Question: Hudson Co., a U.S. firm, has

> Explain how the existence of the euro may affect U.S. international trade

> Assume that during this semester, the euro appreciated against the dollar. Did the direct exchange rate of the euro increase or decrease? Did the indirect exchange rate of the euro increase or decrease?

> Why do you think international trade volume has increased over time? In general, how are inefficient firms affected by the reduction in trade restrictions among countries and the continuous increase in international trade?

> A relatively small U.S. balance-of-trade deficit is commonly attributed to a strong demand for U.S. exports. What do you think is the underlying reason for the strong demand for U.S. exports?

> 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.

> a. What are some of the major objectives of the IMF? b. How is the IMF involved in international trade?

> How can government restrictions affect international payments among countries?

> a. How would a relatively high domestic inflation rate affect the home country’s current account, other things being equal? b. Is a negative current account harmful to a country? Discuss.

> There is an ongoing debate between the United States and China regarding whether the Chinese yuan’s value should be revalued upward. The cost of labor in China is substantially lower than that in the United States. a. Would the U.S. balance-of-trade defi

> The governments of many countries enact policies that can have a major impact on international trade flows. a. Explain how governments might give their local firms a competitive advantage in the international trade arena. b. Why might different tax laws

> a. Explain why a stronger dollar could enlarge the U.S. balance-of-trade deficit. Explain why a weaker dollar could affect the U.S. balance-of-trade deficit. b. It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate a

> MNCs commonly invest in foreign securities. a. Assume that the dollar is presently weak and is expected to strengthen over time. How will these expectations affect the tendency of U.S. investors to invest in foreign securities? b. Explain how low U.S. i

> Go to the currency converter at finance. yahoo.com/currency-converter and determine the bid/ask spread for the euro. Then determine the bid/ask spread for a currency in a less developed country. What do you think is the main reason for the difference in

> There has been considerable momentum to reduce or remove trade barriers in an effort to achieve “free trade.” Yet one disgruntled executive of an exporting firm stated, “Free trade is not conceivable; we are always at the mercy of the exchange rate. Any

> Assume a simple world in which the United States exports soft drinks and beer to France and imports wine from France. If the United States imposes large tariffs on the French wine, explain the likely impact on the values of U.S. beverage firms, U.S. wine

> a. What are the main components of the current account? b. What are the main components of the capital account?

> a. Rochester Co. is a U.S. firm that operates a language institute in France. This institute attracts Americans who want to learn the French language. Rochester Co. charges tuition to the American students in dollars. It expects that its dollar revenue f

> Assume that Alpine Co. is a U.S. firm that has direct foreign investment in Brazil as a result of establishing a subsidiary there. Political conditions have changed in Brazil, but investors’ best guesses of the future cash flows per year for Alpine Co. h

> Odessa Co., Midland Co., and Roswell Co. are U.S. firms in the same industry and have the same valuation as of yesterday, based on the present value of the future cash flows of each company. Odessa Co. obtains a large amount of its supplies invoiced in e

> a. Assume that Bangor Co., a U.S. firm, knows that it will have cash inflows of $900,000 from domestic operations, cash inflows of 200,000 Swiss francs due to exports to Swiss operations, and cash outflows of 500,000 Swiss francs at the end of the year.

> Co. is a U.S. firm that has a subsidiary in China. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Biloxi Co. has expected cash flows from its domestic business equal to $10 million, and the Chinese subs

> Asheville Co. has a subsidiary in Mexico that develops software for its parent. It rents a large facility in Mexico and hires many people in Mexico to work in this facility. Asheville Co. has no other international business. All operations are presently

> Tuscaloosa Co. is a U.S. firm that assembles phones in Argentina and transports the final assembled products to the parent, which then sells the products in the United States. The assembled products are invoiced in dollars. The Argentine subsidiary obtai

> Today, the stock price of Genevo Co. (based in Switzerland) is priced at SF80 per share. The spot rate of the Swiss franc (SF) is $0.70. During the next year, you expect that the stock price of Genevo Co. will decline by 3 percent. You also expect that t

> During the Asian crisis, why did the discount of the forward rate of Asian currencies change? Do you think it increased or decreased? Why?

