Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

978-0073382395 Chapter 21 Concepts Review and Critical Thinking Questions

April 3, 2019
Answers to Concepts Review and Critical Thinking Questions
1. a. The dollar is selling at a premium because it is more expensive in the forward market than in the
spot market (SFr 1.53 versus SFr 1.50).
c. Inflation in Switzerland is higher than in the United States, as are interest rates.
2. The exchange rate will increase, as it will take progressively more pesos to purchase a dollar. This is the
relative PPP relationship.
b. The inflation rate in Australia is higher.
4. A Yankee bond is most accurately described by d.
5. It depends. For example, if a country’s currency strengthens, imports become cheaper (good), but its
6. Additional advantages include being closer to the final consumer and, thereby, saving on transportation,
7. One key thing to remember is that dividend payments are made in the home currency. More generally, it
may be that the owners of the multinational are primarily domestic and are ultimately concerned about
8. a. False. If prices are rising faster in Great Britain, it will take more pounds to buy the same amount
of goods that one dollar can buy; the pound will depreciate relative to the dollar.
isn’t reflected in forward rates today will the forward hedge protect you against additional
CHAPTER 21 B-345
c. True. The market would only be correct on average, while you would be correct all the time.
9. a. American exporters: their situation in general improves because a sale of the exported goods for a
fixed number of euros will be worth more dollars.
b. American exporters: they would generally be better off if the British government’s intentions result
in a strengthened pound.
c. American exporters: would generally be much worse off, because an extreme case of fiscal
expansion like this one will make American goods prohibitively expensive to buy, or else Brazilian
10. IRP is the most likely to hold because it presents the easiest and least costly means to exploit any
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps.
Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
1. Using the quotes from the table, we get:
b. $1.5363
d. New Zealand dollar
e. Mexican peso
This is a cross rate.