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?
> 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$) are provi
> How does the deposit-loan rate spread in the Eurodollar market compare with thedeposit-loan rate spread in the domestic U.S. banking system? Why?
> James Clark is a currency trader with Wachovia. He notices the following quotes: Spot exchange rate ……………………………………………….SFr1.2051/$ Six-month forward exchange rate ………………………….SFr1.1922/$ Six-month dollar interest rate ……………………………….2.50% per year Six-mon
> 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?
> 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?
> Doug Bernard specializes in cross-rate 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 ha
> 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.
