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CHAPTER 31
INTERNATIONAL CORPORATE
FINANCE
Answers to Concepts Review and Critical Thinking Questions
1. a. The dollar is selling at a premium because it is more expensive in the forward market than in the
spot market (SF 1.11 versus SF 1.09).
3. a. The Australian dollar is expected to weaken relative to the dollar, because it will take more A$
4. No. For example, if a country’s currency strengthens, imports become cheaper (good), but its exports
become more expensive for others to buy (bad). The reverse is true for currency depreciation.
5. Additional advantages include being closer to the final consumer and, thereby, saving on
6. One key thing to remember is that dividend payments are made in the home currency. More generally,
7. a. False. If prices are rising faster in Great Britain, it will take more pounds to buy the same amount
of goods that one dollar can buy; the pound will depreciate relative to the dollar.
8. a. American exporters: Their situation in general improves because a sale of the exported goods for
a fixed number of euros will be worth more dollars.
American importers: Their situation in general worsens because the purchase of the imported
9. IRP is the most likely to hold because it presents the easiest and least costly means to exploit any
10. It all depends on whether the forward market expects the same appreciation over the period and
11. One possible reason investment in the foreign subsidiary might be preferred is if this investment
provides direct diversification that shareholders could not attain by investing on their own. Another
12. Yes, the firm should undertake the foreign investment. If, after taking into consideration all risks, a
project in a foreign country has a positive NPV, the firm should undertake it. Note that in practice, the
13. If the foreign currency depreciates, the U.S. parent will experience an exchange rate loss when the
14. False. If the financial markets are perfectly competitive, the difference between the Eurodollar rate
and the U.S. rate will be due to differences in risk and government regulation. Therefore, speculating
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:
a. $100(€.8523/$1) = €85.23
b. $1.1733
2. a. You would prefer £100, since:
(£100)($1.3258/£1) = $132.58
b. You would still prefer £100. Using the $/£ exchange rate and the SF/$ exchange rate to find the
3. a. F180 = ¥109.730(per $). The yen is selling at a premium because it is more expensive in the
forward market than in the spot market ($.009022 versus $.0091133).
4. a. The U.S. dollar, since one Canadian dollar will buy:
(Can$1)/(Can$1.27/$1) = $.7874
b. The cost in U.S. dollars is:
5. a. The cross rate in ¥/£ terms is:
(¥107/$1)($1.43/£1) = ¥153.01/£1
6. We can rearrange the interest rate parity condition to answer this question. The equation we will use
is:
RFC = (FT – S0)/S0 + RUS
7. If we invest in the U.S. for the next three months, we will have:
$30,000,000(1.0019)3 = $30,171,325.11
8. Using the relative purchasing power parity equation:
Ft = S0 × [1 + (hFC – hUS)]t
9. The profit will be the quantity sold, times the sales price minus the cost of production. The production
cost is in Singapore dollars, so we must convert this to U.S. dollars. Doing so, we find that if the
exchange rates stay the same, the profit will be:
Profit = 30,000[$115 – {(S$146.50)/(S$1.3566/$1)}]
10. a. If IRP holds, then:
F180 = (Kr 7.87)[1 + (.05 – .03)]1/2
F180 = Kr 7.9483
Kr 1.02758 – Kr 1.02435 = Kr .00322
11. The international Fisher effect states that the real interest rate across countries is equal. We can
rearrange the international Fisher effect as follows to answer this question:
RUS – hUS = RFC – hFC
12. a. The yen is expected to get stronger, since it will take fewer yen to buy one dollar in the future
than it does today.
13. We need to find the change in the exchange rate over time, so we need to use the relative purchasing
power parity relationship:
Ft = S0 × [1 + (hFC – hUS)]t
Using this relationship, we find the exchange rate in one year should be:
14. First, we need to forecast the future spot rate for each of the next three years. From interest rate and
So:
E(S2) = (1.0310/1.0290)2 ($1.19/€) = $1.1946/€
E(S3) = (1.0310/1.0290)3 ($1.19/€) = $1.1970/€
Now we can use these future spot rates to find the dollar cash flows. The dollar cash flow each year
will be:
15. a. Implicitly, it is assumed that interest rates won’t change over the life of the project, but the
exchange rate is projected to decline because the Euroswiss rate is lower than the Eurodollar rate.
b. We can use uncovered interest parity to calculate the dollar cash flows at each time. The equation
is:
E[ST] = (SF 1.17)[1 + (.05 – .06)]t
E[ST] = 1.17(.99)t
16. a. To construct the balance sheet in dollars, we need to convert the account balances to dollars. At
the current exchange rate, we get:
Assets = solaris 51,000 × ($/solaris 1.20) = $42,500.00
Debt = solaris 16,000 × ($/solaris 1.20) = $13,333.33
17. First, we need to construct the end of year balance sheet in solaris. Since the company has retained
earnings, the equity account will increase, which necessarily implies the assets will also increase by
the same amount. So, the balance sheet at the end of the year in solaris will be:
18. a. The domestic Fisher effect is:
1 + RUS = (1 + rUS)(1 + hUS)
1 + rUS = (1 + RUS)/(1 + hUS)
This relationship must hold for any country, that is:
RFC = 1.10(1.07/1.05) – 1 = .121
Next, we find the NPV in euros as:
