Answers and Solutions: 17 – 1
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
effect from the end of World War II until August 1971. Under the system, the U. S.
currency relative to another currency. For example, in 1967 the British pound was
devalued from $2.80 per pound to $2.50 per pound. Revaluation, the opposite of
devaluation, occurs when the relative price of a currency is increased.
d. Exchange rate risk refers to the fluctuation in exchange rates between currencies over
the “law of one price,” implies that the level of exchange rates adjusts so that
identical goods cost the same in different countries.
website, in whole or in part.
f. The spot rate is the exchange rate which applies to “on the spot” trades, or, more
the spot rate is for current exchanges. The forward exchange rate is the prevailing
exchange rate for exchange (delivery) at some agreed-upon future date, usually 30,
90, or 180 days from the day the transaction is negotiated. Forward exchange rates
are analogous to future prices on commodity exchanges. Discounts (or premiums) on
rate changes. A foreign government may restrict the amount of cash that may be
repatriated. Political risk refers to the possibility of expropriation and to the
unanticipated restriction of cash flows to the parent by a foreign government.
h. A Eurodollar is a U. S. dollar on deposit in a foreign bank, or a foreign branch of a U.
denominated in the currency of the country in which the issue is sold. Thus, a U. S.
firm selling bonds denominated in Swiss francs in Switzerland is selling foreign
bonds.
i. The Euro is a currency used by the nations in the European Monetary Union who
17-2 The U. S. dollar. The primary reason for using the dollar was that it provided a relatively
17-3 Under the fixed exchange rate system, the fluctuations were limited to +1% and -1%.
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
(mainly the risk of expropriation). However, foreign investments also help diversify cash
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
controlling U. S. interest rates more difficult. Eurodollars are outside the direct control of
the U. S. monetary authorities. Because of this, interest rates in the U. S. cannot be
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
website, in whole or in part.
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
17-1 $1 = 9 Mexican pesos; $1 = 111.23 Japanese yen; Cross exchange rate, yen/peso = ?
Yen
Dollar
Yen
17-3 U. S. Computer = $500; French Computer = 550 euros; Spot rate between euro and
500/550 = 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 = ?
.
17-8 $1 = 7.8 pesos; headphones = $15.00; Price of headphones in Mexico = ?
Ph = Pf(Spot rate).
17-12 rNom of 90-day U. S. risk-free securities = 5%; of 90-day German risk-free securities =
5.3%; Spot rate = 1 euro = $0.80; ft selling at premium or discount = ?
.
40.1$
ft
=
01325.1
0125.1
40.1$
ft
= 0.9993.
ft = $1.3990.
The forward rate is selling at a discount, since a euro buys fewer dollars in the forward
market than it does in the spot. In other words, in the spot market $1 would buy 1/1.40 =
0.7143 euros, but at the forward rate $1 would buy 1/1.3990 = 0.7148 euros; therefore,
the forward currency is said to be selling at a discount.
17-13 First, convert the pesos to dollars: D1 = (30 pesos)(0.10 dollars per peso) = 3 pesos.
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
peso)(1 – 0.04) = 0.096 dollars per peso. This is a growth rate of (0.096 – 0.10)/0.10 =
1050
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.
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
= 0.990381
Forward exchange rate = 1,039.90 won per U.S. $.
The 2-year exchange rate is calculated as:
rate exchange Forward
2
0325.1
website, in whole or in part.
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) = −1,050.00 million won.
Rate of return: Enter into your financial calculator or Excel cash flow register CF0 =
−1,050, CF1 = 727.93, CF2 = 617.97 and calculate IRR = 18.85%