Question: Why should an MNC identify net exposure

> Starter Corp. of New Haven, Connecticut, produces sportswear that is licensed by professional sports teams. It recently decided to expand in Europe. What are the potential benefits for this firm from using DFI?

> Blades, Inc. needs to order supplies two months ahead of the delivery date. It is considering an order from a Japanese supplier that requires a payment of 12.5 million yen payable as of the delivery date. Blades has two choices: Purchase two call option

> This chapter concentrates on possible benefits to a firm that increases its international business. a. What are some risks of international business that may not exist for local business? b. What does this chapter reveal about the relationship between an

> Describe some potential benefits to an MNC as a result of direct foreign investment (DFI). Elaborate on each type of benefit. Which motives for DFI do you think encouraged Nike to expand its footwear production in Latin America?

> Carlton Co. and Palmer, Inc., are U.S.- based MNCs with subsidiaries in Mexico that distribute medical supplies (produced in the United States) to customers throughout Latin America. Both subsidiaries purchase the products at cost and sell the products a

> Would a more established MNC or a less established MNC be better able to effectively hedge its given level of translation exposure? Why?

> 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 this MNC hedges translation exposure.

> Explain how a firm can hedge its translation exposure.

> Explain how a U.S.-based MNC’s consolidated earnings are affected by depreciation of foreign currencies.

> When an MNC restructures its operations to reduce its economic exposure, it may sometimes forgo economies of scale. Explain

> Albany Corp. is a U.S.-based MNC that has a large government contract with Australia. The contract will continue for several years and generate more than half of Albany’s total sales volume. The Australian government pays Albany in Australian dollars. Ap

> UVA Co. is a U.S.-based MNC that obtains 40 percent of its foreign supplies from Thailand. It also borrows Thailand’s currency (the baht) from Thai banks and converts the baht to dollars to support its U.S. operations. It currently receives about 10 perc

> Because the Sports Exports Company (a U.S. firm) receives payments in British pounds every month and converts those pounds into dollars, it needs to closely monitor the value of the British pound in the future. Jim Logan, owner of the Sports Exports Comp

> Nashville Co. presently incurs costs of approximately 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 i

> Lola Co. (a U.S. firm) expects to receive 10 million euros in one year. It does not plan to hedge this transaction with a forward contract or other hedging techniques. This transaction is its only international business, and the firm is not exposed to an

> Laguna Co. (a U.S. firm) will be receiving 4 million British pounds in one year. It will need to make a payment of 3 million Polish zloty in one year. It has no other exchange rate risk at this time. However, it needs to buy supplies and can purchase the

> Clearlake, Inc., produces its products in its factory in Texas and exports most of the products to Mexico each month. The exports are denominated in pesos. Clearlake recognizes that hedging on a monthly basis does not really offer any protection against

> Alaska, Inc., plans to create and finance a subsidiary in Mexico that produces computer components at a low cost and exports them to other countries. It has no other international business. The subsidiary will produce computers and export them to Caribbe

> St. Paul Co. does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the following information. St. Paul’s U.S. sales are somewhat affected by the value of the New Zealand dollar (

> Nelson Co. is a U.S. firm with annual export sales to Singapore of about S$800 million. Its main competitor is Mez Co., also based in the United States, with a subsidiary in Singapore that generates about S$800 million in annual sales. Any earnings gener

> Colorado, Inc., is a U.S.-based MNC that obtains 10 percent of its supplies from European manufacturers. Sixty percent of its revenues are due to exports to Europe, where its products are invoiced in euros. Explain how Colorado can attempt to reduce its

> Assume that Suffolk Co. negotiated a forward contract to purchase 200,000 British pounds in 90 days. The 90-day forward rate was $1.40 per British pound. The pounds to be purchased were to be used to purchase British supplies. On the day the pounds were

> If hedging is expected to be more costly than not hedging, why would a firm even consider hedging?

> As the chief financial officer of Blades, Inc., Ben Holt is pleased that his current system of exporting “Speedos” to Thailand seems to be working well. Blades’ primary customer in Thailand, a retaile

> Assume that Loras Corp. imported goods from New Zealand and needs 100,000 New Zealand dollars 180 days from now. It is trying to determine whether to hedge this position. Loras has developed the following probability distribution for the New Zealand doll

> 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.

