Chapter17 - CHAPTER 17 International Business Finance...

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Unformatted text preview: CHAPTER 17 International Business Finance Multiple Choice: Conceptual International operations motivation 1. Which of the following international operations? Answer: e are reasons why companies a. To take advantage of lower production costs inexpensive labor. b. To develop new markets for their finished products. c. To better serve their primary customers. d. Because important raw materials are located abroad. e. All of the above. Multinational financial management 2. in Diff: E move regions Answer: e into of Diff: E Multinational financial management requires that a. The effects of changing currency values be included in financial analyses. b. Legal and economic differences be considered in financial decisions. c. Political risk be excluded from multinational corporate financial analyses. d. All of the above. e. Only a and b above. Currency depreciation 3. Answer: a Diff: E If the inflation rate in the United States is greater than the inflation rate in Sweden, other things held constant, the Swedish currency will a. b. c. d. e. Appreciate against the U.S. dollar. Depreciate against the U.S. dollar. Remain unchanged against the U.S. dollar. Appreciate against other major currencies. Appreciate against the dollar and other major currencies. Chapter 17 - Page 1 International bond markets 4. Answer: d Diff: M Which of the following statements is false? a. Any bond sold outside the country of the borrower is called an international bond. b. Foreign bonds and Eurobonds are two important types of international bonds. c. Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold. d. The term Eurobond specifically applies to any foreign bonds denominated in U.S. currency. e. None of the above. Interest rate parity 5. Answer: a Diff: M In Japan, 90-day securities have a 4 percent annualized return and 180day securities have a 5 percent annualized return. In the United States, 90- day securities have a 4 percent annualized return and 180day securities have an annualized return of 4.5 percent. All securities are of equal risk. Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most correct? a. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market. b. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market. c. The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market. d. Answers a and b are correct. e. Answers b and c are correct. Multiple Choice: Problems Exchange rates 6. Answer: b Diff: E If one Swiss franc can purchase $0.71 U.S. dollars, how many Swiss francs can one U.S. dollar buy? a. b. c. d. e. 0.71 1.41 1.00 2.81 0.50 Chapter 17 - Page 2 Exchange rates Answer: c Diff: E 7. If one U.S. dollar buys 1.64 German deutsche marks, how many dollars can you purchase for one German mark? a. b. c. d. e. 1.64 3.28 0.61 1.00 0.37 Currency appreciation 8. 311 288 144 267 156 yen yen yen yen yen Eurobonds versus domestic bonds Answer: d Diff: E A foreign investor who holds tax exempt Eurobonds paying 9 percent interest is considering investing in an equivalent risk domestic bond in a country with a 28 percent withholding tax on interest paid to foreigners. If 9 percent after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide that after-tax return? a. b. c. d. e. 9.00% 10.20% 11.28% 12.50% 13.57% Credit and exchange rate risk 10. Diff: E Suppose that 288 yen could be purchased in the foreign exchange market for two U.S. dollars today. If the yen is expected to depreciate by 8 percent tomorrow, how many yen could two U.S. dollars buy tomorrow? a. b. c. d. e. 9. Answer: a Answer: d Diff: E Solartech Corporation, a U.S. exporter, sold a solar heating station to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, Solartech agreed to make the bill payable in yen, thus agreeing to take on exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Solartech actually receive after it exchanged yen for U.S. dollars? a. b. c. d. e. $1,000,000 $1,025,000 $1,075,958 $ 929,404 $ 975,610 Chapter 17 - Page 3 Inventory value and exchange rates 11. Answer: b Diff: M A year ago, MC Hammer Company had inventory in Britain valued at 240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates? a. -$240,000 b. -$ 43,200 c. $ 0 d. $ 43,200 e. $ 47,473 Currency depreciation 12. Answer: d One British pound can purchase 1.82 U.S. dollars today in the foreign exchange market and currency forecasters predict that the U.S. dollar will depreciate by 12 percent against the pound over the next 30 days. How many dollars will a pound buy in 30 days? a. b. c. d. e. 1.82 3.64 1.12 2.04 1.63 Cross rates 13. Answer: e Diff: M Suppose exchange rates between U.S. dollars and Swiss francs is SF 1.41 = $1.00 and the exchange rate between the U.S. dollar and the German mark is $1.00 = 1.64 DM. What is the cross-rate of Swiss francs to German marks? a. b. c. d. e. 2.27 1.41 1.64 0.43 0.86 Cross rates 14. Diff: M Answer: b Diff: M Currently, 1 British pound equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 German marks. What is the cross exchange rate between the pound and the mark? a. b. c. d. e. 1 1 1 1 1 British British British British British Chapter 17 - Page 4 pound pound pound pound pound equals equals equals equals equals 3.2400 2.6244 1.8588 1.0000 0.3810 German German German German German marks marks marks marks marks Forward exchange rates 15. premium of 8% premium of 18% discount of 18% discount of 8% premium of 16% Exchange rates and asset value Answer: a Diff: M In 1985, a particular Japanese imported automobile sold for 1,476,000 yen or $8,200. If the car still sells for the same amount of yen today but the current exchange rate is 144 yen per dollar, what is the car selling for today in U.S. dollars? a. b. c. d. e. $10,250 $12,628 $ 8,200 $ 5,964 $13,525 Forward market hedge 17. Diff: M If the spot rate of the French franc is 5.51 francs per dollar and the 180-day forward rate is 5.97 francs per dollar, then the forward rate for the French franc is selling at a ________________ to the spot rate. a. b. c. d. e. 16. Answer: d Answer: e Diff: M Sunware Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Germany for 39,960 marks or $24,000, at the spot rate of 1.665 marks per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 marks. If the spot rate in 90 days is actually 1.638 marks, how much will the U.S. firm have saved in U.S. dollars by hedging its exchange rate exposure? a. -$396 b. -$243 c. $ 0 d. $243 e. $638 Purchasing power parity 18. Answer: d Diff: M A product sells for $750 in the United States. The exchange rate is such that $1 equals 1.65 German marks. If purchasing power parity (PPP) holds, what is the price of the product in Germany? a. 123.75 marks b. 454.55 marks c. 750.00 marks d. 1,237.50 marks e. 1,650.00 marks Chapter 17 - Page 5 Purchasing power parity 19. Answer: c Hockey skates sell in Canada for 105 Canadian dollars. Currently, 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States? a. b. c. d. e. $ 14.79 $ 71.00 $ 74.55 $ 85.88 $147.88 Purchasing power parity 20. Answer: e 1 1 1 1 1 U.S. U.S. U.S. U.S. U.S. dollar dollar dollar dollar dollar equals equals equals equals equals 0.69 0.85 1.21 1.29 1.44 Interest rate parity Swiss Swiss Swiss Swiss Swiss francs francs francs francs francs Answer: a Diff: M 90-day investments in Britain have a 6 percent annualized return and a 1.5 percent quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4 percent annualized return and a 1 percent quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate? a. b. c. d. e. 1 1 1 1 1 pound pound pound pound pound = = = = = $1.6582 $1.8000 $0.6031 $1.0000 $0.8500 Interest rate parity 22. Diff: M A box of candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate? a. b. c. d. e. 21. Diff: M Answer: d Diff: M In the spot market, 1 U.S. dollar equals 1.60 German marks. 6-month German securities have an annualized return of 6 percent (and therefore have a 6-month periodic return equal to 3 percent). 6-month U.S. securities have an annualized return of 6.5 percent and a periodic return of 3.25 percent. If interest rate parity holds, what is the dollar-mark exchange rate in the 180-day forward market? a. b. c. d. e. 1 1 1 1 1 dollar dollar dollar dollar dollar Chapter 17 - Page 6 = = = = = 0.6235 0.6265 1.0000 1.5961 1.6039 marks marks marks marks marks CHAPTER 17 Answers and Solutions 1. International operations motivation Answer: e Diff: E 2. Multinational financial management Answer: e Diff: E 3. Currency depreciation Answer: a Diff: E 4. International bond markets Answer: d Diff: M 5. Interest rate parity Answer: a Diff: M 6. Exchange rates Answer: b Diff: E Dollars should sell for 1/0.71, or 1.41 Swiss francs per dollar. 7. Exchange rates Answer: c Diff: E Answer: a Diff: E You can get 1/1.64, or 0.61 dollars for one mark. 8. Currency appreciation If one gets 288 yen for two dollars, the exchange rate is 144 yen per dollar. If the yen depreciates by 8 percent we would get more yen per dollar. One U.S. dollar will equal 144 × 1.08 = 155.5 yen. Two dollars yields 311 yen (2 × 155.5 yen = 311 yen). 