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Chapter 2 International Flow of Funds Lecture Outline Balance of Payments Current Account Capital and Financial Accounts Growth in International Trade Events That Increased Trade Volume Impact of Outsourcing on Trade Trade Volume Among Countries Trend in U.S.Balance of Trade […]

Chapter 1 Multinational Financial Management: An Overview Lecture Outline Managing the MNC Agency Problems Management Structure of an MNC Why Firms Pursue International Business Theory of Comparative Advantage Imperfect Markets Theory Product Cycle Theory How Firms Engage in International Business […]

Answers to End of Chapter Questions 1. Agency Problems of MNCs. a. Explain the agency problem of MNCs. ANSWER: The agency problem reflects a conflict of interests between decision-making managers b. Why might agency costs be larger for an MNC […]

25. Impact of Exchange Rates on MNC Value. Olmsted Co. has small computer chips assembled in Poland and transports the final assembled products to the parent, where they are sold by the parent in the U.S. The assembled products are […]

Chapter 10 Measuring Exposure to Exchange Rate Fluctuations Lecture Outline Relevance of Exchange Rate Risk Transaction Exposure Estimating “Net” Cash Flows in Each Currency Exposure of an MNC’s Portfolio Transaction Exposure Based on Value-at-Risk Economic Exposure Economic Exposure to Local […]

Answers to End of Chapter Questions 1. Transaction versus Economic Exposure. Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its “net” cash flows in each currency when assessing its transaction exposure? ANSWER: Transaction […]

32. Cash Flow Sensitivity to Exchange Rate Movements. The Central Bank of Poland is about to engage in indirect intervention later today, in which it will lower Poland’s interest rates substantially. This will have an impact on the value of […]

Chapter 11 Managing Transaction Exposure Lecture Outline Policies for Hedging Transaction Exposure Hedging Most of the Exposure Selective Hedging Hedging Payables Forward or Futures Hedge Money Market Hedge Call Option Hedge Comparison of Techniques Used to Hedge Payables Evaluating the […]

Answers to End of Chapter Questions 1. Hedging in General. Explain the relationship between this chapter on hedging and the previous chapter on measuring exposure. ANSWER: The previous chapter explains how to measure exposure, which is necessary before an 2. […]

33. Techniques for Hedging Receivables. SMU Corp. has future receivables of 4,000,000 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 […]

50. PPP and Hedging with Call Options. 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 […]

Chapter 12 Managing Economic Exposure and Translation Exposure Lecture Outline Managing Economic Exposure Assessing Economic Exposure Restructuring to Reduce Economic Exposure Issues Involved in the Restructuring Decision A Case on Hedging Economic Exposure Savor Co.’s Dilemma Assessment of Economic Exposure […]

Answers to End of Chapter Questions 1. Reducing Economic Exposure. Baltimore, 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 product […]

Chapter 13 Direct Foreign Investment Lecture Outline Motives for Direct Foreign Investment (DFI) Revenue-Related Motives Cost-Related Motives Comparing Benefits of DFI Among Countries Measuring an MNC’s Benefits of DFI Benefits of International Diversification Diversification Analysis of International Projects Diversification Among […]

Answers to End of Chapter Questions 1. Motives for DFI. 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 […]

Chapter 14 Multinational Capital Budgeting Lecture Outline Subsidiary versus Parent Perspective Tax Differentials Restrictions on Remitted Earnings Exchange Rate Movements Input for Multinational Capital Budgeting Multinational Capital Budgeting Example Background Analysis Other Factors to Consider Exchange Rate Fluctuations Inflation Financing […]

Answers to End of Chapter Questions 1. MNC Parent’s Perspective. Why should capital budgeting for subsidiary projects be assessed from the parent’s perspective? What additional factors that normally are not relevant for a purely domestic project deserve consideration in multinational […]

27. Capital Budgeting Analysis. Wolverine Corp. currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess this project: The initial investment required is $50 million in New […]

Solution to Continuing Case Problem: Blades, Inc. 1. Should the sales and the associated costs of 180,000 pairs of roller blades to be sold in Thailand under the existing agreement be included in the capital budgeting analysis to decide whether […]

