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.
> 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.
> Briefly discuss some of the services that international banks provide their customersand the marketplace.
> What are multinational corporations (MNCs) and what economic roles do theyplay?
> What considerations might limit the extent to which the theory of comparativeadvantage is realistic?
> If the cost advantage of interest rate swaps would likely be arbitraged away incompetitive markets, what other explanations exist to explain the rapid developmentof the interest rate swap market?
> How is a country’s economic well-being enhanced through free international tradein goods and services?
> Discuss the major trends that have prevailed in international business during thelast two decades.
> The theory of comparative advantage was originally advanced by the 19th-centuryeconomist David Ricardo as an explanation for why nations trade with one another.The theory claims that economic well-being is enhanced if each country’s cit
> Briefly discuss the various types of countertrade.
> Studies show that the legal protection of shareholder rights varies a great dealacross countries. Discuss the possible reasons why the English common law traditionprovides the strongest protection of investors and the French civil law traditionthe weakes
> Nike, a company headquartered in Beaverton, Oregon, is a major force in the sportsfootwear and fashion industry, with annual sales exceeding $12 billion, more thanhalf of which now come from outside the United States. The company was co-foundedin 1964 by
> Discuss and compare hedging transaction exposure using the forward contractversus money market instruments. When do alternative hedging approaches producethe same result?
> Assume the settlement rate in problem 2 is 61⁄8 percent. What is the solution now?
> Discuss some of the reasons why international trade is more difficult and risky from the exporter’s perspective than is domestic trade.
> Evaluate the following statement: “A firm can reduce its currency exposure bydiversifying across different business lines.”
> In what sense do firms with nontradable assets get a free ride from firms whose securities are internationally tradable?
> Karla Ferris, a fixed income manager at Mangus Capital Management, expects thecurrent positively sloped U.S. Treasury yield curve to shift parallel upward.Ferris owns two $1,000,000 corporate bonds maturing on June 15, 2014, one witha variable rate based
> Discuss the advantages and disadvantages of maintaining multiple manufacturingsites as a hedge against exchange rate exposure.
> What are the advantages and disadvantages to a firm of financial hedging of itsoperating exposure compared to operational hedges (such as relocating its manufacturing site)?
> 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.”
> 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
> 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
> 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?
