At the start of 1996, the annual interest rate was 6 percent in the United Statesand 2.8 percent in Japan. The exchange rate was 95 yen per dollar at the time.Mr. Jorus, who is the manager of a Bermuda-based hedge' data-toggle="tooltip" data-placement="top" title="Click to view definition...">hedge fund, thought thatthe substantial interest advantage associated with investing in the United Statesrelative to investing in Japan was not likely to be offset by the decline of thedollar against the yen. He thus concluded that it might be a good idea to borrowin Japan and invest in the United States. At the start of 1996, in fact, he borrowed¥1,000 million for one year and invested in the United States. At the end of 1996,the exchange rate became 105 yen per dollar. How much profit did Mr. Jorus makein dollar terms?
> 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
> The HFS Trustees have solicited input from three consultants concerning the risksand rewards of an allocation to international equities. Two of them strongly favorsuch action, while the third consultant commented as follows:“The risk re
> Explain the pricing spillover effect.
> The Cadbury Code of Best Practice,adopted in the United Kingdom, led to asuccessful reform of corporate governance in the country. Explain the key requirementsof the code and discuss how it contributed to the success of reform.
> Suppose you are interested in investing in the stock markets of seven countries—i.e., Australia, Canada, Germany, Japan, Switzerland, the United Kingdom,and the United States—the same seven countries that appear in Exh
> In problem 2, suppose that Mr. Silber sold SF4,600, his principal investmentamount, forward at the forward exchange rate of SF1.62 per dollar. How wouldthis affect the dollar rate of return on this Swiss stock investment? In hindsight,should Mr. Silber h
> Evaluate the usefulness of relative PPP in predicting movements in foreignexchange rates on: a. Short-term basis (for example, three months). b. Long-term basis (for example, six years).
> The Docket Company of Asheville, NC, USA, is considering establishing anaffiliate operation in the city of Wellington, on the south island ofNew Zealand.It is undecided whether to establish the affiliate as a branch operation or a whollyowned subsidiary.
> As an investor, what factors would you consider before investing in the emergingstock market of a developing country?
> What is a mortgage backed security?
> Using the American term quotes from Exhibit 5.4,calculate a cross-rate matrixfor the euro, Swiss franc, Japanese yen, and British pound so that the resulting triangular matrix is similar to the portion above the diagonal in Exhibit 5.6. Exhibit 5.4: Ex
> Discuss foreign equity ownership restrictions. Why do you think countries impose these restrictions?
> Suppose you are a euro-based investor who just sold Microsoft shares that you hadbought six months ago. You had invested 10,000 euros to buy Microsoft sharesfor $120 per share; the exchange rate was $1.15 per euro. You sold the stock for$135 per share an
> Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industryfor 500 million yen payable in one year. The current spot rate is ¥124/$ and theone-year forward rate is 110/$. The annual interest rate is 5 percent in Japan and8 percent in th
> The Glover Scholastic Aid Foundation has received a €20 million global governmentbond portfolio from a Greek donor. This bond portfolio will be held ineuros and managed separately from Glover’s existing U.S. dollar-deno
> Examine the following summary of the U.S. balance of payments for 2000(in $ billion) and fill in the blank entries. Credits Debits Current Account 1,418.64 774.86 (1) Exports (1.1) Merchandise (1.2) Services (1.3) Factor income (2) Imports (2.1) Merc
> Suppose you are a financial adviser and your client, who is currently investing only inthe U.S. stock market, is considering diversifying into the U.K. stock market. At themoment, there are neither particular barriers nor restrictions on investing in the
> Explain why and how a firm’s cost of capital may decrease when the firm’s stock is cross-listed on foreign stock exchanges.
> What factors would you consider in evaluating the political risk associated with making FDI in a foreign country?
> What operational and financial measures can a MNC take to minimize the political risk associated with a foreign investment project?
> What are the advantages and disadvantages of FDI as compared to a licensing agreement with a foreign partner?
> Define country risk. How is it different from political risk?
> Researchers found that it is very difficult to forecast future exchange rates moreaccurately than the forward exchange rate or the current spot exchange rate. Howwould you interpret this finding?
> Omni Advisors, an international pension fund manager, plans to sell equitiesdenominated in Swiss francs (CHF) and purchase an equivalent amount of equities denominated in South African rands (ZAR). Omni will realize net proceeds of 3 million CHF at the
> Suppose that Baltimore Machinery sold a drilling machine to a Swiss firm and gavethe Swiss client a choice of paying either $10,000 or SF15,000 in three months. a. In the example, Baltimore Machinery effectively gave the Swiss client a free option tobuy
> Do you think that a country’s government should assist private business in the conduct of international trade through direct loans, loan guarantees, and/or credit insurance?