> Grady Co. is a manufacturer of hockey equipment in Chicago, and it will need 3 million Swiss francs in one year to pay for imported supplies. The U.S. oneyear interest rate is 2 percent, versus 7 percent for Switzerland’s one-year interest rate. The spot

> Assume that the country of Dreeland has a currency (called the dree) that tends to move in tandem with the Chilean peso and is expected to continue to move in tandem with the Chilean peso in the future. Indianapolis Co., a U.S. firm, has a large amount o

> The one-year U.S. interest rate is presently higher than the Japanese interest rate. Assume a real rate of interest of 0 percent in each country. Assume that interest rate parity exists. You believe in purchasing power parity (PPP). You have receivables

> Today the spot rate of the euro is $1.20 and the oneyear forward rate is $1.16. A one-year call option on euros exists with a premium of $0.04 per unit and an exercise price of $1.17. You think the spot rate is the best forecast of future spot rates. You

> San Fran Co. imports products. It will pay 5 million Swiss francs for imports in one year. Mateo Co. will also pay 5 million Swiss francs for imports in one year. San Fran Co. and Mateo Co. will also need to pay 5 million Swiss francs for imports arrivin

> Rebel Co. (a U.S. firm) has a contract with the government of Spain and will receive payments of 10,000 euros in exchange for consulting services at the end of each of the next 10 years. The annualized interest rate in the United States is 6 percent rega

> Assume that interest rate parity exists. Today the one-year interest rate in Japan is the same as the one-yearinterest rate in the United States. You use the international Fisher effect when forecasting how exchange rates will change over the next year.

> Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in one year. The one-year U.S. interest rate is 5 percent when investing funds and 7 percent when borrowing funds. The one-year Swiss interest rate is 9 percent wh

> Each month, the Sports Exports Company (a U.S. firm) receives an order for footballs from a British sporting goods distributor. The monthly payment for the footballs is denominated in British pounds, as requested by the British distributor. Jim Logan, ow

> Assume that interest rate parity exists. The annualized interest rate is presently 5 percent in the United States for any term to maturity and is 13 percent in Mexico for any term to maturity. Dokar Co. (a U.S. firm) has an agreement under which it will

> Visor, Inc. (a U.S. firm), has agreed to purchase supplies from Argentina and will need 1 million Argentine pesos in one year. Interest rate parity presently exists. The annual interest rate in Argentina is 19 percent, versus 6 percent in the United Stat

> Explain how a U.S. corporation could hedge net receivables in euros with futures contracts. Explain how a U.S. corporation could hedge net payables in Japanese yen with futures contracts

> You own a U.S. exporting firm that will receive 10 million Swiss francs in one year. Assume that interest parity exists. Assume zero transaction costs. Today the oneyear interest rate in the United States is 7 percent, and the one-year interest rate in S

> Refer to the previous problem. Assume that Brooks believes the cost of a long straddle is too high. However, call options with an exercise price of $0.105 and a premium of $0.002 and put options with an exercise price of $0.09 and a premium of $0.001 are

> Brooks, Inc., imports wood from Morocco. The Moroccan exporter invoices these products in Moroccan dirham. The current exchange rate of the dirham is $0.10. Brooks just purchased wood for 2 million dirham and should pay for the wood in three months. It i

> Marson, Inc., has some customers in Canada and frequently receives payments denominated in Canadian dollars (C$). The current spot rate for the Canadian dollar is $0.75. Two call options on Canadian dollars are available. The first option has an exercise

> Evar Imports, Inc., buys chocolate from Switzerland and resells it in the United States. It just purchased chocolate invoiced at SF62,500; payment for the invoice is due in 30 days. Assume that the current exchange rate of the Swiss franc is $0.74. Also

> Assume interest rate parity exists. Today the one-year interest rate in Canada is the same as the one-year interest rate in the United States. Utah Co. uses the forward rate to forecast the future spot rate of the Canadian dollar that will exist in one y

> Red River Co. (a U.S. firm) purchases imports that have a price of 400,000 Singapore dollars; it has to pay for the imports in 90 days. The firm will use a 90-day forward contract to cover its payables. Assume that interest rate parity exists. This morni

> Ever since Jim Logan began his Sports Exports Company, he has been concerned about his exposure to exchange rate risk. The firm produces footballs and exports them to a distributor in the United Kingdom, with the exports being denominated in British poun

> Tampa Co. will build airplanes and export them to Mexico for delivery in three years. The total payment to be received in three years for these exports is 900 million pesos. Today the peso’s spot rate is $0.10. The annual U.S. interest rate is 4 percent,

> Denver Co. is about to order supplies from Canada that are denominated in Canadian dollars (C$). It has no other transactions in Canada and will not have any other transactions in the future. The supplies will arrive in one year, at which time payment wi

> Indiana Co. expects to receive 5 million euros in one year from exports, and it wants to consider hedging its exchange rate risk. The spot rate of the euro as of today is $1.10. Interest rate parity exists. Indiana Co. uses the forward rate as a predicto

