Case Problem 2 The Fruits of Free Trade Under the World Trade Organization

The essential difference between free trade and protection is this Under a system of free trade excellence of the product is the only means by which it can secure a market, while under protection an inferior article can dominate the market through the aid of legislation. The necessary effect of free trade is, therefore, to encourage efficiency in production, while the necessary effect of protection is to encourage skill in corruption. Prosperity is an abundance of commodities. The merit of any...

Currency Futures and Options

Do you know how many days it took for a son to lose 150 million in foreign-exchange trading that it had taken his father decades to accumulate The answer is just 60 days. The following story illustrates how volatile the currency derivatives market was in the 1990s. Dad, I lost a lot of money, Zahid Ashraf, a 44-year-old from the United Arab Emirates, confessed to his ailing father, Mohammad. Maybe no matter, the father said, recalling the conversation in court testimony. Mohammad Ashraf, who...

O 194 Cultural Values and Capital Structure

Can cultural values be used to predict capital structure across countries Differences in institutional backgrounds provide only a partial answer to the question of why countries have differences in capital structure (Chui et al. 2002). Researchers from different disciplines have investigated the effects of culture on various business practices, such as the study of management functions, organization design, business performance, compensation practices, cross-border acquisition performance, and...

Tables

2.1 Production alternatives of wheat and cameras 31 2.2 Gains to both nations from specialization and trade 31 2.3 The cost of protectionism 37 3.1 The US balance of payments billions of US dollars 60 3.2 The US dollar as a fraction of government reserves around the world 62 3.3 Major-country balances on current account billions of US dollars 64 3.4 Major-country balances on financial account billions of US dollars 64 3.5 World merchandise trade 65 3.6 The international investment position of...

Translation Exposure Management

Main Features of Accounting Exposure Translation exposure has these main features 1 Because accounting exposure, commonly known as translation exposure, is based on book values only, it does not reflect the true economic value a company has at risk. By the same token, the gains and losses of foreign-exchange trading as measured by this concept bear no relationship to the real impact exchange rate changes have on the value of the firm itself. They are purely of a paper nature. 2...

Case Questions

1 Given how Dell translates its foreign-currency financial statements into dollars, how would a falling Brazilian real affect Dell Mercosur's financial statement 2 Dell imports about 97 percent of its manufacturing cost. What type of exposure does this create for it What are its options to reduce that exposure 3 Describe and evaluate Dell's exposure management strategy. 4 What are the costs and benefits of hedging all foreign-exchange risk 5 The mission of the Financial Accounting Standard...

Currency forecasting and market efficiency

Banks and independent consultants offer many currency-forecasting services. Some MNCs have in-house forecasting capabilities. Yet, no one should pay for currency-forecasting services if foreign-exchange markets are perfectly efficient. The efficient market hypothesis holds that 1 spot rates reflect all current information and adjust quickly to new information 2 it is impossible for any market analyst to consistently beat the market and 3 all currencies are fairly priced. Foreign-exchange...

Questions

1 Why have currency swaps replaced parallel loans 2 Explain both interest rate swaps and currency swaps. Which instrument has a greater credit risk an interest rate swap or a currency swap 3 How can a typical mortgage company use an interest rate swap to escape the interest rate risk 4 How can multinational companies utilize a currency swap to reduce borrowing costs 5 If you expect short-term interest rates to rise more than the yield curve should suggest, would you rather pay a fixed long-term...

Eurodollar instruments

The two major types of instrument used in the Eurodollar market are Eurodollar deposits and Eurodollar loans. Eurodollar deposits Eurodollar deposits are either fixed-time deposits or negotiable certificates of deposit. Most Eurodollar deposits are in the form of time deposits. Time deposits are funds being placed in a bank for a fixed maturity at a specified interest rate. In contrast to the US practice, Eurobanks do not maintain checking accounts demand deposits for their customers. While the...

The September 1992 currency crisis in Europe

The Maastricht Treaty, named after the provincial Dutch town that hosted the EEC summit in mid-December 1991, signaled to many a no-turning-back on the road to European unity. However, Europe's plans for economic union experienced a setback in September 1992, because turbulent trading amid the chaos surrounding an apparent breakdown of the European Monetary System EMS racked world currency markets. Although the roots of the currency crisis lay in Germany's high interest rates, the UK took...

Info

Figure 10.1 Exchange rates for the Brazilian real and the US dollar 2001, the number one spot in the industry. Fiscal 2002 was one of the toughest years to date in the PC industry. Because of the softening of the global economy and the events of September 11, demand for PCs was down sharply. Dell responded with an aggressive price strategy and reduced costs through workforce reductions and facility consolidations. Although global industry shipments fell in 2002 by 5 percent, Dell's unit...

Exchange Rate Forecasting

Opening Case 8 Mundell Wins Nobel Prize in Economics One major finding by Robert A. Mundell, who won the Nobel Prize in economics in 1999, has become conventional wisdom when money can move freely across borders, policy-makers must choose between exchange rate stability and an independent monetary policy. They cannot have both. Professor Mundell remains a fan of the gold standard and fixed exchange rates at a time when they are out of favor with most economists. You have fixed rates between New...

Case Problem 13 Arms Dealers Get Creative with Offsets

In December 2002, Lockheed Martin, with its F-16 Fighting Falcon, beat French and Anglo-Swedish rivals to land a 3.6 billion deal from Poland, which is Eastern Europe's largest defense order. Do you know how Lockheed won the contract The answer is simple. Lockheed's offset offer was larger than that of their two rivals. Lockheed put together over 100 projects it valued at 9.8 billion, compared with 7.8 billion from its Anglo-Swedish rival and 3.9 billion from its French rival. In recent years,...

Basic objectives of documentation

Documentation in foreign trade is supposed to assure that the exporter will receive the payment and the importer will receive the merchandise. More specifically, a number of documents in foreign trade are used to eliminate noncompletion risk, to reduce foreign-exchange risk, and to finance trade transactions. Noncompletion risk The risk of noncompletion is greater in foreign trade than in domestic trade. This is why exporters want to keep title to the goods until they are paid and importers are...

Countertrade

Countertrade refers to world trade arrangements that are variations on the idea of a barter. Modern countertrade covers various international trade arrangements in which the sale of goods and services by an exporter is linked to an import purchase of other goods and services. It became popular in the 1960s and 1970s as a way for communist countries to finance their international trade without money. In recent years, countertrade has gained new stature in international trade. World trade...

References

Scholes, The Pricing of Options and Corporate Liabilities, Journal of Political Economy, May June 1973, pp. 637-59. Chicago Board of Trade, Commodity Trading Manual, Chicago Board of Trade of the City of Chicago, 1989. Chicago Mercantile Exchange, Using Currency Futures and Options, 1987. Giddy, I. H., Foreign Exchange Options, Journal of Futures Markets, Summer 1983, pp. 145-65. Giddy, I. H., The Foreign Exchange Option as a Hedging Tool, in Joel M. Stern and Donald H. Chew,...

O 113 The Asian Currency Market

In 1968, an Asian version of the Eurodollar came into existence with the acceptance of dollar-denominated deposits by commercial banks in Singapore. Singapore was an ideal location for the birth of the Asian currency market. It had an excellent communication network, important banks, and a stable government. Because the US dollar accounts for most of the foreign-currency transactions in Singapore, the term Asian dollar market can be used to represent the Asian currency market. The Asian...

How to assess country risk

Country risk is the possibility that borrowers in a country will not honor past obligations. Bank managers must develop a systematic approach for evaluating country risk. Approaches now depend on the type of borrower, such as the host government, an industrial firm, or a private bank. The same variables apply to all three types of clients, although the relative weight assigned to each variable may differ considerably. Country risk may be assessed by various debt ratios, the general...

Measuring a percentage change in spot rates

MNCs frequently measure the percentage change in the exchange rate between two specific points in time for example, the current spot rate and the forecasted spot rate 1 year ahead. For example, if the Australian dollar appreciates from 0.6400 to 0.6800 over a 1-year period, US MNCs are likely to raise questions such as What is the percentage increase in the dollar value of the Australian dollar What is the percent increase in the dollar value of Australian dollar-denominated accounts receivable...

Geographical arbitrage

In principle, the exchange rate for a given currency should be the same in every geographical market. However, geographical arbitrage could arise when local demand-and-supply conditions might create temporary discrepancies among various markets. Arbitrage specialists would buy the currency in a market where its price is lower and then sell the currency where its price is higher. If the exchange rate differential is larger than the transaction cost, an arbitrage profit would be made. Two-point...

Exposure management strategy

Most large MNCs manage their foreign-exchange risk by using a pre-established exposure management strategy. For example, Merck uses the following five steps for currency exposure management 1 projecting exchange rate volatility, 2 assessing the impact of the 5-year strategic plan, 3 deciding on hedging the exposure, 4 selecting the appropriate financial instruments, and 5 constructing a hedging program for details, see Case Problem 6 Merck's Use of Currency Options . To protect assets...

Explain Corporate Motives For Forecasting Exchange Rates

1 Describe corporate motives for currency forecasting. 2 If foreign-exchange markets are perfectly efficient, why should no one pay for the services of currency forecasting firms 3 Most empirical studies have found that foreign-exchange markets are at least weak-form efficient. Does this mean that investors can earn extra profits by using technical analysis 4 Explain fundamental analysis as a technique for forecasting exchange rates. 5 Explain technical analysis as a technique for forecasting...

Case Problem 9 Western Minings Economic Exposure Management

Western Mining Company WMC is an Australia-based minerals producer with business interests in 19 countries. It is the world's third largest nickel producer, owns 40 percent of the world's largest alumina producer Alcoa World Alumina and Chemicals , and is a major producer of copper, uranium, gold, fertilizer, and talc. WMC builds its business on large, low-cost, and long-life assets that are globally competitive. Most commodities produced by Australian mining companies, including WMC, are...

How to read currency futures quotes

The Wall Street Journal and other major newspapers carry currency futures quotations, though they do not list the newest or least active contracts. To explain how to read currency futures quotes, we will focus on the Australian dollar futures traded on the CME. Table 6.2 presents the Australian dollar futures prices reported in The Wall Street Journal on July 1, 2004. Because there is a one-day time lag between the transactions of foreign exchange and the report of these transactions, we...

Caseroblem 6 Mercks Use of Currency Options

The effect of foreign-currency fluctuations on a company depends on a company's business structure, its industry profile, and its competitive environment. This case recounts how Merck assessed its foreign-exchange exposure and decided to hedge those exposures. In 2001, Merck celebrated its 110th anniversary in discovering, developing, producing, and distributing human and animal health pharmaceutical products. Today, the company does business in more than 100 countries around the world. Thus,...

Basic terms

Currency options give the holder the right to buy or sell a foreign currency at a set price on or before a specified date. There are two types of options calls and puts. A currency call option gives the buyer the right, but not the obligation, to buy a particular foreign currency at a specified price at any time during the life of the option. A currency put option gives the buyer the right, but not the obligation, to sell a particular foreign currency at a specified price at any time during the...

How to read currency option quotes

To explain how to read currency option quotes, we will focus on the Swiss franc option traded on the Philadelphia Stock Exchange. Table 6.6 reflects typical quotes in The Wall Street Journal for options on the Swiss franc. Although the table does not show them, there are two sets of figures for each of most currencies. One set consists of quotes for European-style options and another set of quotes for American-style options. A European-style option can be exercised only at the time of...

The July 1993 currency crisis in Europe

On July 1, 1993, wave after wave of currency selling by investors forced European governments to all but abandon their system of managing exchange rates. The economics ministers of the EU rushed off to the EU headquarters in Brussels that weekend, scrambling to save the EMS. This crisis had been triggered by the German central bank's decision not to lower its discount rate. The ministers debated all manner of possible solutions, including devaluing most of the curren cies, or even removing the...

Company Goals And Functions Of Financial Management

Words, management should strive to increase the corporate wealth for the benefit of all constituents. There are a number of compelling reasons for management to focus on stockholder wealth maximization. First, because stockholders are the owners of the company, management has a fiduciary obligation to act in their best interests. Second, stockholders provide the risk capital that protects the welfare of other constituents. Third, stockholder wealth maximization a high stock price provides the...

Preface and Acknowledgments

The sixth edition of Global Corporate Finance is suitable for both undergraduate- and graduate-level courses in international finance, no matter where in the world it is taught, because it does not adopt any specific national viewpoint. Moreover, it is self-contained, and it combines theory and applications. The earlier editions of Global Corporate Finance have been adopted by teachers in over 200 colleges, universities, and management development programs worldwide, particularly because the...