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Unformatted text preview: Chapter 26 Multinational Financial Management ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS Most of the questions are illustrated in the BOC spreadsheet model. 26-1 A purely domestic firm does not have to deal with exchange rates, different laws in different countries, transferring funds between subsidiaries in different countries, having to communicate in different languages, and so forth. All of these factors create complications and challenges for multinational firms. In spite of these challenges, there is a strong trend among corporations to “go global.” The primary motivation is profit—many firms can increase their rates of return on investment, and their stock prices, by going global. Some do it primarily to get raw materials; oil companies are an example. Others go global to expand their markets, which helps them cover huge development costs; this is true for producers of movies like Titanic. Others go global because production costs are lower overseas; this is true for most electronics firms. Still others buy from foreign suppliers; Wal-Mart and Nike are examples. Finally, banks, accounting firms, and other service companies are going global because their customers are doing so, and they must follow their customers or lose them. 26-2 (See the BOC model for data and examples of exchange rates.) From a U.S. perspective, an exchange rate tells us: a. Direct quotation: Number of dollars required to buy one unit of a foreign currency. b. Indirect quotation: Number of units of the foreign currency that can be bought with one dollar. Thus, the direct quotation for the euro in July 2001 (see the BOC model) was 0.8730, meaning that it took 87.3 cents to buy a euro, and the indirect quote was 1.1455, meaning that a dollar would buy 1.1455 euros. By March 2003, the euro had strengthened, and the dollar had weakened, to the point where it took 0.947 dollars to buy a euro, and it took only 1.056 euros to buy one dollar. The direct and indirect quotes are the reciprocals of one another, e.g., 1/0.947 = 1.056. c. Cross rates deal with exchange rates between countries other than the U.S., although the exchange rate between each of the countries being considered and the U.S. is typically used to calculate cross rates. The following formula (implemented in the Excel model) shows the number of pairs of exchange rates if N = 5 currencies are being analyzed: Answers and Solutions: 26 - 1 Number of pairs with N = 250 currencies: N i N 1 i- ∑ = = 5 i 5 1 i- ∑ = = 15 – 5 = 10. Now note that if there were 250 countries, each with its own currency, there would be 31,125 different exchange rates, which would be a lot to follow and keep track of. However, with things benchmarked off the dollar, there would only be 249 basic exchange rates, and all the cross rates could be found from the dollar exchange rates....
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This note was uploaded on 08/29/2009 for the course FM Finance taught by Professor Unknown during the Spring '09 term at DeVry Addison.
- Spring '09