> Virginia Co. has subsidiaries in both Hong Kong and Thailand. Assume that the Hong Kong dollar (HK$) is pegged at $0.13 per Hong Kong dollar and will remain pegged. The Thai baht fluctuates against the U.S. dollar and is presently worth $0.03. Virginia C

> You apply a regression model to annual data in which the annual percentage change in the British pound is the dependent variable, and INF (defined as annual U.S. inflation minus U.K. inflation) is the independent variable. A regression analysis produces

> Assume that Calumet Co. will receive 10 million pesos in 15 months. It does not have a relationship with a bank at this time and, therefore, cannot obtain a forward contract to hedge its receivables at this time. However, in three months, it will be able

> You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14 percent, whereas the nominal annualinterest rate in the United States is 3 percent. You expect that annual inflation will be about 4 percent in Mexico and 5 percent i

> As treasurer of Tempe Corp., you are confronted with the following problem. Assume the one-year forward rate of the British pound is $1.59. You plan to receive 1 million pounds in one year. A one-year put option is available; it has an exercise price of

> If you were a U.S. importer of products from Europe, explain whether a weak U.S. economy would cause you to hedge your payables (denominated in euros) due a few months later if you expected that the weak economy would cause a major reduction in U.S. inte

> Recall from Chapter 20 that the new Thailand subsidiary of Blades, Inc., received a one-time order from a customer for 120,000 pairs of Speedos, Blades’ primary product. There is a six-month lag between the time when Blades needs funds to purchase materi

> SMU Corp. has future receivables of 4 million New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following information to make the decision. Verify your answer by de

> Assume that Carbondale Co. expects to receive S$500,000 in one year. The existing spot rate of the Singapore dollar is $0.60. The one-year forward rate of the Singapore dollar is $0.62. Carbondale created the following probability distribution for the fu

> Describe how a crisis in Asia could reduce the cash flows of a U.S. firm that exports products (denominated in U.S. dollars) to Asian countries. How could a U.S. firm that exports products (denominated in U.S. dollars) to Asia insulate itself from any cu

> Because Obisbo, Inc., conducts much business in Japan, it is likely to have cash flows in yen that will periodically be remitted by its Japanese subsidiary to the U.S. parent. What are the limitations of hedging these remittances one year in advance over

> Assume that Hampshire Co. has net payables of 200,000 Mexican pesos in 180 days. The Mexican interest rate is 7 percent over 180 days, and the spot rate of the Mexican peso is $0.10. Suggest how the U.S. firm could implement a money market hedge. Be prec

> St. Louis, Inc., which relies on exporting, denominates its exports in pesos and receives pesos every month. It expects the peso to weaken over time. St. Louis recognizes the limitations of monthly hedging. It also recognizes that it could eliminate its

> Wedco Technology of New Jersey exports plastics products to Europe. Wedco decided to price its exports in dollars. Telematics International, Inc. (of Florida), exports computer network systems to the United Kingdom (denominated in British pounds) and oth

> Malibu, Inc., is a U.S. company that imports British goods. It plans to use call options to hedge payables of 100,000 pounds in 90 days. Three call options are available that have an expiration date 90 days from now. Fill in the number of dollars needed

> Cornell Co. purchases computer chips denominated in euros on a monthly basis from a Dutch supplier. To hedge its exchange rate risk, this U.S. firm negotiates a three-month forward contract three months before the next order will arrive. In other words,

> Explain how a Malaysian firm can use the forward market to hedge periodic purchases of U.S. goods denominated in U.S. dollars. Explain how a French firm can use forward contracts to hedge periodic sales of goods to U.S. importers that are invoiced in dol

> At the current time, the Sports Exports Company focuses on producing footballs and exporting them to a distributor in the United Kingdom. The exports are denominated in British pounds. Jim Logan, the company’s owner, plans to develop other sporting goods

> During the Asian crisis, some local firms in Asia borrowed U.S. dollars rather than local currency to support their local operations. Why would they borrow dollars when they really needed their local currency to support operations? Why did this strategy

> Your firm exports 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 way. Would a forw

> Suppose your firm is 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 future spot rate. Do you think Mexican peso call options would be a more appropriate hedge than the forward he

> Would Montana Co.’s real cost of hedging Japanese yen payables have been positive, negative, or about zero, on average, over a period in which the yen weakened consistently? Explain.

