCs in the so-calledfast-fashion business, including H&M, Inditex (parent of the popular Zara brand),Marks&Spencer, and Gap, are heavily outsourcing to Bangladesh. As a result,the garment industry h
> Due to the integrated nature of their capital markets, investors in both the UnitedStates and the U.K. require the same real interest rate, 2.5 percent, on their lending.There is a consensus in capital markets that the annual inflation rate is likelyto b
> Suppose that the current spot exchange rate is €1.50/£ and the one-year forwardexchange rate is €1.60/£. The one-year interest rate is 5.4 percent in euros and5.2 percent in pounds. You can borrow at most €1,000,000 or the equivalent poundamount, that is
> Should a firm hedge? Why or why not?
> Explain the arrangements and workings of the European Monetary System (EMS).
> Omni Advisors, an international pension fund manager, uses the concepts of purchasingpower parity (PPP) and the International Fisher Effect (IFE) to forecastspot exchange rates. Omni gathers the financial information as follows: Base price level……………………
> As of November 1, 1999, the exchange rate between the Brazilian real and U.S.dollar was R$1.95/$. The consensus forecast for the U.S. and Brazil inflation ratesfor the next one-year period was 2.6 percent and 20.0 percent, respectively. Whatwould you hav
> Do problem 9 again assuming an American put option instead of a call option. Data from Problem 9: Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the minimum price that a six-month American call option with a st
> Following corporate scandals and failures in the United States and abroad, therehas been a growing demand for corporate governance reform. What should bethe key objectives of corporate governance reform? What kinds of obstacles canthwart reform efforts?
> Suppose that the pound is pegged to gold at 6 pounds per ounce, whereas thefranc is pegged to gold at 12 francs per ounce. This, of course, implies that theequilibrium exchange rate should be two francs per pound. If the current marketexchange rate is 2.
> In the October 23, 1999, issue, The Economist reports that the interest rate perannum is 5.93 percent in the United States and 70.0 percent in Turkey. Why doyou think the interest rate is so high in Turkey? On the basis of the reported interestrates, how
> Explain how a country can run an overall balance-of-payments deficit or surplus.
> Discuss the various ways the exporter can receive payment in a foreign tradetransaction after the importer’s bank accepts the exporter’s time draft and itbecomes a banker’s acceptance.
> How does the theory of comparative advantage relate to the currency swap market?
> Suppose that the current spot exchange rate is €0.80/$ and the three-month forwardexchange rate is €0.7813/$. The three-month interest rate is 5.6 percent perannum in the United States and 5.40 percent per annum in France. Assume thatyou can borrow up to
> Explain Vernon’s product life-cycle theory of FDI. What are the strengths and weaknesses of the theory?
> Discuss how a MNC might attempt to repatriate blocked funds from a host country.
> Currently, the spot exchange rate is $1.50/£ and the three-month forward exchangerate is $1.52/£. The three-month interest rate is 8.0 percent per annum in the U.S.and 5.8 percent per annum in the U.K. Assume that you can borrow as much as$1,500,000 or £
> While you were visiting London, you purchased a Jaguar for £35,000, payablein three months. You have enough cash at your bank in New York City, whichpays 0.35 percent interest per month, compounding monthly, to pay for thecar. Currently, the spot exchang
> Veritas Emerging Market Fund specializes in investing in emerging stock markets ofthe world. Mr. Henry Mobaus, an experienced hand in international investment andyour boss, is currently interested in Turkish stock markets. He thinks that Turkey willevent
> It has been shown that foreign companies listed on U.S. stock exchanges are valuedmore than those from the same countries that are not listed in the United States.Explain why U.S.-listed foreign firms are valued more than those that are not. Alsoexplain
> Over the past five years, the exchange rate between the British pound and the U.S.dollar, $/£, has changed from about 1.90 to about 1.45. Would you agree that over thisfive-year period, British goods have become cheaper for buyers in the United States?
> What is meant by a currency trading at a discount or at a premium in the forwardmarket?
> Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950.What is the minimum price that a six-month American call option with a strikingprice of $0.6800 should sell for in a rational market? Assume the annualized sixmonthEurodolla
> Do problem 1 again assuming you have a long position in the futures contract. Data from Problem 1: Assume today’s settlement price on a CME EUR futures contract is $1.3140/EUR.You have a short position in one contract. Your performance bond account curr
> Give a full definition of the market for foreign exchange.
> Recent surveys of corporate exchange risk management practices indicate thatmany U.S. firms simply do not hedge. How would you explain this result?
> Explain the mechanism that restores the balance-of-payments equilibrium when it is disturbed under the gold standard.
> A CAD/$ 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