International Corporate Governance and Control  1 Chapter 15 International Corporate Governance and Control Lecture Outline International Corporate Governance Governance by Board Members Governance by Institutional Investors Governance by Shareholder Activists International Corporate Control Motives for International Acquisitions Trends in […]

International Corporate Governance and Control  1 Answers to End of Chapter Questions 1. Motives for Restructuring. Why do you think MNCs continuously assess possible forms of multinational restructuring, such as foreign acquisitions or downsizing of a foreign subsidiary? ANSWER: […]

22. Factors that Affect the NPV of a Divestiture. Clemson Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. One week ago, it received an offer from a company to purchase it, […]

Chapter 16 Country Risk Analysis Lecture Outline Political Risk Characteristics Attitude of Consumers in the Host Country Actions of Host Government Blockage of Fund Transfers Currency Inconvertibility War Bureaucracy Corruption Financial Risk Characteristics Economic Growth Measuring Country Risk Techniques to […]

Answers to End of Chapter Questions 1. Forms of Country Risk. List some forms of political risk other than a takeover of a subsidiary by the host government, and briefly elaborate on how each factor can affect the risk to […]

22. Integrating Country Risk and Capital Budgeting. Tovar Co. is a U.S. firm that has been asked to provide consulting services to help Grecia Company (in Greece) improve its performance. Tovar would need to spend $300,000 today on expenses related […]

Chapter 17 Multinational Cost of Capital and Capital Structure Lecture Outline Components of Capital External Sources of Debt External Sources of Equity The MNC’s Capital Structure Decision Influence of Corporate Characteristics Influence of Host Country Characteristics Response to Changing Country […]

Answers to End of Chapter Questions 1. Capital Structure of MNCs. Present an argument in support of an MNC’s favoring a debt-intensive capital structure. Present an argument in support of an MNC’s favoring an equity-intensive capital structure. ANSWER: MNCs that […]

25. Sensitivity of Foreign Project Risk to Capital Structure. Texas Co. produces drugs and plans to acquire a subsidiary in Poland. This subsidiary is a lab that would perform biotech research. Texas Co. is attracted to the lab because of […]

Chapter 18 Long-Term Debt Financing Lecture Outline Financing to Match the Inflow Currency Using Currency Swaps to Execute the Matching Strategy Using Parallel Loans to Execute the Matching Strategy Debt Denomination Decision by Subsidiaries Debt Decision in Host Countries with […]

Answers to End of Chapter Questions 1. Floating-Rate Bonds. a. What factors should be considered by a U.S. firm that plans to issue a floating rate bond denominated in a foreign currency? ANSWER: A U.S. firm should consider the interest […]

Solution to Continuing Case Problem: Blades, Inc. 1. Given that Blades expects to use the cash flows generated by the Thai subsidiary to pay the interest and principal of the notes, would the effective financing cost of the baht-denominated notes […]

Chapter 19 Financing International Trade Lecture Outline Payment Methods for International Trade Prepayment Letters of Credit Drafts Consignment Open Account Trade Finance Methods Accounts Receivable Financing Factoring Letters of Credit Banker’s Acceptances Working Capital Financing Medium-Term Capital Goods Financing (Forfaiting) […]

Answers to End of Chapter Questions 1. Banker’s Acceptances. a. Describe how foreign trade would be affected if banks did not provide trade-related services. b. How can a banker’s acceptance be beneficial to an exporter, an importer, and a bank? […]

Answers to End of Chapter Questions 1. Balance of Payments. a. Of what is the current account generally composed? ANSWER: The current account balance is composed of (1) the balance of trade, (2) the net b. Of what is the […]

Chapter 20 Short-Term Financing Lecture Outline Sources of Foreign Financing Internal Short-term Financing External Short-term Financing Access to Funding During the Credit Crisis Financing with a Foreign Currency Comparison of Interest Rates Among Currencies Determining the Effective Financing Rate Criteria […]

Answers to End of Chapter Questions 1. Financing From Subsidiaries. Explain why an MNC parent would consider financing from its subsidiaries. ANSWER: A parent may obtain funds at a lower cost from its subsidiaries than from a bank, since a […]

Chapter 21 International Cash Management Lecture Outline Multinational Working Capital Management Subsidiary Expenses Subsidiary Revenue Subsidiary Dividend Payments Subsidiary Liquidity Management Centralized Cash Management Accommodating Cash Shortages Techniques to Optimize Cash Flows Accelerating Cash Inflows Minimizing Currency Conversion Costs Managing […]