> If interest rate parity exists, would a forward hedge be more favorable than, the same as, or less favorable than a money market hedge on euro payables? Explain

> Would Oregon Co.’s real cost of hedging Australian dollar payables every 90 days have been positive, negative, or about zero onaverage over a period in which the Australian dollar strengthened consistently? What does this imply about the forward rate as

> Assume that Stevens Point Co. has net receivables of 100,000 Singapore dollars in 90 days. The spot rate of the Singapore dollar is $0.50, and the Singapore interest rate is 2 percent over 90 days. Suggest how the U.S. firm could implement a money market

> As treasurer of Tucson Corp. (a U.S. exporter to New Zealand), you must decide how to hedge (if at all) future receivables of 250,000 New Zealand dollars 90 days from now. Put options are available for a premium of $0.03 per unit and an exercise price of

> Explain how a firm can use currency diversification to reduce its transaction exposure.

> Explain how a firm can use cross-hedging to reduce its transaction exposure.

> Under what conditions would Zona Co.’s subsidiary consider using a leading strategy to reduce transaction exposure? Under what conditions would Zona Co.’s subsidiary consider using a lagging strategy to reduce transaction exposure?

> Blades, Inc., just received a special order for 120,000 pairs of Speedos, its primary roller blades product. Ben Holt, Blades’ chief financial officer (CFO), needs shortterm financing to finance this large order from the time Blades orders its supplies u

> How can a firm hedge its long-term currency positions? Elaborate on each method.

> Can Brooklyn Co. determine whether currency options will be more or less expensive than a forward hedge when considering both hedging techniques to cover net payables in euros? Why or why not?

> Relate the use of currency options to hedging net payables and receivables. That is, when should a firm purchase currency puts, and when should it purchase currency calls? Why would Cleveland, Inc., consider hedging net payables or net receivables with c

> Assume the following information: Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days. Would it bebetter off using a forward hedge or a money market hedge? Substantiate your answer with estimated revenue for each t

> Assume the following information: Assume that the Santa Barbara Co. in the United States will need 300,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate

> Kayla Co. imports products from Mexico, and it will make payment in pesos in 90 days. Interest rate parity holds. The prevailing interest rate in Mexico is very high, which reflects the high expected inflation there. Kayla expects that the Mexican peso w

> Explain the relationship between hedging (discussed in this chapter) and measuring exposure (discussed in Chapter 10)

> What factors affect a firm’s degree of translation exposure? Explain how each factor influences translation exposure

> Memphis Co. hires you as a consultant to assess its degree of economic exposure to exchange rate fluctuations. How would you handle this task? Be specific.

> Why are the cash flows of a purely domestic firm exposed to exchange rate fluctuations?

> The Sports Exports Company produces footballs and exports them to a distributor in the United Kingdom. It typically sends footballs in bulk and then receives payment after the distributor receives the shipment. The business relationship with the distribu

> Fischer, Inc., a U.S.- based MNC, exports products from Florida to Europe. It obtains supplies and borrows funds locally. How would appreciation of the euro likely affect its net cash flows? Why?

> How should appreciation of a firm’s home country currency generally affect its cash inflows? How should depreciation of a firm’s home country currency generally affect its cash outflows?

> Bag Company, a U.S. firm, has a business of offering cruises along the coast of Argentina that are solely geared toward American tourists. The company charges American tourists in U.S. dollars, but all of its expenses, such as payments to its employees,

> Milwaukee Co. has an Australian subsidiary that earned 40 million Australian dollars (A$) this year. Little Rock Co. has an Australian subsidiary that earned A$30 million this year. Milwaukee’s subsidiary plans to reinvest its earnings in Australia, wher

> Spencer Co., a U.S. firm, has a large subsidiary in Singapore that generates a large amount of the parent’s earnings. Spencer’s stock is usually valued at approximately 16 times its reported earnings per share. The earnings generated by the Singapore sub

> Reese Co. will pay 1 million British pounds for materials imported from the United Kingdom in one month. This firm also sells some goods to Poland and will receive 3 million zloty (the Polish currency) for those goods in one month. The spot rate of the p

> Yazoo, Inc., is a U.S. firm that has substantial international business in Japan and has cash inflows in Japanese yen. The spot rate of the yen today is $0.01. The yen exchange rate was $0.008 three months ago, $0.0085 two months ago, and $0.009 one mont

> Quartz Co. has its entire operations in Miami, Florida, and is an exporter of products to eurozone countries. All of its earnings are derived from its exports. The exports are denominated in euros. Reed Co., a U.S.-based firm, is approximately the same s

> Layton Co., a U.S. firm, attempts to determine its economic exposure to movements in the Japanese yen by applying regression analysis to data over the last 36 quarters: where SP represents the percentage change in Layton’s stock price

> Lance Co. is a U.S. company that has exposure to the Swiss franc (SF) and the Danish krone (DK). It has net inflows of SF100 million and net outflows of DK500 million. The present exchange rate of the SF is approximately $0.80, and the present exchange r