> MNCs tend to expand more when they can more easily access funds by issuing stock. In some countries, shareholder rights are very limited, and the MNCs have limited ability to raise funds by issuing stock. Explain why access to funding is more restricted

> Because of the low labor costs in Thailand, Melnick Co. (based in the United States) recently established a major research and development subsidiary there that it owns. The subsidiary was created to improve new products that Melnick can sell in the Unit

> If a U.S. recession occurred without any change in interest rates, identify the part of the MNC valuation equation that would most likely be affected.

> Arlington Co. expects to receive 10 million euros in each of the next 10 years. It will need to obtain 2 million Mexican pesos in each of the next 10 years. The euro exchange rate is presently valued at $1.38 and is expected to depreciate by 2 percent ea

> Minneapolis Co. is a major exporter of products to Canada. Today, an event occurred that has increased the uncertainty surrounding the Canadian dollar’s future value over the long term. Explain how this event might affect the valuation of Minneapolis Co

> Olmsted Co. has small computer chips assembled in Poland and transports the final assembled products to the parent company; the parent then sells these products in the United States. The assembled products are invoiced in dollars. Olmsted Co. uses Polish

> Carlisle Co. is a U.S. firm that is about to purchase a large company in Switzerland at a purchase price of $20 million. This company, which produces furniture and sells it locally (in Switzerland), is expected to earn large profits every year. Following

> Rose Co., a U.S. firm, has expanded its business by establishing networking portals in numerous countries, including Argentina, Australia, China, Germany, Ireland, Japan, and the United Kingdom. It has cash outflows associated with the creation and admin

> Nantucket Travel Agency specializes in tours for American tourists. Until recently, all of its business was in the United States It just established a subsidiary in Athens, Greece, which provides tour services in the Greek islands for American visitors.

> In addition to its stores in the United States, Walmart Stores, Inc., has numerous retail units in Argentina, Brazil, Canada, China, Mexico, and the United Kingdom. Consider that the value of Walmart is composed of two parts: a U.S. part (due to business

> Today you notice the following exchange rate quotations: (a) $1 5 3.00 Argentine pesos and (b) 1 Argentine peso 5 0.50 Canadian dollar. You need to purchase 100,000 Canadian dollars with U.S. dollars. How many U.S. dollars will you need for your purchase

> Fort Worth, Inc., specializes in manufacturing some basic parts for sports utility vehicles (SUVs) that are produced and sold in the United States. Its main advantage in the United States is that its production is efficient and less costly than that of s

> Birm Co., based in Alabama, is considering several international opportunities in Europe that could affect the firm’s value. Its valuation depends on four factors: (1) expected cash flows in dollars, (2) expected cash flows in euros that are ultimately c

> The managers of Loyola Corp. recently had a meeting to discuss new opportunities in Europe as a result of recent integration among Eastern European countries. They decided not to penetrate new markets because of their present focus on expanding market sh

> Anheuser-Busch (which is now part of AB InBev due to a merger), the producer of Budweiser and other beers, has engaged in a joint venture with Kirin Brewery, the largest brewery in Japan. The joint venture enabled Anheuser-Busch to have its beer distribu

> Following the terrorist attacks on the United States on September 11, 2001, the valuations of many MNCs declined by more than 10 percent. Explain why the expected cash flows of MNCs were reduced, even if they were not directly hit by the terrorist attack

> Explain why political risk may discourage international business.

> Snyder Golf Co., a U.S. firm that sells high-quality golf clubs in the United States, wants to expand internationally by selling the same golf clubs in Brazil. a. Describe the trade-offs that are involved for each method (such as exporting, direct forei

> Duve, Inc., desires to penetrate a foreign market either by creating 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

> Review this book’s table of contents and indicate whether each of the chapters from Chapter 2 through Chapter 21 has a macro or micro perspective.

> McCanna Corp., a U.S. firm, has a French subsidiary that produces and exports wine. All of the European countries where it sells its wine use the euro as their currency, which is the same currency used in France. Is McCanna Corp. exposed to exchange rate

> Why do interest rates vary among countries? Why are interest rates usually similar for those European countries that use the euro as their currency? Offer a reason why the government interest rate of one country could be slightly higher than the governme

> Explain why morestandardized product specifications across countries can increase global competition

> Would the agency problem be more pronounced for Berkeley Corp., whose parent company makes most major decisions for its foreign subsidiaries, or Oakland Corp., which uses a decentralized approach?

