ch18_sm - CHAPTER18 INTERNATIONALASPECTSOF...

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CHAPTER 18 INTERNATIONAL ASPECTS OF FINANCIAL MANAGEMENT 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 (SFr 1.53 versus SFr 1.50). b. The franc is expected to depreciate relative to the dollar, because it will take more francs to buy one dollar in the future than it does today. c. Inflation in Switzerland is higher than in the United States, as are interest rates. 2. The exchange rate will increase, as it will take progressively more deutsche marks to purchase a dollar as the higher inflation in Russia will devalue the ruble mark. This is the relative PPP relationship. 3. a. The Australian dollar is expected to weaken relative to the dollar, because it will take more A$ in the future to buy one dollar than it does today. b. The inflation rate in Australia is higher. c. Nominal interest rates in Australia are higher; relative real rates in the two countries are the same. 4. A Yankee bond is most accurately described by d. 5. Either. 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 a currency depreciation. 6. Additional advantages include being closer to the final consumer and thereby saving on transportation, significantly lower wages, and less exposure to exchange rate risk. Disadvantages include political risk and costs of supervising distant operations. 7. One key thing to remember is that dividend payments are made in the home currency. More generally, it may be that the owners of the multinational are primarily domestic who are ultimately concerned about their wealth denominated in their home currency because, unlike a multinational, they are not internationally diversified. 8.
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ch18_sm - CHAPTER18 INTERNATIONALASPECTSOF...

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