CHAPTER 19 – INTERNATIONAL CORPORATE FINANCE
Questions
LG1 19-1 What do global organizations like the World Trade Organization and the International Monetary Fund do?
LG1 19-2 What is the purpose of trading zones? What are some of the most important zones for world trade?
LG1 19-3 Explain how a country’s import trade limitations and tariffs influence MNC’s foreign direct investment.
If a country has import limitations, some firms may choose to locate manufacturing facilities within the country in
LG2 19-4 What are the risks of foreign direct investment into the United States? What does new FDI into the United
States mean for firms already operating in that industry in the United States?
LG3&5 19-5 Describe the similarities and the differences of exchange rate/cross rate arbitrage and spot rate/forward rate
arbitrage.
LG4 19-6 What is meant when it is said that the U.S. dollar is strengthening? How would it impact your vacation abroad
and foreign visitors to the United States?
LG4 19-7 Describe the difference between a forward rate selling at a discount and selling at a premium. If the spot rate
between the U.S. dollar and the Brazilian real is $1 = 2.0875 real and the 3-month forward rate is $1 = 2.1025 real,
LG4 19-8 What is meant by hedging exchange rate risk and what are some ways it is done?
LG4&6 19-9 What are the advantages of borrowing money in the country you plan to invest it in?
LG5 19-10 If a Sony television costs $500 in the United States, what do you think it should cost in Japan? What are
some reasons that your price might not be right?
LG5 18-11 What happens to a country’s currency over time when it has a high inflation rate? What will that mean for the
country’s exports and imports?
LG5 19-12 What forces are at work that cause the price of wheat per bushel to be the same in most every country of the
world?
LG5 19-13 If the spot exchange rate between the U.S. dollar and the Singapore dollar is $1 = SG$1.5266 and the 3-month
expected exchange rate is $1 = SG$1.5305, then what is the expected inflation relationship between the two
countries?
LG5 19-14 Over the past decade, China has acquired hundreds of billions of U.S. dollars because of the trade imbalance
between the two countries. They have used many of these dollars to purchase U.S. Treasury bonds. What would
likely happen to the dollar’s value, and interest rates and inflation in the United States, if China decided to suddenly
sell the Treasury bonds and exchange the dollars for other currencies?
LG6 19-15 Can a U.S. firm experience political risk problems in its overseas projects because of the U.S. government?
Give examples.
LG7 19-16 Give some examples of the financial complications that occur when evaluating a capital budgeting project in a
foreign country.
The first complication is that multiple currencies might be involved. The capital to fund the project might come
problems
basic problems
LG3 19-1 Exchange Rate Quote Convert each of the following direct quotes to dollar indirect quotes:
a. 1 Danish krone = $0.170
b. 1 Indian rupee = $0.0184
c. 1 Israeli shekel = $0.2751
LG3 19-2 Exchange Rate Quote Convert each of the following direct quotes to dollar indirect quotes:
a. 1 Korean won = $0.0009
b. 1 Malaysian ringgit = $0.3238
c. 1 Thai baht = $0.0331
LG3 19-3 Exchange Rate Quote Convert each of the following indirect quotes to dollar direct quotes:
a. $1 = 20,864 Vietnamese dong
b. $1 = 6.300 Venezuelan bolivar fuerte
c. $1 = 9.175 South African rand
LG3 19-4 Exchange Rate Quote Convert each of the following indirect quotes to dollar direct quotes:
a. $1 = 3.7497 Saudi Arabian riyal
b. $1 = 44.15 Philippine peso
c. $1 = 0.5409 Latvian lat
a. 1 riyal = $1 / 3.7497 riyal = $0.2667
b. 1 peso = $1 / 44.15 peso = $0.0227
c. 1 lat = $1 / 0.5409 lat = $1.8488
LG3 19-5 Currency Exchange Compute the amount of each foreign currency that can be purchased for $500,000:
a. 1 Danish krone = $0.170
LG3 19-6 Currency Exchange Compute the amount of each foreign currency that can be purchased for one million
dollars:
a. 1 Korean won = $0.0009
b. 1 Malaysian ringgit = $0.3238
c. 1 Thai baht = $0.0331
LG3 19-7 Currency Exchange Compute the number of dollars that can be bought with two million of each foreign
currency units:
a. $1 = 20,864 Vietnamese dong
b. $1 = 6.300 Venezuelan bolivar fuerte
c. $1 = 9.175 South African rand
LG3 19-8 Currency Exchange Compute the number of dollars that can be bought with one million of each foreign
currency units:
a. $1 = 3.7497 Saudi Arabian riyal
b. $1 = 44.150 Philippine peso
c. $1 = 0.5409 Latvian lat
LG5 19-9 Law of One Price If the price of silver in England is £15.23 per ounce, what is the expected price of silver in
the United States if the spot exchange rate is $1 = £0.6535?
LG5 19-10 Law of One Price If the price of copper in Europe is €2.12 per ounce, what is the expected price of copper in
LG7 19-11 Discount Rates A financial manager has determined that the appropriate discount rate for a foreign project is
12 percent. However, that discount rate applies in the United States using dollars. What discount rate should be
used in the foreign country using the foreign currency? The inflation rate in the United States and in the foreign
country is expected to be 3 percent and 6 percent, respectively.
LG7 19-12 Discount Rates A financial manager has determined that the appropriate discount rate for a foreign project is
16 percent. However, that discount rate applies in the United States using dollars. What discount rate should the
manager use in the foreign country using the foreign currency? The inflation rate in the United States and in the
foreign country is expected to be 5 percent and 4 percent, respectively.
intermediate problems
LG3 19-13 Cross Rate Given these two exchange rates, $1 = 12.268 Mexican pesos and $1 = €0.7624, compute the cross
rate between the Mexican peso and the euro. State this exchange rate in pesos and in euros.
LG3 19-14 Cross Rate Given these two exchange rates, $1 = 0.9952 Australian dollars and $1 = £0.6476, compute the
LG4 19-15 Exchange Rate Risk In 1997, many East Asian currencies suddenly and dramatically devalued. What is the
percentage change in value of a $50 million investment in Indonesia when the exchange rate changes from $1 =
2,000 rupiah to $1 = 10,000 rupiah?
LG4 19-16 Exchange Rate Risk The Russian financial crisis of 1998 caused its currency to be dramatically devalued.
What is the percentage change in value of a $100 million investment in Russia when the exchange rate changes from
$1 = 6 rubles to $1 = 21 rubles?
1 0.0125
Forward exchange rate $0.8427 per NZD $0.8448 per NZD
1 0.01
+
= ´ =
+
LG5 19-18 Interest Rate Parity The spot rate between the U.S. dollar and the Taiwan dollar is $1 = TWD29.905. If the
interest rate in the United States is five percent and in Taiwan is three percent, then what should be the 1-month
15m pounds × ($1 / 5.725 pounds) + 25m rials × ($1 / 3.639 rials) = $9.49m
If the cash flows come in one year, they would be:
15m pounds × ($1 / 5.892 pounds) + 25m rials × ($1 / 3.988 rials) = $8.81m
The firm would get $0.68 million less in one year.