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Typically, a firm in its domestic stage of globalization has all financial transactions in
its domestic currency.
Both covered and uncovered interest arbitrage are risky operations in the sense that
even without default in the securities, the returns are unknown until all transactions are
complete.
Patient Capitalism is characterized by short-term focus by both management and
investors.
After being introduced in the 1980s, currency swaps have gained increasing importance
as financial derivative instruments.
Currency risk is a concern for any international merger and acquisition activity. For
instance, the initial bid, if denominated in a foreign currency, creates a contingent
foreign currency exposure for the bidder.
As opposed to greenfield investment, a cross-border acquisition is typically quicker.
If a foreign exchange transaction calls for payment in the importer's currency, the
exporter has the foreign exchange risk.
Relative to MNEs, purely domestic firms tend to have GREATER political risk.
Of the OECD 30 countries, most employ a worldwide approach to tax policy, but a few,
including the United States, use the worldwide approach.
In general, as a country's income increases, so does the demand for imports.
One of the reasons companies use interest rate swaps is because they pursue a target
debt structure that combines maturity, currency of composition, and fixed/floating
pricing.
The combined impact of a new equity issue undertaken simultaneously with a
cross-listing has a more favorable impact on stock price than cross-listing alone.
The writer of the option is referred to as the seller, and the buyer of the option is
referred to as the holder.
Because current and financial/capital account balances use double-entry bookkeeping it
is unusual to find serious discrepancies in the debits and credits.
A number of financial instruments that are used in domestic financial management have
been modified for use in international financial management. Examples are foreign
currency options and futures, interest rate and currency swaps, and letters of credit.
Success of the forfaiting technique springs from the belief that the aval can be depend
on.
A country CANNOT have both a territorial and a worldwide approach as a national tax
policy.
International trade might have approached the comparative advantage model in the 19th
century, and it does so even more today.
The assumptions for relative PPP are more rigid than the assumptions for absolute PPP.
In recent years the trend has been for markets to increasing focus on the shareholder
wealth form of wealth maximization.
The Euro currency is fixed against other currencies on the international currency
exchange markets, but allows member country currencies to float against each other.
A basis point is one-tenth of one percent.
Hedging is accomplished by combining the exposed asset with a hedge asset to create a
two asset portfolio in which the two assets react in relatively equal directions to an
exchange rate change.
Under the temporal rate method, specific assets and liabilities are translated at exchange
rates consistent with the timing of the item's creation.
When estimating an average corporate after-tax cost of capital, the component cost of
equity is multiplied by (1-t) to allow for the tax-deductibility of dividend payments.
In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a one-to-one
basis.
The CAPM has now become very widely accepted in global business as the preferred
method of calculating the cost of equity for a firm. As a result of this, there is now little
debate over what numerical values should be used in its application.
Nondeliverable Forwards were originally envisioned as a method of currency
speculation, but it is now estimated that 70% of NDFs are trading for hedging purposes.
Joint ventures are a more common FDI than wholly owned subsidiaries.
Eurobonds are usually issued in registered form.
According to recent research, family-owned firms in some highly-developed economies
typically outperform publicly-owned firms.
Foreign currency options are available both over-the-counter and on organized
exchanges.
Swap agreements are treated as line items on the balance sheet via U.S. accounting
methods.
If a U.S. multinational remits profits from two different countries (subsidiaries) back to
the parent company (U.S.), the excess foreign tax credit from one subsidiary can only
be cross-credited against another subsidiary from the same country.
The effect of an imbalance in the BOP is the same for countries on a fixed exchange
rate regime as for those on a floating exchange rate regime.
A distinction about the publicly traded firm's shares is that they raise capital with the
daily rise and fall of their share prices.
Use interest rate parity to answer this question. A U.S. investor has a choice between a
risk-free one-year U.S. security with an annual return of 4%, and a comparable British
security with a return of 5%. If the spot rate is $1.43/£, the forward rate is $1.44/£, and
there are no transaction costs, the investor should invest in the U.S. security.
The primary problem with volatility is that it is unobservable; it is the only input into
the option pricing formula that is determined subjectively by the trader pricing the
option.
Portfolio theory assumes that investors are risk-averse. This means that investors:
A) cannot be induced to make risky investments.
B) prefer more risk to less for a given return.
C) will accept some risk, but not unnecessary risk.
D) All of the above are true.
If the spot rate changes from $1.70/£ to $1.71/£ and there is an option with an initial
premium of $0.033/£ and a delta of 0.5, then the new option premium would be:
A) $0.043/£.
B) $0.038/£.
C) $0.005/£.
D) $1.715/£.
A foreign currency ________ contract calls for the future delivery of a standard amount
of foreign exchange at a fixed time, place, and price.
A) futures
B) forward
C) option
D) swap
The owner-specific advantages of OLI must be:
A) firm-specific.