> Salt Lake Company’s 2013 income statement and selected balance sheet data at December 31, 2012 and 2013, follow. RequiredPrepare the cash flows from operating activities section only of the company’s 2013 statement o
> Refer to Satu Company’s financial statements and related information in Problem 12-4B. RequiredPrepare a complete statement of cash flows; report its cash flows from operating activities according to the direct method. In Problem 12-4
> Refer to the information in Exercise 12-10. Using the direct method, prepare the statement of cash flows for the year ended June 30, 2013. In Exercise 12-10 The following financial statements and additional information are reported. Additional Inform
> Refer to the information reported aboutSatu Company in Problem 12-4B. RequiredPrepare a complete statement of cash flows using a spreadsheet as in Exhibit 12A.1; report operating activities under the indirect method. Identify the debits and credits in t
> Forten Company, a merchandiser, recently completed its calendar-year 2013 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on cred
> Refer to the information in Problem 12-7A. RequiredPrepare the cash flows from operating activities section only of the company’s 2013 statement of cash flows using the direct method. In Problem 12-7A Lansing Company’
> Access the March 30, 2012, filing of the 10-K report (for year ending December 31, 2011) of Mendocino Brewing Company, Inc., at www .sec.gov. Required 1. Does Mendocino Brewing use the direct or indirect method to construct its consolidated statement of
> Hampton Company reports the following information for its recent calendar year. Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000 Expenses Cost of goods sold . . . . . . . . . . . . . . . . . 100,000 Salaries expense . . . . . . . .
> Use the following information to determine this company’s cash flows from financing activities. a. Net income was $35,000. b. Issued common stock for $64,000 cash. c. Paid cash dividend of $14,600. d. Paid $50,000 cash to settle a note payable at its $50
> Refer to Polaris’s financial statements in Appendix A. Compute its profit margin for the years ended December 31, 2011, and December 31, 2010.
> A company reported average total assets of $1,240,000 in 2012 and $1,510,000 in 2013. Its net operating cash flow in 2012 was $102,920 and $138,920 in 2013. Calculate its cash flow on total assets ratio for both years. Comment on the results and any chan
> Where on the income statement does a company report an unusual gain not expected to occur more often than once every two years or so?
> What does a relatively high accounts receivable turnover indicate about a company’s short-term liquidity?
> What does the number of days’ sales uncollected indicate?
> Satu Company, a merchandiser, recently completed its 2013 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debi
> Why is working capital given special attention in the process of analyzing balance sheets?
> Suggest several reasons why a 2:1 current ratio might not be adequate for a particular company.
> What three factors would influence your evaluation as to whether a company’s current ratio is good or bad?
> Lansing Company’s 2013 income statement and selected balance sheet data at December 31, 2012 and 2013, follow. RequiredPrepare the cash flows from operating activities section only of the company’s 2013 statement of
> Which items are usually assigned a 100% value on (a) a common-size balance sheet and (b) a common-size income statement?
> Explain the difference between financial reporting and financial statements.
> What ratios would you compute to evaluate management performance?
> Visit The Motley Fool’s Website (Fool.com). Enter the Fool’s School (at Fool.com/School). Identify and select the link How to Value Stocks. (Please note the site may ask you to register with your email address. Registration is free and grants access to f
> The following summarized Cash T-account reflects the total debits and total credits to the Cash account of Thomas Corporation for calendar year 2013. (1) Use this information to prepare a complete statement of cash flows for year 2013. The cash provided
> How does inventory turnover provide information about a company’s short-term liquidity?
> Refer to Gazelle Corporation’s financial statements and related information in Problem 12-1B. RequiredPrepare a complete statement of cash flows; report its operating activities according to the direct method. Disclose any noncash inves
> Why is a company’s capital structure, as measured by debt and equity ratios, important to financial statement analysts?
> What is the difference between comparative financial statements and common-size comparative statements?
> Why would a company’s return on total assets be different from its return on common stockholders’ equity?
> You are to devise an investment strategy to enable you to accumulate $1,000,000 by age 65. Start by making some assumptions about your salary. Next compute the percent of your salary that you will be able to save each year. If you will receive any lump-s
