Get Guided FIN 565 Homework Week 1-7 Bundle
FIN 565 Week 1 Homework Solutions
- Question: Imperfect Markets
- Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets.
- If perfect markets existed, would wages, prices, and interest rates among countries be more similar or less similar than under conditions of imperfect markets? Why?
2. Question: Benefits and Risks of International Business. As an overall review of this chapter, identify possible reasons for growth in international business. Then list the various disadvantages that may discourage international business
3. Question: Exposure to Exchange Rates. McCanna Corp., a U.S. firm, has a French subsidiary that produceswineandexportstovariousEuropeancountries.Allofthecountrieswhereitsells its wine use the euro as their currency, which is the same currency used in France. Is McCanna Corp. exposed to exchange rate risk?
4. Question: Methods Used to Conduct International Business Duve, Inc., desires to penetrate a foreign market with either a licensing agreement with a foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and return between a licensing agreement with a foreign firm and the acquisition of a foreign firm.
5. Question: Balance of Payments
- What are the main components of the current account?
- What are the main components of the capital account?
6. Question: Exchange Rate Effect on Trade Balance Would the U.S. balance-of-trade deficit be larger or smaller if the dollar depreciates against all currencies, versus depreciating against some currencies but appreciating against others? Explain.
7. Question: International Investments S.-based MNCs commonly invest in foreign securities … How will these expectations affect the tendency of U.S. investors to invest in foreign securities? Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest abroad In general terms, what is the attraction of foreign investments to U.S. investors?
8. Question: Income Effects on Exchange Rates Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?
9. Question: Co-movements of Exchange Rates Explain why the value of the British pound against the dollar will not always move in tandem with the value of the euro against the dollar.
10. Question: Relative Importance of Factors Affecting Exchange Rate Risk Assume that the level of capital flows between the United States and the country of Kendo is negligible (close to zero) and will continue to be negligible. There is a substantial amount of trade between the United States and the country of Kendo and no capital flows. How will high inflation and high-interest rates affect the value of the kren (Krendo’s currency)? Explain.
FIN-565 Week 2 Homework Solutions
- Question: Percentage Depreciation Assume the spot rate of the British pound is $1.73. The expected spot rate 1 year from now is assumed to be $1.66. What percentage of depreciation does this reflect?
- Question: Inflation Effects on Exchange Rates Assume that the S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?
- Question: Effects of Real Interest Rates What is the expected relationship between the relative real interest rates of two countries and the exchange rate of their currencies?
- Question: Forward versus Futures Contracts Compare and contrast forward and futures contracts.
- Question: Currency Options Differentiate between a currency call option and a currency put option.
- Question: Exchange Rate Systems Compare and contrast the fixed, freely floating, and managed float exchange rate systems. What are some advantages and disadvantages of a freely floating exchange rate system versus a fixed exchange rate system?
- Question: DirectInterventionHowcanacentralbankusedirectinterventiontochangethevalueofa a currency? Explain why a central bank may desire to smooth exchange rate movements of its
- Question: IndirectInterventionHowcanacentralbankuseindirectinterventiontochangethevalueofa a currency?
FIN 565 Week 3 Homework Solutions
- Question: Covered Interest Arbitrage Assume the following information:
- Question: Interest Rate Parity Consider investors who invest in either U.S. or British one-year Treasury bills. Assume zero transaction costs and no taxes. a) If interest rate parity exists, then the return for U.S. investors who use covered interest arbitrage will be the same as the return for U.S. investors who invest in U.S. Treasury bills. Is this statement true or false? If false, correct the statement. b) If interest rate parity exists, then the return for British investors who use covered interest arbitrage will be the same as the return for British investors who invest in British Treasury bills. Is this statement true or false? If false, correct the statement.
- Question: Interpreting Changes in the Forward Premium Assume that interest rate parity holds. At the beginning of the month, the spot rate of the Canadian dollar is $.70, while the one-year forward rate is $.68. Assume that U.S. interest rates increase steadily over the month. At the end of the month, the one-year forward rate is higher than it was at the beginning of the month. Yet the one-year forward discount is larger (the one-year premium is more negative) at the end of the month than it was at the beginning of the month. Explain how the relationship between the U.S. interest rate and the Canadian interest rate changed from the beginning of the month until the end of the month.