> 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

> Plak Co. of Chicago has several European subsidiaries that remit earnings to it each year. Explain how appreciation of the euro (the currency used in many European countries) would affect Plak’s valuation

> Rollins, Inc., has $3 million in cash available for 1 year. It can earn 3 percent on aU.S. Treasury bill or 5 percent on a British Treasury security. The British investment requires conversion of the company’s dollars to British pounds. Assume that inter

> Fort Collins, Inc., has $1 million in cash available for 30 days. It can earn 1 percent on a 30-day investment in the United States. Alternatively, if it converts the dollars to Mexican pesos, it can earn 1.5 percent on a Mexican deposit. The spot rate o

> Evansville, Inc., has $2 million in cash available for 90 days. It is considering the use of covered interest arbitrage because the euro’s 90-day interest rate is higher than the U.S. interest rate. What will determine whether this strategy is feasible?

> Why would a U.S. firm consider investing its short-term funds in euros even when it does not have any future cash outflows in euros?

> Tallahassee Co. has $2 million in excess cash that it has invested in Mexico at an annual interest rate of 60 percent. The U.S. interest rate is 9 percent. By how much would the Mexican peso have to depreciate to cause such a strategy to backfire.

> Walmart has established two retail outlets in the city of Shanzen, China, which has a population of 3.7 million. These massive outlets sell imported goods in addition to products produced locally. As Walmart generates earnings beyond what it needs in Sha

> If a U.S. firm believes that the international Fisher effect holds, what are the implications regarding a strategy of continually attempting to generate high returns from investing in currencies with high interest rates?

> How can an MNC implement leading and lagging techniques to help subsidiaries in need of funds?

> Explain the benefits of netting. How can a centralized cash management system be beneficial to the MNC?

> Ithaca Co. considers placing 30 percent of its excess funds in a one-year Singapore dollar deposit and the remaining 70 percent of its funds in a one-year Canadian dollar deposit. The Singapore one-yearinterest rate is 15 percent,

> Pittsburgh Co. plans to invest its excess cash in Mexican pesos for one year. 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 e

> Palos Co. commonly invests some of its excess dollars in foreign governments’ short-term securities in an effort to earn a higher short-term interest rate on its cash. Describe how the potential return and risk of this strategy may have changed after the

> Should McNeese Co. consider investing funds in Latin American countries where it may expand facilities? The interest rates are high in this region, and the proceeds from the investments could be used to help support the expansion. When would this strateg

> Hofstra, Inc., has no European business and has cash invested in six European countries, each of which uses the euro as its local currency. Are Hofstra’s short-term investments well diversified and subject to a low degree of exchange rate risk? Explain

> Dallas Co. has determined that the interest rate on euros is 6 percent and the U.S. interest rate for one-year Treasury bills is 3 percent. The one-year forward rate of the euro has a discount of 5 percent. Does interest rate parity exist? Can Dallas ach

> Why would a firm consider investing in a portfolio of foreign currencies instead of just a single foreign currency?

> Why do you think the terrorist attacks on the United States on September 11, 2001, were expected to cause a decline in U.S. interest rates? Given the expectations for a decline in U.S. interest rates and stock prices, how were capital flows between the U

> Assume that the one-year U.S. interest rate is 2 percent and the one-year Canadian interest rate is 5 percent. If a U.S. firm invests its funds in Canada, by what percentage will the Canadian dollar have to depreciate to make its effective yield the same

> Repeat question 9, but this time assume that Rollins, Inc., expects the 1-year forward rate of the pound to substantially underestimate the spot rate to be realized in 1 year.

> Repeat question 9, but this time assume that Rollins, Inc., expects the 1-year forward rate of the pound to substantially overestimate the spot rate to be realized in 1 year

> Discuss the general functions involved in international cash management. Explain how an MNC can optimize cash flows.

> Assume that interest rate parity exists. If a firm believes that the forward rate is an unbiased predictor of the future spot rate, will it expect to achieve lower financing costs by consistently borrowing a foreign currency with a low interest rate?

