CHAPTER 20INTERNATIONAL CORPORATEFINANCEAnswers to Concept Questions1.a.The dollar is selling at a premium because it is more expensive in the forward market than in thespot market (Fr 1.53 versus Fr 1.50).b.The franc is expected to depreciate relative to the dollar because it will take more francs to buyone dollar in the future than it does today.c.Inflation in Switzerland is higher than in the United States, as are nominal interest rates.2.The exchange rate will increase, as it will take progressively more pesos to purchase a dollar. This isthe 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 byd.5.Neither. For example, if a country’s currency strengthens, imports become cheaper (good), but itsexports become more expensive for others to buy (bad). The reverse is true for currency depreciation.6.Additional advantages include being closer to the final consumer and, thereby, saving ontransportation, significantly lower wages, and less exposure to exchange rate risk. Disadvantagesinclude 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 and are ultimately concernedabout their wealth denominated in their home currency because, unlike a multinational, they are notinternationally diversified.