- Question: PPP Applied to the Euro Assume that several European countries that use the euro as their currency experience higher inflation than the United States, while two other European countries that use the euro as their currency experience lower inflation than the United States. According to PPP, how will the euro’s value against the dollar be affected?
- Question: Estimating Depreciation Due to PPP Assume that the spot exchange rate of the British pound is $1.73. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?
- Question: Forecasting with a Forward Rate Assume that the four-year annualized interest rate in the United States is 9 percent and the four-year annualized interest rate in Singapore is 6 percent. Assume interest rate parity holds for a four-year horizon. Assume that the spot rate of the Singapore dollar is $.60. If the forward rate is used to forecast exchange rates, what will be the forecast for the Singapore dollar’s spot rate in four years? What percentage appreciation or depreciation does this forecast imply over the four-year period?
- Question: Forecasting Euro Cooper, Inc., a U.S.-based MNC, periodically obtains euros to purchase German products. It assesses U.S. and German trade patterns and inflation rates to develop a fundamental forecast for the euro. How could Cooper possibly improve its method of fundamental forecasting as applied to the euro?
FIN-565 Week 4 Homework Solutions
- Question: Sources of Supplies and Exposure to Exchange Rate Risk Laguna Co.(aS. firm) will be receiving 4 million British pounds in one year. It will need to make a payment of 3 million Polish zlotych in one year. It has no other exchange rate risk at this time. However, it needs to buy supplies and can purchase them from Switzerland, Hong Kong, Canada, or Ecuador. Another alternative is that it could also purchase one-fourth of the supplies from each of the four countries mentioned in the previous sentence.
- Question: Which alternative should Laguna Co. select in order to minimize its overall exchange rate risk?
- Question: Financing to Reduce Exchange Rate Exposure Nashville Co. presently incurs costs of about 12 million Australian dollars (A$) per year for research and development expenses in Australia. It sells the products that are designed each year, and all of the products sold each year are invoiced in U.S. dollars. Nashville anticipates revenue of about $20 million per year, and about half of the revenue will be from sales to customers in Australia. The Australian dollar is presently valued at $1 (1 S. dollar), but it fluctuates a lot over time. Nashville Co. is planning a new project that will expand its sales to other regions within the United States, and the sales will be invoiced in dollars. Nashville can finance this project with a five-year loan by (1) borrowing only Australian dollars, (2) borrowing only U.S. dollars, or (3) borrowing one-half of the funds from each of these sources. The five-year interest rates on an Australian dollar loan and a U.S. dollar loan are the same. 1. If Nashville wants to use the form of financing that will reduce its exposure to exchange rate risk the most, what is the optimal form of financing? 2. Now assume that Nashville expects … Suppose the company wants to maximize the expected net present value of its new project and is not concerned about its exposure to exchange rate risk. Under these conditions, which financing alternative is most appropriate? Briefly explain.
- Question: Hedging with Forward Contracts Explain how a U.S. corporation could hedge net receivables in Malaysian ringgit with a forward contract. Explain how a U.S. corporation could hedge payables in Canadian dollars with a forward contract.
- Question: Forward versus Options Hedge on Payables If you are a U.S. importer of Mexican goods and you believe that today’s forward rate of the peso is a very accurate estimate of the futures pot rate, do you think Mexican peso call options would be a more appropriate hedge than the forward hedge? Explain.
- Question: Forward versus Options Hedge on Receivables You are an exporter of goods to the United Kingdom, and you believe that today’s forward rate of the British pound substantially underestimates the future spot rate. Company policy requires you to hedge your British pound receivables in some Would a forward hedge or a put option hedge be more appropriate? Explain.
- Question: Limitations of Hedging Translation Exposure Bartunek Co. is a U.S.-based MNC that has European subsidiaries and wants to hedge its translation exposure to fluctuations in the euro’s value. Explain some limitations when it hedges translation exposure.
FIN 565 Week 5 Homework Solutions
- Question: Host Government Incentives for DFI Why would foreign governments provide MNCs with incentives to undertake DFI there?
