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units of a foreign currency that can be purchased by 1 unit of the home currency.
Indirect quotations are the reciprocal of the direct quotation, and direct quotations are the reciprocal of the
indirect quotation.
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A B C D E F G H I J K
11/23/2018
From a U.S. perspective, the quotes in the first column are called direct quotes because they are number of
(2) What is an indirect quotation? What is the indirect quotation for kronor (the plural of krona is kronor).
(3) The euro and British pound usually are quoted as direct quotes. Most other currencies are quoted as
indirect quotes. How would you calculate the indirect quote for a euro? How would you calculate the direct
quote for a krona?
Chapter 17. Mini Case for Multinational Financial Management
b. What are the six major factors which distinguish multinational financial management from financial
management as practiced by a purely domestic firm? Answer: See Chapter 17 Mini Case Show
c. Consider the following illustrative exchange rates.
(1) What is a direct quotation? What is the direct quote for euros?
U.S. Dollars Required to
Units of Foreign
With the growth in demand for exotic foods, Possum Products’ CEO Michael Munger is considering
expanding the geographic footprint of its line of dried and smoked low-fat opossum, ostrich, and venison
jerky snack packs. Historically, jerky products have performed well in the southern United States, but there
are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the
expansion carries some risk–Europeans may not be as accepting of opossum jerky as initial research
a. What is a multinational corporation? Why do firms expand into other countries? Answer: See Chapter 17
Mini Case Show
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Target Price = 1.75$ x 1.5
2.0 euros = 2.0 x 8.7500 kronor/euro
2.0 euros = 17.50 kronor
(5) Assume Possum Products can produce a package of jerky and ship it to France for $1.75. If the firm
wants a 50 percent markup on the product, what should the jerky sell for in France?
Exchange rate risk is the risk that the value of a cash flow in one currency translated from another currency
will decline due to a change in exchange rates.
(6) Now assume Possum Products begins producing the same package of jerky in France. The product costs
2.0 euros to produce and ship to Sweden, where it can be sold for 20 kronor. What is the dollar profit on the
sale?
(7) What is exchange rate risk?
A cross rate is the exchange rate between any two currencies not involving U.S. dollars. In practice, cross
rates are usually calculated from direct or indirect rates. That is, on the basis of U.S. dollar exchange rates.
(4) What is a cross rate? Calculate the two cross rates between euros and kronor.
Interest rate parity implies that investors should expect to earn the same return on similar-risk securities in all
countries:
Direct Forward Rate
=
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A B C D E F G H I J K
Suppose the kronor per dollar exchange rate changes.
Test for parity using the Interest Rate Parity Equation
rh = 0.03000
rf = 0.02000
1+rh
1+rf
f. What is the difference between spot rates and forward rates? When is the foreign currency forward rate
selling at a premium to the spot rate? At a discount? Answer: See Chapter 17 Mini Case Show
If interest rate parity holds, the computed forward rate would be the same as the observed forward rate, so
parity does not hold.
Direct Spot Rate
=
d. Briefly describe the current international monetary system. How does the current system differ from the
system that was in place prior to August 1971? Answer: See Chapter 17 Mini Case Show
e. What is a convertible currency? What problems arise when a multinational company operates in a country
whose currency is not convertible? Answer: See Chapter 17 Mini Case Show
Direct Forward Rate
= 3.632% per 180 days
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A B C D E F G H I J K
1000 x 0.8000 euro/dollar
= 800.00 euros
At end of 180 days, convert euro investment to dollars:
816.00 x 1.27000 dollars per euro
= $ 1,036.32
k. To what extent do average capital structures vary across different countries? Answer: See Chapter 17 Mini Case Show
Intital cost in million of yen = ¥1,000
Year 1 CF in yen = ¥500
Year 2 CF in yen = ¥800
U.S. project cost of capital = 10.0%
j. Briefly discuss the international capital markets. Answer: See Chapter 17 Mini Case Show
This is higher than return on U.S. security, so French securities have higher returns after
adjusting for exchange rates.
h.What is purchasing power parity? If a package of jerky costs $2.00 a liter in the United States and
purchasing power parity holds, what should be the price of the jerky package in France?
i. What impact does relative inflation have on interest rates and exchange rates? Answer: See Chapter 17 Mini
Case Show
= 816.00 euros