CH18 - CHAPTER 18 INTERNATIONAL ASPECTS OF FINANCIAL...

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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 (SF 1.53 versus SF 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 rubles to purchase a dollar as the higher inflation in Russia will devalue the ruble. 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 should be higher. c. Nominal interest rates in Australia should be higher; relative real rates in the two countries should be 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. The main advantage is the avoidance of the tariff. There are probably other advantages, but we don’t know about them. Disadvantages include political risk, the different exchange rate risk as Hynix now has to be concerned with the Taiwanese exchange rate as well, and costs of supervising distant operations, although ProMOS will provide much of the supervision. 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.
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8. 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. b. False. The forward market would already reflect the projected deterioration of the euro relative to the dollar. Only if you feel that there might be additional, unanticipated weakening of the euro that isn’t reflected in forward rates today will the forward hedge protect you against additional declines. c. True. The market would only be correct on average, while you would be correct all the time. 9. a. American exporters: their situation in general improves because a sale of the exported goods for a fixed number of pesos will be worth more dollars. American importers: their situation in general worsens because the purchase of the imported
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CH18 - CHAPTER 18 INTERNATIONAL ASPECTS OF FINANCIAL...

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