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CHAPTER 21
INTERNATIONAL CORPORATE
FINANCE
Answers to Concepts Review and Critical Thinking Questions
6. The main advantage is the avoidance of the tariff. Additional advantages include being closer to the
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9. a. American exporters: Their situation in general improves because a sale of the exported goods for
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
Basic
1. Using the quotes from the table, we get:
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4. a. The U.S. dollar, since one Canadian dollar will buy:
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6. We can rearrange the interest rate parity condition to answer this question. The equation we will use
is:
7. If we invest in the U.S. for the next three months, we will have:
8. Using the relative purchasing power parity equation:
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10. a. If IRP holds, then:
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11. The international Fisher effect states that the real interest rate across countries is equal. We can
13. We need to find the change in the exchange rate over time so we need to use the relative purchasing
power parity relationship:
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Intermediate
14. First, we need to forecast the future spot rate for each of the next three years. From interest rate and
purchasing power parity, the expected exchange rate is:
15. a. Implicitly, it is assumed that interest rates won’t change over the life of the project, but the
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16. a. To construct the balance sheet in dollars, we need to convert the account balances to dollars. At
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Challenge
17. First, we need to construct the end of year balance sheet in solaris. Since the company has retained
18. a. The domestic Fisher effect is:
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d. For the home currency approach, we calculate the expected currency spot rate at time t as:
