Concepts Review and Critical Thinking Questions

1. Spot and Forward Rates Suppose the exchange rate for the Swiss franc is quoted as SF 1.50 in the spot market and SF 1.53 in the 90-day forward market.

a. Is the dollar selling at a premium or a discount relative to the franc?

b. Does the financial market expect the franc to strengthen relative to the dollar? Explain.

c. What do you suspect is true about relative economic conditions in the United States and Switzerland?

2. Purchasing Power Parity Suppose the rate of inflation in Mexico will run about 3 percent higher than the U.S. inflation rate over the next several years. All other things being the same, what will happen to the Mexican peso versus dollar exchange rate? What relationship are you relying on in answering?

3. Exchange Rates The exchange rate for the Australian dollar is currently A$1.40. This exchange rate is expected to rise by 10 percent over the next year.

a. Is the Australian dollar expected to get stronger or weaker?

b. What do you think about the relative inflation rates in the United States and Australia?

c. What do you think about the relative nominal interest rates in the United States and Australia? Relative real rates?

4. Yankee Bonds Which of the following most accurately describes a Yankee bond?

a. A bond issued by General Motors in Japan with the interest payable in U.S. dollars b. A bond issued by General Motors in Japan with the interest payable in yen c. A bond issued by Toyota in the United States with the interest payable in yen d. A bond issued by Toyota in the United States with the interest payable in dollars e. A bond issued by Toyota worldwide with the interest payable in dollars

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

22. International Corporate Finance

© The McGraw-Hill Companies, 2002

CHAPTER 22 International Corporate Finance

5. Exchange Rates Are exchange rate changes necessarily good or bad for a particular company?

6. International Risks Duracell International confirmed in October 1995 that it was planning to open battery-manufacturing plants in China and India. Manufacturing in these countries allows Duracell to avoid import duties of between 30 and 35 percent that have made alkaline batteries prohibitively expensive for some consumers. What additional advantages might Duracell see in this proposal? What are some of the risks to Duracell?

7. Multinational Corporations Given that many multinationals based in many countries have much greater sales outside their domestic markets than within them, what is the particular relevance of their domestic currency?

8. Exchange Rate Movements Are the following statements true or false? Explain why.

a. If the general price index in Great Britain rises faster than that in the United States, we would expect the pound to appreciate relative to the dollar.

b. Suppose you are a German machine tool exporter and you invoice all of your sales in foreign currency. Further suppose that the German monetary authorities begin to undertake an expansionary monetary policy. If it is certain that the easy money policy will result in higher inflation rates in Germany relative to those in other countries, then you should use the forward markets to protect yourself against future losses resulting from the deterioration in the value of the deutsche mark.

c. If you could accurately estimate differences in the relative inflation rates of two countries over a long period of time, while other market participants were unable to do so, you could successfully speculate in spot currency markets.

9. Exchange Rate Movements Some countries encourage movements in their exchange rate relative to those of some other country as a short-term means of addressing foreign trade imbalances. For each of the following scenarios, evaluate the impact the announcement would have on an American importer and an American exporter doing business with the foreign country.

a. Officials in the administration of the United States government announce that they are comfortable with a rising deutsche mark relative to the dollar.

b. British monetary authorities announce that they feel the pound has been driven too low by currency speculators relative to the dollar.

c. The Brazilian government announces that it will print billions of new cruzeiros and inject them into the economy in an effort to reduce the country's 40 percent unemployment rate.

10. International Capital Market Relationships We discussed five international capital market relationships: relative PPP, IRP, UFR, UIP, and the international Fisher effect. Which of these would you expect to hold most closely? Which do you think would be most likely to be violated?

0 0

Post a comment