In 1990, General Electric acquired Tungsram Ltd., a Hungarian light bulb manufacturer.
Hungary's inflation rate was 28% in 1990 and 35% in 1991, while the forint (Hungary's
currency) was devalued 5% and 15%, respectively, during those years. Corresponding
As a foreign exchange trader at Sumitomo Bank, one of your customers would like a yen quote
on Australian dollars. Current market rates are:
What bid and ask yen cross rates would you quote on
1. Suppose that the forward ask price for March 20 on euros is $0.9127 at the same time that the
price of IMM euro futures for delivery on March 20 is $0.9145. How could an arbitrageur profit
from this situation? What will be the arbitrageur's profit per
Suppose the euro is quoted at 0.7064 80 in London, and the pound sterling is quoted at 1.6244-59
Is there a profitable arbitrage situation? Describe it.
Compute the percentage bid ask spreads on the pound and euro.
Suppose Dow Chemical receives quotes of $0.009369-71 for the yen and $0.03675-6 for the
Taiwan dollar (NT$).
How many U.S. dollars will Dow Chemical receive from the sale of 50 million?
What is the U.S. dollar cost to Dow Chemical of buying 1 billio
The $: exchange rate is 1 = $0.95, and the /SFr exchange rate is SFr 1 = 0.71. What
is the SFr/$ exchange rate?
Suppose the direct quote for sterling in New York is 1.1110 5. What is the direct quote for
dollars in London?
SFr1 = 0.71 x 0.
On January 10, Volkswagen agrees to import auto parts worth $7 million from the United States.
The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to
hedge its dollar position by entering into IMM futures contracts. T
Explain lockout provisions and yield-maintenance agreements. Does the inclusion of one or both
of these provisions affect the borrowers cost of debt financing? Explain.
A lockout provision prohibits prepayment of a commercial mortgage over a specif
Distinguish between recourse and nonrecourse financing.
When a note is used and the borrower has personal liability, the arrangement is known as
recourse financing. The borrower has personal responsibility for recourse debt, and, upon default
1. List at least six characteristics of a commercial loan application that the lender should
2. What is the difference in the present value of these two loan alternatives? Assume the
appropriate discount rate is 6 percent.
Discuss several differences between long-term commercial mortgages and their residential
Commercial mortgages have shorter terms than residential mortgages; five to ten- year terms are
common for commercial mortgages and residential m
Answer the following questions on financial leverage, value, and return:
Define financial risk
Should the investor select the origination LTV that maximizes the IRR on equity?
Explain why or why not
Financial risk refers to the risk that N
1. Consider the stand-alone locations favored by Walgreens for locating their drugstores.
In most cases, Walgreens does not own these properties. Instead, they lease the properties
on a long-term basis from institutional owners. What does Walgreens gain b
List and briefly describe the typical items included in a commercial mortgage loan application
Loan application packages typically include the following:
Loan application the specific document that serves as a request for funds.
Suppose Credit Suisse quotes spot and 90-day forward rates of $0.7957-60, 8-13.
What are the outright 90-day forward rates that Credit Suisse is quoting?
What is the forward discount or premium associated with buying 90-day Swiss francs?
Suppose Air France receives the following indirect quotes in New York: 0.92 - 3 and 0.63 - 4.
Given these quotes, what range of / bid and ask quotes in Paris will permit arbitrage?
Triangular arbitrage can take place in either of two ways: (1) Conv
Using the data in Exhibit 7.5, calculate the 30 day, 90 day, and 180 day forward discounts for the
Here are the relevant rates for the Canadian dollar:
C$1 = $0.7545
30 day forward:
C$1 = $0.7536
90 day forward:
C$1 = $0.7520
Assess the likely consequences of a declining dollar on Fluor Corporation, the international
construction engineering contractor based in Irvine, California. Most of Fluor's value added
involves project design and management; most of its costs are for U.S
South Korean companies such as Goldstar, Samsung, and Daewoo have captured more than 10%
of the U.S. color TV market with their small, low priced TV sets. They are also becoming more
significant exporters of videocassette recorders and small microwave ove
How is each type of risk used in the capital budgeting process?
Because managements primary goal is shareholder wealth maximization, the most relevant risk
for capital projects is market risk. However, creditors, customers, suppliers, and employees
Perform a sensitivity analysis on the unit sales, salvage value, and cost of capital for the project.
Assume that each of these variables can vary from its base case, or expected, value by plus and
minus 10, 20, and 30 percent. Include a sensitivity diagr
What is the primary weakness of sensitivity analysis? What is its primary usefulness?
The two primary disadvantages of sensitivity analysis are
It does not reflect the effects of diversification and
It does not incorporate any information a
Estimate the required net operating working capital for each year, and the cash flow due to investments in
net operating working capital.
The project requires a level of net operating working capital in the amount equal to 12% of the next years
Calculate the net cash flows for each year? Based on these cash flows, what are the projects
NPV, IRR, MIRR, and payback?
Do these indicators suggest that the project should be
The net cash flows are:
Calculate the after-tax salvage cash flow.
When the project is terminated at the end of year 4, the equipment can be sold for $25,000. But, since it
has been depreciated to a $0 book value, taxes must be paid on the full salvage value. For this pro
a. What is the worst-case NPV? The best-case NPV?
b. Use the worst-, most likely, and best-case NPVs and probabilities of occurrence to find the
projects expected NPV, standard deviation, and coefficient of variation.
We used a spreadsheet model to
Write down the formula that is used to calculate the yield to maturity on a 20-year 10%
coupon bond with $1,000 face value that sells for $2,000. Assume yearly coupons.
If there is a decline in interest rates, which would you rather be holding, long
On checking the Telerate screen, you see the following exchange rate and interest rate quotes:
a. Can you find an arbitrage opportunity?
What steps must you take to capitalize on it?
What is the profit per $1,000,000 arbitraged?
On Monday morning, an investor takes a long position in a pound futures contract that matures
on Wednesday afternoon. The agreed upon price is $1.78 for 62,500. At the close of trading on
Monday, the futures price has risen to $1.79. At Tuesday close, the
1. Describe the shaded property by government rectangular survey.
2. Some real estate industry persons have suggested that it is good to require a title Insurance
commitment as evidence of title for rural property, but that it satisfactory to use the less
The use of Torrens certificates, never large in the U.S., has diminished in recent years. Explain
how marketable title laws, recently adopted in many states, might have made Torrens certificates
less interesting and useful.
The idea of a Torrens ce
Explain the possible advantages of miniperm financing as opposed to traditional construction
financing followed by permanent financing.
A miniperm loan serves as a construction loan for a few years after the property is completed.
The typical term
Do you believe that the owners of properties contaminated by events that occur on another
property (gasoline leakage or spills, for example) should be responsible for cleaning up their
properties? Why or why not? If not, who should pay for the cleanup?
Accounts receivable balance (LO4) Barneys Antique Shop has annual credit sales of $1,080,000 and an
average collection period of 40 days. Assume a 360-day year. What is the companys average accounts
receivable balance? Accounts receivable are equal to the