- Question: DFI Location Decision Decko Co. is a U.S. firm with a Chinese subsidiary that produces smartphones in China and sells them in Japan. This subsidiary pays its wages and its rent in Chinese yuan, which is stable relative to the dollar. The smartphones sold to Japan are denominated in Japanese yen. Assume that Decko Co. expects that the Chinese yuan will continue to stay stable against the dollar. The subsidiary’s main goal is to generate profits for itself and reinvest the profits. It does not plan to remit any funds to Decko, the U.S. parent.
- Assume that the Japanese yen strengthens against the U.S. dollar over time. How would this be expected to affect the profits earned by the Chinese subsidiary?
- If Decko Co. had established its subsidiary in Tokyo, Japan, instead of in China, would the subsidiary’s profits be more exposed or less exposed to exchange raterisk?
- Why do you think that Decko Co. established its subsidiary in China instead of Japan? Assume no major country risk barriers.
- If the Chinese subsidiary needs to borrow money to finance its expansion and wants to reduce its exchange rate risk, should it borrow U.S. dollars, Chinese yuan, or Japanese yen?
3. Question: Capital Budgeting Analysis A project in South Korea requires an initial investment of 2 billion South Korean won. The project is expected to generate net cash flows to the subsidiary of 3 billion and 4 billion won in the two years of operation, respectively. The project has no salvage value. The current value of the won is 1,100 won per U.S. dollar, and the value of the won is expected to remain constant over the next two years.
- What is the NPV of this project if the required rate of return is 13percent?
- Repeat the question, except assume that the value of the won is expected to be 1,200won per U.S. dollar after two years. Further, assume that the funds are blocked and that the parent company will only be able to remit them back to the United States in two years. How does this affect the NPV of the project?
FIN-565 Week 6 Homework Solutions
- Question: Pricing a Foreign Target Alaska, Inc., would like to acquire Estoya Corp., which is located in Peru. In initial negotiations, Estonia has asked for a purchase price of 1 billion Peruvian new sol. If Alaska completes the purchase, it would keep Estoya’s operations for two years and then sell the company. In the recent past, Estoya has generated annual cash flows of 500 million new sol per year, but Alaska believes that it can increase these cash flows by 5 percent each year by improving the operations of the plant. Given these improvements, Alaska believes it will be able to resell Estoya in two years for 1.2 billion new sol. The current exchange rate of the new sol is $.29, and exchange rate forecasts for the next two years indicate values of $.29 and $.27, respectively. Given these facts, should Alaska, Inc., pay 1 billion new sol for Estoya Corp. if the required rate of return is 18 percent? What is the maximum price Alaska should be willing to pay?
- Question: Feasibility of a Divestiture Merton, Inc., has a subsidiary in Bulgaria that it fully finances with its own equity. Last week, a firm offered to buy the subsidiary from Merton for $60 million in cash, and the offer is still available this week as well. The annualized long-term risk-free rate in the United States increased from 7 to 8 percent this week. The expected monthly cash flows to be generated by the subsidiary have not changed since last week. The risk premium that Merton applies to its projects in Bulgaria was reduced from 11.3 to 10.9 percent this week. The annualized long-term risk-free rate in Bulgaria declined from 23 to 21 percent this week. Would the NPV to Merton, Inc., from divesting this unit be more or less than the NPV determined last week? Why? (No analysis is necessary, but make sure that your explanation is very clear.)
- Question: Financing Decision Drexel Co. is a U.S.-based company that is establishing a project in a politically unstable country. It is considering two possible sources of financing. Either the parent could provide most of the financing, or the subsidiary could be supported by local loans from banks in that country. Which financing alternative is more appropriate to protect the subsidiary?
- Question: Financing Trade-Offs Pullman, Inc., a U.S. firm, has been highly profitable but prefers not to pay out higher dividends because its shareholders want the funds to be reinvested. It plans for large growth in several less developed countries. Pullman would like to finance the growth with local debt in the host countries of concern to reduce its exposure to country risk. Explain the dilemma faced by Pullman, and offer possible solutions.
- Question: Financing Decision In recent years, several U.S. firms have penetrated Mexico’s market. One of the biggest challenges is the cost of capital to finance businesses in Mexico. Mexican interest rates tend to be much higher than U.S. interest rates. In some periods, the Mexican government does not attempt to lower the interest rates because higher rates may attract foreign investment in Mexican securities.
