Chapter 21
International Financial Management
Discussion Questions
21-1. What risks does a foreign affiliate of a multinational firm face in today’s
business world?
In addition to the normal risks that a domestic firm faces (such as the risk
21-2. What allegations are sometimes made against foreign affiliates of multinational
firms and against the multinational firms themselves?
Some countries have charged that foreign affiliates subverted their governments
and caused instability for their currencies in international money and foreign
exchange markets. The less developed countries (LDCs) have, at times, alleged
21-3. List the factors that affect the value of a currency in foreign exchange markets.
Factors affecting the value of a currency are inflation, interest rates, balance
of payments, and government policies. Other factors that have an influence
21-4. Explain how exports and imports tend to influence the value of a currency.
When a country sells (exports) more goods and services to foreign countries
than it purchases (imports), it will have a surplus in its balance of trade.
Since foreigners are expected to pay their bills for the exporter’s goods in the
of other factors may also influence these patterns such as the economic and
political stability of the country.
21-5. Differentiate between the spot exchange rate and the forward exchange rate.
21-6. What is meant by translation exposure in terms of foreign exchange risk?
The foreign-located assets and liabilities of a multinational corporation are
denominated in their respective foreign currencies and need to be translated
21-7. What factors influence a U.S. business firm to go overseas?
Factors that influence a U.S. business firm to go overseas are avoidance
of tariffs; lower production and labor costs; usage of superior American
technology abroad in such areas as oil exploration, mining, and manufacturing;
21-8. What procedure(s) would you recommend for a multinational company in
studying exposure to political risk? What actual strategies can be used to guard
against such risk?
In studying exposure to political risk, a company may hire outside consultants
Strategic steps to guard against such risks include:
21-9. What factors beyond the normal domestic analysis go into a financial feasibility
study for a multinational firm?
An international financial feasibility study must go beyond domestic factors to
21-10. What is a letter of credit?
21-11. Explain the functions of the following agencies.
Overseas Private Investment Corporation (OPIC)
Overseas Private Investment Corporation (OPIC)—A government agency that
sells insurance policies to qualified firms. This agency insures against losses
Export-Import Bank (Eximbank)—An agency of the U.S. government that
facilitates the financing of U.S. exports through its miscellaneous programs.
In its direct loan program, the Eximbank lends money to foreign purchasers of
Foreign Credit Insurance Association (FCIA)—An agency established by a
group of 60 U.S. insurance companies. It sells credit export insurance to
International Finance Corporation (IFC)—An affiliate of the World Bank
established with the sole purpose of providing partial seed capital for private
to the International Finance Corporation.
21-12. What are the differences between a parallel loan and a fronting loan?
In a parallel loan, the exchange rate markets are avoided entirely—that is, the
funds do not enter the foreign exchange market at all. Also, no financial institution
21-13. What is LIBOR? How does it compare to the U.S. prime rate?
LIBOR (London Interbank Offered Rate) is an interbank rate applicable for
large deposits in the Eurodollar market. It is a benchmark rate just like the
21-14. What is the danger or concern in floating a Eurobond issue?
When a multinational firm borrows money through the Eurobond market
(foreign currency denominated debt), it creates transaction exposure, a kind
21-15. What are ADRs?
ADRs (American Depository Receipts) represent the ownership interest in a
21-16. Comment on any dilemmas that multinational firms and their foreign affiliates
may face in regard to debt ratio limits and dividend payouts.
Debt ratios in many countries are higher than those in the United States.
A foreign affiliate faces a dilemma in its financing decision. Should it follow
the parent firm’s norm or that of the host country? Furthermore, should this be
Chapter 21
Problems
1. Spot and forward rates (LO21-2) The Wall Street Journal reported the following spot and
forward rates for the Swiss franc ($/SF):
Spot…………………………………….. $0.8202
30-day forward……………………… $0.8244
90-day forward……………………… $0.8295
180-day forward……………………. $0.8343
a. Was the Swiss franc selling at a discount or premium in the forward market?
b. What was the 30-day forward premium (or discount)?
c. What was the 90-day forward premium (or discount)?
d. Suppose you executed a 90-day forward contract to exchange 100,000 Swiss francs into
U.S. dollars. How many dollars would you get 90 days hence?
e. Assume a Swiss bank entered into a 180-day forward contract with Bankers Trust to
buy $100,000. How many francs will the Swiss bank deliver in six months to get the
U.S. dollars?
21-1. Solution:
b.
21-1. (Continued)
c.
d. 90-day forward rate = $.8295
2. Cross rates (LO21-2) Suppose a Polish zloty is selling for $0.3414 and a British pound is
selling for 1.4973. What is the exchange rate (cross rate) of the Polish zloty to the British
pound? That is, how many Polish zlotys are equal to a British pound?