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Exam 17: Multinational Financial Management

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Question 1

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Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return.In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return.In the 90-day forward market, 1 British pound equals $1.65.If interest rate parity holds, what is the spot exchange rate?

A) 1 pound = $1.8000
B) 1 pound = $1.6582
C) 1 pound = $1.0000
D) 1 pound = $0.8500
E) 1 pound = $0.6031

F) A) and B)
G) A) and E)

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Question 2

Multiple Choice

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Suppose a U.S.firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received) .The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.50 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

A) $0
B) $1,834.86
C) $4,517.26
D) $5,712.31
E) $7,547.17

F) A) and C)
G) None of the above

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Question 3

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Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U.S.corporations.

When the value of the U.S.dollar appreciates against another country's currency, we may purchase more of the foreign currency with a dollar.

Suppose one U.S.dollar can purchase 144 yen today in the foreign exchange market.If the yen depreciates by 8.0% tomorrow, how many yen could one U.S.dollar buy tomorrow?

If the United States is running a deficit trade balance with China, then in a free market we would expect the value of the Chinese yuan to depreciate against the U.S.dollar.

Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.

Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure.Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

Suppose 1 U.S.dollar equals 1.60 Canadian dollars in the spot market.6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%) .6-month U.S.securities have an annualized return of 6.5% and a periodic return of 3.25%.If interest rate parity holds, what is the U.S.dollar-Canadian dollar exchange rate in the 180-day forward market?

Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

The cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.

Which of the following statements is NOT CORRECT?

Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S.dollars.If purchasing power parity (PPP) holds, what is the price of hockey pucks in the United States?

In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200.If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S.dollars?

Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners.If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?

Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.

A Eurodollar is a U.S.dollar deposited in a bank outside the United States.

A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States.Assuming that purchasing power parity (PPP) holds, what is the current exchange rate?