- How might U.S.-based MNCs expand in Mexico without incurring high Mexican interest expenses when financing their expansion? Are any disadvantages associated with this strategy?
- Are there any additional alternatives for the Mexican subsidiary to finance its business itself after it has been well established? How might this strategy affect the subsidiary’s capital structure?
6. Question: Exchange Rate Effects
- Explain the difference in the cost of financing with foreign currencies during a strong-dollar period versus a weak-dollar period for a U.S.firm.
- Explain how a U.S.-based MNC issuing bonds denominated in euros may be able to offset a portion of its exchange rate risk.
7. Question: Borrowing Combined with Forward Hedging Cedar Falls Co. has a subsidiary in Brazil, where local interest rates are high. It considers borrowing dollars and hedging the exchange rate risk by selling the Brazilian real forward in exchange for dollars for the periods in which it would need to make loan payments in dollars. Assume that forward contracts on the real are available. What is the limitation of this strategy?
8. Question: Financing Decision Cuanto Corp. is a U.S. drug company that has attempted to capitalize on new opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are very low, often less than one-fourth of the cost in Germany or Switzerland. Furthermore, there is a strong demand for drugs in Eastern Europe. Cuanto penetrated Eastern Europe by purchasing a 60 percent stake in Galena, a Czech firm that produces drugs. 1. Should Cuanto finance its investment in the Czech firm by borrowing dollars from a U.S. bank that would then be converted into koruna (the Czech currency) or by borrowing koruna from a local Czech bank? What information do you need to know to answer this question? 2. How can borrowing koruna locally from a Czech bank reduce the exposure of Cuanto to exchange rate risk? 3. How can borrowing koruna locally from a Czech bank reduce the exposure of Cuanto to the political risk caused by government regulations?
FIN 565 Week 7 Homework Solutions
- Question: Banker’s Acceptances
- Describe how foreign trade would be affected if banks did not provide trade- related services.
- How can a banker’s acceptance be beneficial to an exporter, an importer, and a bank?
2. Question: Letters of Credit Ocean Traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however. Ocean Traders had an irrevocable L/C issued by a Russian bank to ensure that it would receive payment upon shipment of 16,000 tons of fish to a Russian firm. This bank backed out of its obligation, however, stating that it was not authorized to guarantee commercial transactions.
- Explain how an irrevocable L/C would normally facilitate the business transaction …
- Explain how the cancellation of the L/C could create a trade crisis between the U.S.and Russian firms.
- Why do you think situations like this (the cancellation of the L/C) are rare in industrialized countries?
- Can you think of any alternative strategy that the U.S. exporter could have used to protect itself better when dealing with a Russian importer?
3. Question: IRP Application to Short-Term Financing Connecticut Co. plans to finance its U.S. operations. It can borrow euros on a short-term basis at a lower interest rate than if it borrowed dollars.
- If interest rate parity does not hold, what strategy should Connecticut Co.consider when it needs short-term financing?
- Assume that Connecticut Co. needs dollars. It borrows euros at a lower interest rate than that dollars. If interest rate parity exists and if the forward rate of the euro is a reliable predictor of the future spot rate, what does this suggest about the feasibility of such a strategy?
- If Connecticut Co. expects the current spot rate to be a more reliable predictor of the future spot rate, what does this suggest about the feasibility of such a strategy?
4. Question: IRP Application to Short-term Financing Seabreeze Co. needs to finance some dollar-denominated expenses for one year. It can borrow euros cheaper than dollars. Interest rate parity exists. The one-year forward rate of the euro contains a premium of 4 percent. If it believes the euro will appreciate by 6 percent over the next year, would its expected financing expense be lower if it borrowed dollars or euros?
5. Question: Investing in a Portfolio Pittsburgh Co. plans to invest its excess cash in Mexican pesos for one The one-year Mexican interest rate is 19 percent. The probability of the peso’s percentage change in value during the next year is shown next: … What is the expected value of the effective yield based on this information? Given that the U.S. interest rate for one year is 7 percent, what is the probability that a one-year investment in pesos will generate a lower effective yield than could be generated if Pittsburgh Co. simply invested domestically?
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