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BRAZIL FIGHTS A REAL BATTLE 1 ANSWER. On the positive side, currency controls would reduce currency speculation and, hence, exchange rate volatility. But these benefits would come at a steep cost. Currency controls would raise the cost of capital to […]

CHAPTER 1: INTRODUCTION 1 CHAPTER 1 INTRODUCTION Chapter 1 emphasizes the internationalization of business and economic activity that has occurred since the end of World War II. Although international business activities have existed for centuries, primarily in the form of […]

CHAPTER 10: MEASURING AND MANAGING ECONOMIC EXPOSURE 33 9. Cooper Industries is a maker of compressors, pneumatic tools, and electrical equipment. It does not face much foreign competition in the U.S., and exports account for only 7% of its sales. […]

CHAPTER 10: MEASURING AND MANAGING ECONOMIC EXPOSURE 1 CHAPTER 10 MEASURING AND MANAGING ECONOMIC EXPOSURE This chapter defines economic exposure as the extent to which a given currency change will change the value of a firm. Exchange risk is just […]

4. In 1990, General Electric acquired Tungsram Ltd., a Hungarian light bulb manufacturer. Hungary’s inflation rate was 28% in 1990 and 35% in 1991, while the forint (Hungary’s currency) was devalued 5% and 15%, respectively, during those years. Corresponding inflation […]

CHAPTER 11: COUNTRY RISK ANALYSIS 1 CHAPTER 11 COUNTRY RISK ANALYSIS I moved this chapter from the section on foreign investment analysis to this section because I have concluded that the international economic environment is heavily dependent on the policies […]

CHAPTER 12: INTERNATIONAL FINANCING AND NATIONAL CAPITAL MARKETS 1 Finally, I discuss the role of international development banks in financing LDCs and private-sector alternatives. CHAPTER 12 INTERNATIONAL FINANCING AND NATIONAL CAPITAL MARKETS I begin this session by discussing the evolutionary […]

CHAPTER 13: INTERNATIONAL PORTFOLIO INVESTMENT 1 ANSWER. Yes. As markets increasingly move toward 24-hour-a-day trading, the necessary coordination of clearing and settlement systems will naturally occur. The result will be to lower the costs of global shares relative to ADRs. […]

ANSWER. Key factors include whether the cash flows of the affiliate are closely tied to the state of the local economy or to the world economy, the correlation between the local and domestic economies, and the volatility of the foreign […]

CHAPTER 15: FOREIGN TRADE AND SHORT-TERM FINANCING 1 posed by greater distances, the lack of familiarity between exporters and importers, the possibility of government imposition of exchange controls, and greater costs involved in bringing suit against a party domiciled in […]

CHAPTER 16: MANAGING THE MULTINATIONAL FINANCIAL SYSTEM 1 The chapter then analyzes at length the most important conduits used by MNCs to transfer funds and profits internally: transfer pricing, fees and royalties, dividends, loans, leads and lags, and parent investment […]

10. In a widely anticipated move, on August 30, 1990, the Bank of Japan raised the discount rate (the rate it charges on loans to financial institutions) from 5.25% to 6% to reduce inflationary pressures in Japan. Many currency traders […]

CHAPTER 2: THE DETERMINATION OF EXCHANGE RATES 1 CHAPTER 2 THE DETERMINATION OF EXCHANGE RATES This chapter explains what an exchange rate is and how it is determined in a freely floating exchange rate regime, that is, in the absence […]

CHAPTER 3: THE INTERNATIONAL MONETARY SYSTEM 1 period the collective judgment of buyers and sellers. The current volatile market environment, a consequence of unstable U.S. and world financial conditions, cannot for long be arbitrarily directed by government officials. when the […]

CHAPTER 4: PARITY CONDITIONS IN INTERNATIONAL FINANCE/CURRENCY FORECASTING 1 To maintain the same exchange rate between money and goods both domestically and abroad, the exchange rate must decline by (approximately) the difference between the domestic and foreign rates of inflation. […]

CHAPTER 5: THE BOP AND INTERNATIONAL ECONOMIC LINKAGES 1 among transactions in the BOP is between those that represent purchases and sales of goods and services in the current period, called the current account, and those that represent capital transactions, […]

CHAPTER 6: THE FOREIGN EXCHANGE MARKET 1 1) The profit for the $/SFr/DKr/$ arbitrage will be $5,000,000 * 0.0061 = $30,500. 2) The profit from the $/DKr/£/$ arbitrage will be $5,000,000 * 0.0072 = $36,000. 3) The profit from the […]

CHAPTER 7: CURRENCY FUTURES AND OPTIONS MARKETS 1 ANSWER. A currency futures market arose because private individuals were unable to avail themselves of the forward market. Currency options are partly a response to individuals and firms who would like to […]

CHAPTER 8: SWAPS AND INTEREST RATE DERIVATIVES 1 CHAPTER 8 SWAPS AND INTEREST RATE DERIVATIVES This chapter examines several special financing vehicles that MNCs can use to fund their foreign investments. These vehicles include interest rate and currency swaps, structured […]

CHAPTER 9: MEASURING AND MANAGING ACCOUNTING EXPOSURE 1 CHAPTER 9 MEASURING AND MANAGING TRANSLATION AND TRANSACTION EXPOSURE This chapter introduces the concept of accounting exposure and describes the various alternatives available to measure accounting exposure and to manage it. A […]

3.c. Zapata can borrow an additional Mex$15,000. How will this affect its translation exposure if it uses the funds to pay a dividend to its parent? If it uses the funds to increase its cash position? ANSWER. If Zapata borrows […]

2 3 4 5 6 7 8 9 10 FF 4,800,000,000 FF 4,800,000,000 FF 4,800,000,000 FF 4,800,000,000 FF 4,800,000,000 FF 3,840,000,000 FF 2,880,000,000 FF 1,920,000,000 FF 960,000,000 FF 67,200,000 FF 67,200,000 FF 67,200,000 FF 67,200,000 FF 67,200,000 FF 53,760,000 FF […]

PRESENT VALUE ANALYSIS OF EURODISNEYLAND AS A STANDALONE PROJECT ASSUMING 11 MILLION DAILY ATTENDANCE YEAR 1991 1992 1993 1994 1995 1996 1996+ A. CUSTOMERS 11,000,000 11,330,000 11,669,900 12,019,997 12,380,597 B. INDIVIDUAL EXPENDITURES 1. ADMISSION FEES (FF) 167.20 175.56 184.34 193.55 […]

SUGGESTED ANSWERS TO INTERNATIONAL MACHINE CORPORATION 1. Should IMC make this investment? 2. What is IMC’s required rate of return for this project? 3. What factors and assumptions are critical to your project analysis? ANSWER. Subsidiary peso operating cash flows […]

Exhibit 1 Operating Cash Flows (pesos) Item/Year 1 2 3 4 5 6 7 8 9 10 7. Depreciation 6,550,000 6,550,000 6,550,000 6,550,000 6,550,000 6,550,000 6,550,000 6,550,000 6,550,000 6,550,000 11. Total costs (items 4 through 10) 73,290,000 91,006,200 112,431,774 139,846,027 […]

Required return = Risk-free + Project beta x Market risk return premium where the market risk premium is the required return on the market less the risk-free return. The project beta is based on the systematic risk of the project. […]

230 Part I Case Studies Case I.1 Will Argentina Devalue Its Peso? In November 2000, Mike Lanning was reacting to reports that Argentina might devalue its peso. Such a decision would have important ramifica- tions for his company, Wessen Development […]

Part III Case Studies Case III.1 Rolls-Royce Limited Rolls-Royce Limited, the British aeroengine manufacturer, suffered a loss of £58 million in 1979 on worldwide sales of £848 million. The company’s annual report for 1979 (page 4) blamed the loss on […]

Case IV.1 Plano Cruzado Part IV Case Studies On February 28, 1986, President Jose Sarnay of Brazil announced the Plano Cruzado. At the time, Brazilian inflation was running at an annualized rate of more than 400%. The plan slashed infla- […]

Part V Case Studies Case V.1 The International Machine Corporation The International Machine Corporation (IMC) is a large, well-established manufacturer of a wide variety of food processing and packaging equip- ment. Total revenue for last year was $12 billion, of […]

Part VI Case Studies Case VI.1 Xerox Miscopies Foreign Interest Rate Data On May 31, 2001, Xerox disclosed in a filing with the Securities and Exchange Commission (SEC) that several years earlier it had changed the way in which some […]

ANSWER. The Plano Cruzado suppressed inflation, rather than controlling it. As such, rational people would anticipate that the plan would end in a price explosion. Indeed, once controls were eased just after the election in November 1986, inflation hit an […]

ROLLS-ROYCE LIMITED 1 exposure is based on the extent to which a future exchange rate change will change the profitability of engines not yet sold. The latter exposure is to real exchange rate changes. Currency changes that are fully offset […]

THE MEXICAN PESO 1 ANSWER. The increasing real value of the Mexican peso, combined with a balance–of-payments deficit funded with increasing amounts of foreign debt, was a sure indicator of a future devaluation. these promised benefits, the Mexican government borrowed […]

WILL ARGENTINA DEVALUE ITS PESO? 1 interest rates along with improved trade prospects, in turn, would stimulate Argentine economic activity and reduce unemployment. The latter effects would help boost government tax revenues as well and could reduce its unemployment compensation […]

XEROX MISCOPIES FOREIGN INTEREST RATE DATA 1 ANSWER. The high Mexican interest rates of the late 1990s reflected the high Mexican inflation rates at the time (this is the Fisher effect at work) and the consequent prospect of continuing devaluation […]