B) not easily copied.
C) transferable to foreign subsidiaries.
D) all of the above
Since 2009 the IMF's exchange rate regime classification system uses a "de facto
classification" methodology. Under this system, a country that has given up their own
sovereignty over monetary
policy is considered to have:
A) a residual agreement.
B) hard pegs.
C) soft pegs.
D) floating arrangements.
Option values increase with the length of time to maturity. The expected change in the
option premium from a small change in the time to expiration is termed delta.
Which of the following is NOT an example of a financial cash flow?
A) parent invested equity capital
B) interest on intrafirm lending
C) payment for goods and services
D) intrafirm principal payments
Generally speaking, which of the following is NOT considered an important factor in
the composition and control of corporate boards of directors?
A) the number of insider vs outside directors
B) the total number of directors on the board
C) the composition of the compensation committee
D) All of the above are important factors of board composition.
If a firm lies within a country with ________ or ________ domestic capital markets, it
can achieve lower global cost and greater availability of capital with a properly
designed and implemented strategy to participate in international capital markets.
A) liquid; segmented
B) liquid; large
C) illiquid; segmented
D) large; illiquid
Instruction 15.1:
Use the information to answer the following question(s).
Green Valley Exporters USA has $100,000 of before tax foreign income. The host
country has a corporate income tax rate of 25% and the U.S. has a corporate income tax
rate of 35%.
Refer to Instruction 15.1. If the U.S. has no bilateral trade agreement with the host
country, what is the total amount of income taxes Green Valley Exporters will pay?
A) $25,000
B) $35,000
C) $51,250
D) $60,000
The concept of relative comparative advantage's origins lie in:
A) Adam Smith's work of 1776
B) David Ricardo's work of 1776
C) The Wealth of Nations book, published in 1887
D) On the Principles of Political Economy and Taxation book, published in 1817
Of the following, which was NOT identified by the authors as a type of cultural
difference that MNEs must consider when expanding to foreign countries?
A) differences in human resource norms
B) differences in religious heritage
C) differences in allowable ownership structures
D) All of the above must be considered.
Which of the following is NOT an important impediment to widespread use of parallel
loans?
A) difficulty in finding an appropriate counterparty
B) the risk that one of the parties will fail to return the borrowed funds when agreed
C) the process does not avoid exchange rate risk
D) All of the above are significant impediments.
The L in OLI refers to an advantage in a firm's home market that is a:
A) liability in the domestic market.
B) location-specific advantage.
C) longevity in a particular market.
D) none of the above
A well-established, large China-based MNE will probably be most adversely affected
by which of the following elements of firm value?
A) an open marketplace
B) high-quality strategic management
C) access to capital
D) access to qualified labor pool
Another name for the International Bank for Reconstruction and Development is:
A) the Recon Bank.
B) the European Monetary System.
C) the Marshall Plan.
D) the World Bank.
Which of the following is NOT a factor of Porter's "diamond of national advantage"?
A) factor conditions
B) demand conditions
C) related and supporting industries
D) All of the above are factors of the diamond of national advantage.
The Eximbank does all of the following EXCEPT:
A) guarantees lease transactions
B) supplies counseling for exporters in finding financing for US goods
C) finances the cost involved in the preparation of feasibility studies for non-US clients
D) provides letters of credit for U.S. exporters.
Beta may be defined as:
A) the measure of systematic risk.
B) a risk measure of a portfolio.
C) the ratio of the variance of the portfolio to the variance of the market.
D) all of the above
Phillips NV produces DVD players and exports them to the United States. Last year the
exchange rate was $1.25/euro and Plillips charged 120 euro per player in Euroland and
$150 per DVD player in the United States. Currently the spot exchange rate is
$1.45/euro and Phillips is charging $160 per DVD player. What is the degree of pass
through by Phillips NV on their DVD players?
A) 92%
B) 33.3%
C) 41.7%
D) 4.1%
A number of institutional services provide updated country risk ratings on a regular
basis. This is an example of micro-risk information for MNEs using this data.
Export receivables are normally sold at a discount. The size of the discount depends on
the following factors EXCEPT:
A) overdraft fees
B) collection risk
C) cost of credit insurance
D) size of financing and services fees
Which of the following is NOT identified by your authors as a proactive management
technique to reduce exposure to foreign exchange risk?
A) matching currency cash flows
B) cross-currency swaps
C) remaining a purely domestic firm
D) parallel loans
Systematic risk:
A) is the standard deviation of a security's return.
B) is measured with beta.
C) is measured with standard deviation.
D) none of the above
The OLI paradigm is an attempt to create a framework to explain why MNEs choose
________ rather than some other form of international venture.
A) licensing
B) joint ventures
C) foreign direct investment
D) strategic alliances
You have been hired as a consultant to the central bank for a country that has for many
years suffered from repeated currency crises and depends heavily on the U.S. financial
and product markets. Which of the following policies would have the greatest
effectiveness for reducing currency volatility of the client country with the United
States?