Answers to End of Chapter Questions 1. International Cash Management. Discuss the general functions involved in international cash management. Explain how the MNC’s optimization of cash flow can distort the profits of each subsidiary. ANSWER: The general functions of international […]

Discussion in the Board Room This exercise is intended to apply many of the key concepts to broad issues that are discussed by managers who make financial decisions. It does not replace the more detailed questions and problems at the […]

Chapter 13 Assume that you wanted to expand your Learning English business to other non-U.S. countries where some individuals may want to speak English. a. Explain why you might be able to stabilize the profits of your total business in […]

Chapter 3 International Financial Markets Lecture Outline Foreign Exchange Market History of Foreign Exchange Foreign Exchange Transactions Foreign Exchange Quotations Interpreting Foreign Exchange Quotations Currency Derivatives International Money Market Origins and Development Money Market Interest Rates Among Countries International Credit […]

Answers to End of Chapter Questions 1. Motives for Investing in Foreign Money Markets. Explain why an MNC may invest funds in a financial market outside its own country. ANSWER: The MNC may be able to earn a higher interest […]

Chapter 4 Exchange Rate Determination Lecture Outline Measuring Exchange Rate Movements Exchange Rate Equilibrium Demand for a Currency Supply of a Currency for Sale Equilibrium Factors that Influence Exchange Rates Relative Inflation Rates Relative Interest Rates Relative Income Levels Government […]

Answers to End of Chapter Questions 1. Percentage Depreciation. Assume the spot rate of the British pound is $1.73. The expected spot rate one year from now is assumed to be $1.66. What percentage depreciation does this reflect? ANSWER: ($1.66 […]

22. Relative Importance of Factors Affecting Exchange Rate Risk. Assume that the level of capital flows between the U.S. and the country of Krendo is negligible (close to zero) and will continue to be negligible. There is a substantial amount […]

Chapter 5 Currency Derivatives Lecture Outline Forward Market How MNCs Use Forward Contracts Non-Deliverable Forward Contracts Currency Futures Market Contract Specifications Trading Currency Futures Trading Platforms for Currency Futures Comparison to Forward Contracts Pricing Currency Futures Credit Risk of Currency […]

Answers to End of Chapter Questions 1. Forward versus Futures Contracts. Compare and contrast forward and futures contracts. ANSWER: Because currency futures contracts are standardized into small amounts, they can be 2. Using Currency Futures. a. How can currency futures […]

31. Currency Strangles. (See Appendix B in this chapter.) Assume the following options are currently available for British pounds (₤): Call option premium on British pounds = $.04 per unit Put option premium on British pounds = $.03 per unit […]

Chapter 6 Government Influence on Exchange Rates Lecture Outline Exchange Rate Systems Fixed Exchange Rate System Freely Floating Exchange Rate System Managed Float Exchange Rate System Pegged Exchange Rate System Dollarization Classification of Exchange Rate Arrangements A Single European Currency […]

Answers to End of Chapter Questions 1. Exchange Rate Systems. Compare and contrast the fixed, freely floating, and managed float exchange rate systems. What are some advantages and disadvantages of a freely floating exchange rate system versus a fixed exchange […]

28. Pegged Exchange Rates. The U.S., Argentina, and Canada commonly engage in international trade with each other. All the products traded can easily be produced in all three countries. The traded products are always invoiced in the exporting country’s currency. […]

Chapter 7 International Arbitrage and Interest Rate Parity Lecture Outline International Arbitrage Locational Arbitrage Triangular Arbitrage Covered Interest Arbitrage Comparison of Arbitrage Effects Interest Rate Parity Derivation of Interest Rate Parity Determining the Forward Premium Graphic Analysis of Interest Rate […]

Answers to End of Chapter Questions 1. Locational Arbitrage. Explain the concept of locational arbitrage and the scenario necessary for it to be plausible. ANSWER: Locational arbitrage can occur when the spot rate of a given currency varies among 2. […]

36. IRP and Changes in the Forward Rate. Assume that interest rate parity exists. As of this morning, the 1-month interest rate in Canada was lower than the 1-month interest rate in the U.S.. Assume that as a result of […]

