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Chapter 17
Multinational Financial Management
ANSWERS TO END-OF-CHAPTER QUESTIONS
17-1 a. A multinational corporation is one that operates in two or more countries.
b. The exchange rate specifies the number of units of a given currency that can be
purchased for one unit of another currency. The fixed exchange rate system was in
c. A country has a deficit trade balance when it imports more goods from abroad than it
exports. Devaluation is the lowering, by governmental action, of the price of its
d. Exchange rate risk refers to the fluctuation in exchange rates between currencies over
time. A convertible currency is one which can be traded in the currency markets and
e. Interest rate parity holds that investors should expect to earn the same return in all
f. The spot rate is the exchange rate which applies to “on the spot” trades, or, more
precisely, exchanges that occur two days following the day of trade. In other words,
g. Repatriation of earnings is the cash flow, usually in the form of dividends or royalties,
from the foreign branch or subsidiary to the parent company. These cash flows must
h. A Eurodollar is a U. S. dollar on deposit in a foreign bank, or a foreign branch of a U.
S. bank. Eurodollars are used to conduct transactions throughout Europe and the rest
of the world. An international bond is any bond sold outside of the country of the
17-5 There will be an excess supply of dollars in the foreign exchange markets, and thus, will
17-6 Taking into account differential labor costs abroad, transportation, tax advantages, and so
17-7 The foreign project’s cash flows have to be converted to U. S. dollars, since the
shareholders of the U. S. corporation (assuming they are mainly U. S. residents) are
17-8 A Eurodollar is a dollar deposit in a foreign bank, normally a European bank. The
foreign bank need not be owned by foreigners--it only has to be located in a foreign
The existence of the Eurodollar market makes the Federal Reserve’s job of
controlling U. S. interest rates more difficult. Eurodollars are outside the direct control of
17-9 No, interest rate parity implies that an investment in the U. S. with the same risk as a
similar investment in a foreign country should have the same return. Using direct quotes
for the spot rate and forward rate, interest rate parity is expressed as:
f
h
r1
r1
rateSpot
rateForward
.
Interest rate parity shows why a particular currency might be at a forward premium or
discount. A currency is at a forward premium whenever domestic interest rates are higher
than foreign interest rates. Discounts prevail if domestic interest rates are lower than
foreign interest rates. If these conditions do not hold, then arbitrage will soon force
interest rates back to parity.
17-10 Purchasing power parity assumes there are neither transaction costs nor regulations which
limit the ability to buy and sell goods across different countries. In many cases, these
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
Cross Rate:
Dollar
Yen
Peso
Dollar
=
Peso
Yen
.
Note that an indirect quotation is given for Mexican; however, the cross rate formula
requires a direct quotation. The indirect quotation is the reciprocal of the direct
17-2 rNom, 6-month T-bills = 7%; rNom of similar default-free 6-month Japanese bonds = 5.5%;
Spot exchange rate, e0: 1 Yen = $0.009; 6-month forward exchange rate = ft = ?
)r1(
)r1(
e
f
f
h
0
t
.
17-3 U. S. Computer = $500; French Computer = 550 euros; Spot rate between euro and
dollar = ?
Ph = Pf(e0)
17-5 The current exchange rate is 0.60 dollars per Swiss franc. A 10 percent appreciation will
17-6 Cross rate = Swiss francs/dollars dollars/pounds = Swiss francs/pounds
17-7 Spot rate = 1 yen = $0.0086; ft = 1 yen = $0.0086; rNom of 90-day Japanese risk-free
securities = 4.6%; rNom of 90-day U. S. risk-free securities = ?
)r1(
)r1(
rateSpot
f
f
h
t
.
1 =
0115.1
)r1(
h
17-8 $1 = 7.8 pesos; headphones = $15.00; Price of headphones in Mexico = ?
Ph = Pf(Spot rate).
17-10 a. The automobile’s value has increased because the dollar has declined in value relative
to the yen.
b. The 1983 cost in yen was (245 yen per dollar)(8,000 dollars) = 1,960,000 yen. At an
c. If the exchange rate is 0.500 Swiss francs per dollar when payment is due in 3
months, the SFr. 1,000,000 will cost:
which is more than the spot price today and more than purchasing a forward contract
for 90 days.
)r1(
)r1(
rateSpot
f
f
h
t
.
40.1$
f
t
=
01325.1
0125.1
40.1$
f
t
= 0.9993.
ft = $1.3990.
The forward rate is selling at a discount, since a euro buys fewer dollars in the forward
Second, find the growth rate in dollar denominated pesos. If the peso is depreciating 4% a
year with respect to the dollar, then the exchange rate at t=2 will be (0.10 dollars per
P0=
g
s
1
r
D
=
)0368.013.0(
3$
17-14 a. If a U.S. based company undertakes the project, the rate of return for the project is a
simple calculation, as is the net present value.
Rate of return: Enter into your financial calculator or Excel cash flow register CF0 =
b. This analysis is from the perspective of a Korean investor, so Korea is the home
According to interest rate parity, the following condition holds:
rate exchangeSpot
rate exchange Forward
=
t
US
Korea
r1
r1
For the 1-year forward rate:
1050
rate exchange Forward
=
04.1
03.1
1050
rate exchange Forward
Forward exchange rate = 1,039.90 won per U.S. $.
The 2-year exchange rate is calculated as:
1050
rate exchange Forward
=
2
0425.1
0325.1
2-year forward exchange rate = 1029.95 Won per U.S.
dollar.
c. First, we must adjust the cash flows to reflect Nam Sung’s home currency.
The expected Won cash flows are
Year 0: (−1,000,000 dollars)(1,050 won per dollar) =
Using the won-denominated cash flows, the appropriate NPV and rate of return can
be found.
Rate of return: Enter into your financial calculator or Excel cash flow register CF0 =
