ch 19_Solutions - Chapter19 191...

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Chapter 19 Multinational Financial Management Answers to End-of-Chapter Questions 19-1 Taking into account differential labor costs abroad, transportation, tax advantages, and so forth,  U.S. corporations can maximize long-run profits. There are also nonprofit behavioral and strategic  considerations, such as maximizing market share and enhancing the prestige of corporate  officers. 19-2 A dollar will buy more euros. 19-3 There will be an excess supply of dollars in the foreign exchange markets, and thus, this will tend  to drive down the value of the dollar.  Foreign investments in the United States will increase. 19-4 The foreign project’s cash flows have to be converted to U.S. dollars, since the shareholders of  the U.S. corporation (assuming they are mainly U.S. residents) are interested in dollar returns.  This subjects them to exchange rate risk, and therefore requires an additional risk premium.  There is also a risk premium for political risk (mainly the risk of expropriation) that should be  included. 19-5 No, interest rate parity implies that an investment in the U.S. with the same risk as a similar  investment in a foreign country should have the same return.  Interest rate parity is expressed as  follows: . r 1 r 1 rate   exchange Spot  rate   exchange   Forward f h + + = Interest rate parity shows why a particular currency might be at a forward premium or discount.  A  currency is at a forward premium whenever domestic interest rates are higher than foreign  interest rates.  Discounts prevail if domestic interest rates are lower than foreign interest rates. If  these conditions do not hold, then arbitrage will soon force interest rates back to parity. 19-6 Purchasing power parity assumes there are neither transactions costs nor regulations that limit  the ability to buy and sell goods across different countries.  In many cases, these assumptions  are incorrect, which explains why PPP is often violated.  An additional complication, when  empirically testing to see whether PPP holds, is that products in different countries are rarely  Chapter 19:  Multinational Financial Management Answers and Solutions 1
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identical.  Frequently, there are real or perceived differences in quality, which can lead to price  differences in different countries. 19-7 A Eurodollar is a dollar deposit in a foreign bank, normally a European bank.  The foreign bank  need not be owned by foreigners—it only has to be located in a foreign country.  For example, a  Citibank subsidiary in Paris accepts Eurodollar deposits.  The Frenchman’s deposit at Chase  Manhattan Bank in New York is not a Eurodollar deposit.  However, if he transfers his deposit to a 
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