Chapter 8 Relationships Among Inflation, Interest Rates, and Exchange Rates Lecture Outline Purchasing Power Parity (PPP) Interpretations of PPP Rationale Behind PPP Theory Derivation of PPP Using PPP to Estimate Exchange Rate Effects Graphic Analysis of PPP Testing the PPP […]

Answers to End of Chapter Questions 1. PPP. Explain the theory of purchasing power parity (PPP). Based on this theory, what is a general forecast of the values of currencies in countries with high inflation? ANSWER: PPP suggests that the […]

30. Interactive Effects of PPP. Assume that the inflation rates of the countries that use the euro are very low, while other European countries that have their own currencies experience high inflation. Explain how and why the euro’s value could […]

Chapter 9 Forecasting Exchange Rates Lecture Outline Why Firms Forecast Exchange Rates Forecasting Techniques Technical Forecasting Fundamental Forecasting Market-Based Forecasting Mixed Forecasting Guidelines for Implementing a Forecast Forecast Error Measurement of Forecast Error Forecast Accuracy Among Currencies Forecast Error over […]

Answers to End of Chapter Questions 1. Motives for Forecasting. Explain corporate motives for forecasting exchange rates. ANSWER: Several decisions of MNCs require an assessment of the future. Future exchange rates will affect all critical characteristics of the firm such […]

24. Selecting between Forecast Methods. Bolivia currently has a nominal one-year risk-free interest rate of 40 percent, which is primarily due to the high level of expected inflation. The U.S. nominal one-year risk-free interest rate is 8 percent. The spot […]

1) Intracompany trade makes up approximately ____ percent of all international trade. a. 50 b. 70 c. 25 d. 13 e. 5 2) At present, U.S. firms acquire more targets in the former Soviet Union than in any other country. […]

1) If today’s exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is: a. weak-form efficient b. semistrong-form efficient c. strong-form efficient d. all of the […]

1) A subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are international rather than domestic. a. True b. False 2) To force the value of the British pound to depreciate against the dollar, […]

1) Which of the following would probably not cause the stock price of a foreign target to decrease? a. Its expected cash flows decline b. General stock market conditions in the foreign country are deteriorating c. Investors anticipate that the […]

1) Which of the following is not a way in which country risk analysis can be used? a. to monitor countries where an MNC is currently doing business b. as a screening device to avoid conducting business in countries with […]

1) In general, the ____ rate payer in a plain vanilla swap believes interest rates are going to ____. a. fixed; decline b. floating; decline c. floating; increase d. none of the above 2) The VAR method presumes that the […]

1) The parent of MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC. a. True b. False 2) The Bank of England is responsible for setting the monetary policy for the […]

1) There are no transactions costs associated with trading futures or options. a. True b. False 2) According to the international Fisher effect, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be […]

1) An MNC must assess country risk not only in countries where it currently does business but also in those where it expects to export or establish subsidiaries. a. True b. False 2) According to your text, U.S. firms pursue […]

1) The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used. a. True b. False 2) The capital asset pricing model (CAPM) suggests that the required return on a firm’s stock is a […]

1) Which of the following is not true regarding letters of credit? a. They are issued by banks on behalf of the importer promising to pay the exporter b. A revocable letter of credit can be cancelled or revoked at […]

1) Which of the following is not a form of financial risk? a. Exchange rate movements b. Inflation rates c. Blockage of fund transfers d. All of the above are forms of financial risk. 2) Transaction exposure results when an […]

1) Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil. a. True b. False 2) In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign […]

1) Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would […]

1) MNCs can use ____ to reduce exchange rate risk. This occurs when two parties provide simultaneous loans with an agreement to repay at a specified point in the future. a. forward contracts b. currency swaps c. parallel loans d. […]

1) Assume the annual British interest rate is above the annual U.S. interest rate. Also assume the pound’s forward rate of $1.75 equals the pound’s spot rate. Given this information, interest rate parity ____ exist, and the U.S. firm ____ […]

1) Transaction exposure reflects: a. the exposure of a firm’s international contractual transactions to exchange rate fluctuations b. the exposure of a firm’s local currency value to transactions between foreign exchange traders c. the exposure of a firm’s financial statements […]

1) Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of: a. interest rate parity b. locational arbitrage c. purchasing power parity d. the exchange rate mechanism […]

1) The currency futures markets are regulated by the International Monetary Fund. a. True b. False 2) An MNC may be more exposed to agency problems if most of its shares are held by: a. a few mutual funds b. […]

1) Procedural and documentation requirements imposed by the foreign government are referred to as: a. regulatory barriers b. industry barriers c. protective barriers d. “Red Tape” barriers 2) If you have a position where you might be obligated to buy […]

1) Which of the following does not represent the risk from using forward contracts? a. if a forward contract is used to hedge receivables, and the spot exchange rate at the expiration of contract exceeds the contract price b. if […]

1) An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore will be more attractive. […]

1) Which of the following is not true regarding options? a. Options are traded on exchanges, never over-the-counter b. Similar to futures contracts, margin requirements are normally imposed on option traders c. Although commissions for options are fixed per transaction, […]

1) Japan’s annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____. a. low; small b. high; small c. low; large d. high; […]

1) Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes. a. True b. False 2) Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power […]

1) Which of the following factors is not expected to generally have a favorable impact on the firm’s cost of capital according to the text? a. easy access to international capital markets b. high degree of international diversification c. high […]

1) If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation. a. True b. False 2) Which of the following is not mentioned in the text […]

1) If the one-year forward rate for the euro is $1.07, while the current spot rate is $1.05, the expected percentage change in the euro is ____%. a. 1.90 b. 2.00 c. -1.87 d. none of the above 2) In […]

1) A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency. a. True b. False 2) If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield […]

1) Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run. a. True b. False 2) To reduce the exposure to a host government takeover, an MNC may attempt to recover cash flows from the […]

1) The highest amount a buyer of a call or a put option can lose is the exercise price. a. True b. False 2) Even if the interest rate associated with a foreign country is higher than the domestic interest […]

1) A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future. a. True b. False 2) If interest rate parity does not hold, and the forward ____ is […]

1) If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could: a. obtain a 90-day forward purchase contract on Canadian […]

1) Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these […]

1) Currency options are only traded on exchanges. That is, there is no over-the-counter market for options. a. True b. False 2) Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days […]

1) The Asian crisis is generally believed to have started in Japan. a. True b. False 2) Assume that the bank’s bid quote of Mexican peso is $.126 and ask price is $.129. If you have Mexican pesos, what is […]

1) Although netting typically increases the need for foreign exchange conversion, it generally reduces the number of cross border transactions between subsidiaries. a. True b. False 2) The valuation of MNC accounts for all the cash flows received by the […]

1) Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.00 You […]

1) Exhibit 14-1 Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps’ cost […]

1) If the U.S. dollar appreciates, a. an MNC’s U.S. sales will probably decrease b. an MNC’s exports denominated in U.S. dollars will probably increase c. an MNC’s interest owed on foreign funds borrowed will probably increase d. an MNC’s […]

1) If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders). a. True b. False 2) If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified. a. […]

1) A set of currency cash inflows is more volatile if the correlations are low. a. True b. False 2) ____ purchases more U.S. exports than the other countries listed here. a. Italy b. Spain c. Mexico d. Canada Answer: […]

1) The ____ an MNC, the ____ its cost of capital is likely to be. a. larger; higher b. larger; lower c. smaller; lower d. A and C 2) Eurobonds: a. are usually issued in bearer form b. typically carry […]

1) ____ can cause the parent’s after-tax cash flows to differ from the subsidiary’s after-tax cash flows. a. The number of units sold by the subsidiary b. The subsidiary’s earnings before income and taxes (EBIT) c. The tax rate the […]

1) The ____ is the difference between exports and imports. a. balance of trade b. balance on goods and services c. balance of payments d. current account e. capital account 2) The U.S. inflation rate is expected to be 4 […]

1) The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate. a. True b. […]

1) A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is 9%. It uses today’s spot rate as a forecast for the franc’s spot rate in one year. The U.S. one-year interest […]

1) Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6%. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at […]

1) A letter of credit does not guarantee that the goods purchased will be those invoiced and shipped. a. True b. False 2) Assume the U.S. one-year interest rate is 11% and the French one-year interest rate is 18%. The […]