A) dollarization
B) an exchange rate pegged to the U.S. dollar
C) an exchange rate with a fixed price per ounce of gold
D) an internationally floating exchange rate
The beginning share price for a security over a three-year period was $50. Subsequent
year-end prices were $62, $58 and $64. The arithmetic average annual rate of return and
the geometric average annual rate of return for this stock was:
A) 9.30% and 8.58% respectively.
B) 9.30% and 7.89% respectively.
C) 9.30% and 7.03% respectively.
D) 9.30% and 6.37% respectively.
In the foreign exchange market, ________ seek all of their profit from exchange rate
changes while ________ seek to profit from simultaneous exchange rate differences in
different markets.
A) wholesalers; retailers
B) central banks; treasuries
C) speculators; arbitrageurs
D) dealers; brokers
Refer to Table 7.1. The exercise price of ________ giving the purchaser the right to sell
pounds in June has a cost per pound of ________ for a total price of ________.
A) 1460; 0.68 cents; $425.00
B) 1440; 1.06 cents; $662.50
C) 1450; 1.02 cents; $637.50
D) 1440; 1.42 cents; $887.50
Most Western nations were on the gold standard for currency exchange rates from 1876
until 1914. Today we have several different exchange rate regimes in use, but most
larger economy nations have freely floating exchange rates today and are not obligated
to convert their currency into a predetermined amount of gold on demand. Currently
several parties still call for the "good old days" and a return to the gold standard.
Develop an argument as to why this is a good idea.
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars
from a manufacturer in Germany for euro 3,000,000. The purchase was made in June
with payment due six months later in December. Because this is a sizable contract for
the firm and because the contract is in euros rather than dollars, CVT is considering
several hedging alternatives to reduce the exchange rate risk arising from the sale. To
help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.250/euro
∙ The six month forward rate is $1.22/euro
∙ CVT's cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December call options for euro 750,000; strike price $1.28, premium price is 1.5%
∙ CVT's forecast for 6-month spot rates is $1.27/euro
∙ The budget rate, or the highest acceptable purchase price for this project, is $3,900,000
or $1.30/euro
Refer to Instruction 10.1. The cost of a put option to CVT would be:
A) $52,500.
B) $55,388.
C) $58,275.
D) There is not enough information to answer this question.
The two basic methods for the translation of foreign subsidiary financial statements are
the ________ method and the ________ method.
A) current rate; temporal
B) temporal; proper timing
C) current rate; future rate
D) none of the above
An investment agreement spells out specific rights and responsibilities of both the
foreign firm and the host government. What are the main financial policies that should
be included in an investment agreement?
The value contribution of a subsidiary of a multinational firm to the firm can be
reported in the income statement or balance sheet of the consolidated firm. Explain the
reporting of the changes in the value of a subsidiary as a result of the change in an
exchange rate - changes to the income and the assets of the subsidiary - in the
consolidated financial statements of the parent company.
Dollarization is the use of the U.S. dollar as the official currency of the country. List
and explain the arguments for and against dollarization. Provide example/s of countries
that used the dollar as its official currency.
What are the main types of political risks that are global in origin? What are the main
strategies used by MNEs to manage the globalspecific risks you have identified?
What are the advantages and disadvantages of serving a foreign market through a
greenfield foreign direct investment compared to an acquisition of a local firm in the
target market?
Explain the worldwide and territorial approaches of national taxation. The authors state
that the United States uses both approaches. How can this be? Give an example of each
taxation approach.
What is the major difference between "currency risk" and "risk of noncompletion"?
How are these risks handled in a typical international trade transaction?
Explain how all exchange rate regimes must deal with the trade-off between rules and
discretion, as well as between cooperation and independence. List and classified two
International Monetary Systems based on these four quadrants.
Private equity funds differ from traditional venture capital funds. List and discuss three
differences between them.
What is real option analysis? How is it a better method of making investment decisions
than using traditional capital budgeting analysis?
List and explain the three attributes (often referred as the impossible trinity) an ideal
currency would possess if existed in today's world.
List and explain three "Greek" elements and impacts on a call option premium.
What does the OLI Paradigm propose to explain? Define each component and provide
an example of each.
Why might different documentation be used for an export to a nonaffiliated foreign
buyer who is a new customer, as compared with an export to a nonaffiliated foreign
buyer to whom the exporter has been selling for many years?
The mobility of international capital flows is causing emerging market nations to
choose between a free-floating currency exchange regime and a currency board (or
taken to the limit, dollarization). Describe how each of the regimes would work and
identify at least two likely economic results for each regime.
Although international trade might have approached the comparative advantage model
during the nineteenth century, it certainly does not today, for a variety of reasons.
Develop an argument as to why this is not happening today.