> Seabreeze Co. needs to finance some dollar-denominated expenses for oneyear. It can borrow euros at a lower cost than it can borrow dollars. Interest rate parity exists. The oneyear forward rate of the euro contains a premium of 4 percent. If the company

> 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. a. If interest rate parity does not hold, what strategy should Connecticut Co. consider when it needs s

> How is it possible for a firm to incur a negative effective financing rate?

> Assume that Davenport, Inc., needs $3 million for a one-year period. Within one year, it will generate enough U.S. dollars to pay off the loan. It is considering three options: (1) borrowing U.S. dollars at an interest rate of 6 percent, (2) borrowing

> How can a U.S. firm finance in euros and not necessarily be exposed to exchange rate risk?

> Chapman Co. is a privately owned MNC in the United States that plans to engage in an initial public offering (IPO) of stock so that it can finance its international expansion. Currently, world stock market conditions are very weak, but they are expected

> a. Discuss the development of a probability distribution of effective financing rates when financing in a foreign currency. How is this distribution developed? b. Once the probability distribution of effective financing rates from financing in a foreign

> a. Explain how a firm’s degree of risk aversion enters into its decision of whether to finance in a foreign currency or a local currency. b. Assume that interest rate parity exists. If the forward rate is an unbiased forecast of the future spot rate, ex

> Raleigh Corp. needs to borrow funds for one year to support its operations in the United States. The following interest rates are available: The percentage changes in the spot rates of the Canadian dollar and Japanese yen over the next year are as follo

> a. Does borrowing a portfolio of currencies offer any possible advantages over borrowing a single foreign currency? b. If a firm borrows a portfolio of currencies, what characteristics of the currencies will affect the potential uncertainty of the portf

> Pepperdine, Inc., considers obtaining 40 percent of its one-year financing in Canadian dollars and 60 percent in Japanese yen. The forecasts of appreciation in the Canadian dollar and Japanese yen for the next year are as follows: The interest rate on t

> Jacksonville Corp. is a U.S.-based firm that needs $600,000. It has no business in Japan but is considering one-year financing with Japanese yen because the annual interest rate would be 5 percent versus 9 percent in the United States. Assume that intere

> Missoula, Inc., decides to borrow Japanese yen for one year. The interest rate on the borrowed yen is 8 percent. Missoula has developed the following probability distribution for the yen’s degree of fluctuation against the dollar: Give

> Homewood Co. commonly finances some of its U.S. expansion by repeatedly borrowing on a short-term basis. Explain how a global credit crisis might limit the firm’s ability to repeatedly borrow short-term funds and increase the cost of borrowing.

> Bradenton, Inc., has a foreign subsidiary in Asia that commonly obtains short-term financing from local banks. If Asiasuddenly experiences an economic crisis, explain why Bradenton may not be able to easily obtain funds from the local banks.

> Mizner, Inc., is a U.S.-based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one-year loan of 10 million pesos to cover its operating expenses. The subsidiary can borrow pesos at 11 percent and can use peso revenues to be received over t

> Explain why some financial institutions prefer to provide credit in financial markets outside their own country.

> Assume that the U.S. interest rate is 7 percent and the euro’s interest rate is 4 percent. Assume that the euro’s forward rate has a premium of 4 percent. Determine whether the following statement is true: “If interest rate parity does not hold, U.S. fir

> Greensboro, Inc., needs $4 million for one year. It currently has no business in Japan but plans to borrow Japanese yen from a Japanese bank because the Japanese interest rate is 3 percentage points lower than the U.S. rate. Assume that interest rate par

> Explain why an MNC parent would consider financing from its subsidiaries.

> What is countertrade?

> This chapter described many forms of government insurance and guarantee programs. What motivates a government to establish such programs?

> Briefly describe the role of the Private Export Funding Corporation (PEFCO).

> What is forfaiting? Specify the type of traded products for which forfaiting is applied.

> What are bills of lading, and how do they facilitate international trade transactions?

> a. What is the role today of the Export-Import Bank of the United States? b. Describe the Direct Loan Program administered by the Ex-Im Bank.

> What is the role of a factor in international trade transactions?