9. Eurobonds versus domestic bonds Answer: d Diff: E Gross up the interest rate on the domestic bond: kd(pretax) = 0.09/(1 - 0.28) = 12.5%. Solution check: After-tax return: 12.5% - 0.28(12.5%) = 12.5% - 3.5% = 9.0%. 10. Credit and exchange rate risk Time line: 0 | Answer: d Diff: E 6 months | 143.5 million yen At spot rate 140.0 yen/$ → 1,025,000 US$ spot rate = 154.4 yen/$ $929,404.15 US$ Calculate the amount received in US dollars after the 143,500,000 yen are exchanged for dollars at the spot rate of 154.4 yen, when the invoice is paid. 143,500,000/154.4 = $929,404.15 ≈ $929,404. Chapter 17 - Page 7 11. Inventory value and exchange rates Answer: b Diff: M Answer: d Diff: M Inventory, this year = 240,000£ × $1.82 = $436,800 Inventory, last year = 240,000£ × $2.00 = 480,000 Loss = ($ 43,200 ) 12. Currency depreciation The British pound will appreciate against the dollar by 12 percent. 1£ = 1.82 US$ × 1.12 = 2.04 US$. 13. Cross rates Answer: e Diff: M Answer: b Diff: M SF/DM = (1.41/1) × (1/1.64) = 1.41/1.64 = 0.86 SF/DM. 14. Cross rates 1 British pound can be exchanged for 1.62 U.S. dollars. 1.62 U.S. dollars can then be exchanged for 2.6244 [(1.62)(1.62)] German marks. It follows that 1 pound is worth 2.6244 marks. 15. Forward exchange rates Answer: d Diff: M (5.97 - 5.51)/5.51 = 0.083 ≈ 8%. Because one can obtain more French francs for a dollar in the forward market, the forward currency is selling at an 8 percent discount to the spot rate. 16. Exchange rates and asset value Answer: a Diff: M Exchange rate in 1985 = 1,476,000/$8,200 = 180 yen per dollar. Today's exchange rate = 144 yen per dollar; 144/180 = 0.80. Today's price = $8,200/0.8 = $10,250. Alternatively, 1,476,000/144 = $10,250. 17. Forward market hedge Answer: e Diff: M Time line: 0 30 | | Spot rate 1.655 DM/US$ Forward rate 1.682 DM/US$ 60 | 90 Days | 39,960 DM 1.638 spot rate 90-day forward contract: $23,757.43 Calculate the cost of the forward contract at the forward rate: 39,960 DM/(1.682 DM/US$) = $23,757.43. Calculate the cost of purchasing exchange currency at the spot rate in 90 days to satisfy the payable: 39,960 DM/1.638 DM/US$ = $24,395.60. Calculate the savings from the forward market hedge: $24,395.60 - $23,757.43 = $638.17 ≈ $638. Chapter 17 - Page 8 18. Purchasing power parity $750 equals 1,237.50 [(750)(1.65)] marks. should cost the same in both markets. 19. Diff: M If PPP holds, the product Answer: c Diff: M 105 Canadian dollars equals 74.55 [(105)(0.71)] U.S. dollars. holds the skates should cost the same in both markets. 20. Purchasing power parity Answer: d If PPP Purchasing power parity Answer: e Diff: M If PPP holds, the candy should cost the same in each country, so that 28.80 Swiss francs equals 20 U.S. dollars. This relationship implies that 1 U.S. dollar equals 1.44 Swiss francs. 21. Interest rate parity Answer: a Diff: M From the interest rate parity formula it follows that e 0 = (ft)(1 + kf)/(1 + kh) = (1.65 dollars/pound)(1.015)/(1.01) = 1.6582 dollars/ pound. Another way to think of this is $1 invested today in the United States yields $1.01 90 days from now. Alternatively, investors could put their money in British securities. In this case, the investor would exchange today $1 for (1/1.6582) or 0.6031 pounds in the spot market. This money could be invested in Britain—after 90 days this investment would be worth 0.6031(1.015) = 0.6121 pounds. Given the forward exchange rate, 0.6121 pounds is worth $1.01 90 days from now. (0.6121 × 1.65 = $1.01.) 22. Interest rate parity Answer: d Diff: M From the interest rate parity formula it follows that f t = (eo)(1 + kh)/(1 + kf) = (0.6250 dollars/mark)(1.0325)/(1.03) = 0.6265 dollars/ mark, or 1.5961 marks per dollar. Another way to think of this is $1 invested today in the United States yields $1.0325 six months from now. Alternatively, investors could put their money in German securities. In this case, the investor would exchange $1 today for 1.6 marks. This money could be invested in Germany—after six months this investment would be worth 1.6480 marks [(1.6)(1.03)]. At a forward exchange rate of 1 dollar equals 1.5961 marks, 1.6480 marks would be worth $1.0325. Since the two investments produce the same return, interest rate parity holds. Chapter 17 - Page 9 ...
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