国际财务管理答案

SolutionsforInternationalCorporateFinance2Chapter14Chapter26Chapter38Chapter412Chapter514Chapter616Chapter718Chapter821Chapter923Chapter1026Chapter1129Chapter12Chapter15.InternationalBusinessMethods.SnyderGolfCo.,aU.S.firmthatsellshigh-qualitygolfclubsintheU.S.,wantstoexpandinternationallybysellingthesamegolfclubsinBrazil.a.Describethetradeoffsthatareinvolvedforeachmethod(suchasexporting,directforeigninvestment,etc.)thatSnydercouldusetoachieveitsgoal.ANSWER:Snydercanexporttheclubs,butthetransportationexpensesmaybehigh.IfcouldestablishasubsidiaryinBraziltoproduceandselltheclubs,butthismayrequirealargeinvestmentoffunds.Itcoulduselicensing,inwhichitspecifiestoaBrazilianfirmhowtoproducetheclubs.Inthisway,itdoesnothavetoestablishitsownsubsidiarythere.b.Whichmethodwouldyourecommendforthisfirm?Justifyyourrecommendation.ANSWER:IftheamountofgolfclubstobesoldinBrazilissmall,itmaydecidetoexport.However,iftheexpectedsaleslevelishigh,itmaybenefitfromlicensing.Ifitisconfidentthattheexpectedsaleslevelwillremainhigh,itmaybewillingtoestablishasubsidiary.ThewagesarelowerinBrazil,andthelargeinvestmentneededtoestablishasubsidiarymaybeworthwhile.8.ComparativeAdvantage.a.Explainhowthetheoryofcomparativeadvantagerelatestotheneedforinternationalbusiness.ANSWER:Thetheoryofcomparativeadvantageimpliesthatcountriesshouldspecializeinproduction,therebyrelyingonothercountriesforsomeproducts.Consequently,thereisaneedforinternationalbusiness.b.ExplainhowtheproductcycletheoryrelatestothegrowthofanMNC.ANSWER:Theproductcycletheorysuggeststhatatsomepointintime,thefirmwillattempttocapitalizeonitsperceivedadvantagesinmarketsotherthanwhereitwasinitiallyestablished.10.ValuationofWal-Mart’sInternationalBusiness.InadditiontoallofitsstoresintheU.S.,Wal-Marthas11storesinArgentina,24storesinBrazil,214storesinCanada,29storesinChina,92storesinGermany,15storesinSouthKorea,611storesinMexico,and261storesintheU.K.ConsiderthevalueofWal-Martasbeingcomposedoftwoparts,aU.S.part(duetobusinessintheU.S.)andanon-U.S.part(duetobusinessinothercountries).Explainhowtodeterminethepresentvalue(indollars)ofthenon-U.S.partassumingthatyouhadaccesstoallthedetailsofWal-MartbusinessesoutsidetheU.S.ANSWER:Thenon-U.S.partcanbemeasuredasthepresentvalueoffuturedollarcashflowsresultingfromthenon-U.S.businesses.Basedonrecentearningsdataforeachstoreandapplyinganexpectedgrowthrate,youcanestimatetheremittedearningsthatwillcomefromeachcountryineachyearinthefuture.Youcanconvertthosecashflowstodollarsusingaforecastedexchangerateperyear.Determinethepresentvalueofcashflowsofallstoreswithinonecountry.Thenrepeattheprocessforothercountries.Thenaddupallthepresentvaluesthatyouestimatedtoderiveaconsolidatedpresentvalueofallnon-U.S.subsidiaries.15.InternationalJointVenture.Anheuser-Busch,theproducerofBudweiserandotherbeers,hasrecentlyexpandedintoJapanbyengaginginajointventurewithKirinBrewery,thelargestbreweryinJapan.ThejointventureenablesAnheuser-BuschtohaveitsbeerdistributedthroughKirin’sdistributionchannelsinJapan.Inaddition,itcanutilizeKirin’sfacilitiestoproducebeerthatwillbesoldlocally.Inreturn,Anheuser-BuschprovidesinformationabouttheAmericanbeermarkettoKirin.a.ExplainhowthejointventurecanenableAnheuser-Buschtoachieveitsobjectiveofmaximizingshareholderwealth.ANSWER:ThejointventurecreatesawayforAnheuser-BuschtodistributeBudweiserthroughoutJapan.ItenablesAnheuser-BuschtopenetratetheJapanesemarketwithoutrequiringasubstantialinvestmentinJapan.b.Explainhowthejointventurecanlimittheriskoftheinternationalbusiness.ANSWER:ThejointventurehaslimitedriskbecauseAnheuser-BuschdoesnotneedtoestablishitsowndistributionnetworkinJapan.Thus,Anheuser-Buschmaybeabletouseasmallerinvestmentfortheinternationalbusiness,andthereisahigherprobabilitythattheinternationalbusinesswillbesuccessful.c.Manyinternationaljointventuresareintendedtocircumventbarriersthatnormallypreventforeigncompetition.WhatbarrierinJapanisAnheuser-Buschcircumventingasaresultofthejointventure?WhatbarrierintheUnitedStatesisKirincircumventingasaresultofthejointventure?ANSWER:Anheuser-BuschisabletobenefitfromKirin’sdistributionsysteminJapan,whichwouldnotnormallybesoaccessible.KirinisabletolearnmoreabouthowAnheuser-Buschexpandeditsproductacrossnumerouscountries,andthereforebreaksthroughan“information”barrier.d.ExplainhowAnheuser-BuschcouldlosesomeofitsmarketshareincountriesoutsideJapanasaresultofthisparticularjointventure.ANSWER:Anheuser-BuschcouldlosesomeofitsmarketsharetoKirinasaresultofexplainingitsworldwideexpansionstrategiestoKirin.However,itappearsthatAnheuser-Buschexpectsthepotentialbenefitsofthejointventuretooutweighanypotentialadverseeffects.24.GlobalCompetition.Explainwhymorestandardizedproductspecificationsacrosscountriescanincreaseglobalcompetition.ANSWER:Standardizedproductspecificationsallowfirmstomoreeasilyexpandtheirbusinessacrossothercountries,whichincreasesglobalcompetition.Chapter24.FreeTrade.Therehasbeenconsiderablemomentumtoreduceorremovetradebarriersinanefforttoachieve“freetrade.”Yet,onedisgruntledexecutiveofanexportingfirmstated,“Freetradeisnotconceivable;wearealwaysatthemercyoftheexchangerate.Anycountrycanusethismechanismtoimposetradebarriers.”Whatdoesthisstatementmean?ANSWER:Thisstatementimpliesthateveniftherewerenoexplicitbarriers,agovernmentcouldattempttomanipulateexchangeratestoalevelthatwouldeffectivelyreduceforeigncompetition.Forexample,aU.S.firmmaybediscouragedfromattemptingtoexporttoJapanifthevalueofthedollarisveryhighagainsttheyen.ThepricesoftheU.S.goodsfromtheJapaneseperspectivearetoohighbecauseofthestrongdollar.ThereversesituationcouldalsobepossibleinwhichaJapaneseexportingfirmispricedoutoftheU.S.marketbecauseofastrongyen(weakdollar).[Answerisbasedonopinion.]8.InternationalInvestments.InrecentyearsmanyU.S.-basedMNCshaveincreasedtheirinvestmentsinforeignsecurities,whicharenotassusceptibletonegativeshocksintheU.S.market.Also,whenMNCsbelievethatU.S.securitiesareovervalued,theycanpursuenon-U.S.securitiesthataredrivenbyadifferentmarket.Moreover,inperiodsoflowU.S.interestrates,U.S.corporationstendtoseekinvestmentsinforeignsecurities.Ingeneral,theflowoffundsintoforeigncountriestendstodeclinewhenU.S.investorsanticipateastrongdollar.a.ExplainhowexpectationsofastrongdollarcanaffectthetendencyofU.S.investorstoinvestabroad.ANSWER:AweakdollarwoulddiscourageU.S.investorsfrominvestingabroad.Itcancausetheinvestorstopurchaseforeigncurrency(wheninvesting)atahigherexchangeratethantheexchangerateatwhichtheywouldsellthecurrency(whentheinvestmentisliquidated).b.ExplainhowlowU.S.interestratescanaffectthetendencyofU.S.-basedMNCstoinvestabroad.ANSWER:LowU.S.interestratescanencourageU.S.-basedMNCstoinvestabroad,asinvestorsseekhigherreturnsontheirinvestmentthantheycanearnintheU.S.c.Ingeneralterms,whatistheattractionofforeigninvestmentstoU.S.investors?ANSWER:Themainattractionispotentiallyhigherreturns.TheinternationalstockscanoutperformU.S.stocks,andinternationalbondscanoutperformU.S.bonds.However,thereisnoguaranteethatthereturnsoninternationalinvestmentswillbesofavorable.Someinvestorsmayalsopursueinternationalinvestmentstodiversifytheirinvestmentportfolio,whichcanpossiblyreducerisk.10.ExchangeRateEffectsonTrade.a.ExplainwhyastrongerdollarcouldenlargetheU.S.balanceoftradedeficit.ExplainwhyaweakerdollarcouldaffecttheU.S.balanceoftradedeficit.ANSWER:AstrongerdollarmakesU.S.exportsmoreexpensivetoimportersandmayreduceimports.ItmakesU.S.importscheapandmayincreaseU.S.imports.Aweakerhomecurrencyincreasesthepricesofimportspurchasedbythehomecountryandreducesthepricespaidbyforeignbusinessesforthehomecountry’sexports.Thisshouldcauseadecreaseinthehomecountry’sdemandforimportsandanincreaseintheforeigndemandforthehomecountry’sexports,andthereforeincreasethecurrentaccount.However,thisrelationshipcanbedistortedbyotherfactors.b.Itissometimessuggestedthatafloatingexchangeratewilladjusttoreduceoreliminateanycurrentaccountdeficit.Explainwhythisadjustmentwouldoccur.ANSWER:Acurrentaccountdeficitreflectsanetsaleofthehomecurrencyinexchangeforothercurrencies.Thisplacesdownwardpressureonthathomecurrency’svalue.Ifthecurrencyweakens,itwillreducethehomedemandforforeigngoods(sincegoodswillnowbemoreexpensive),andwillincreasethehomeexportvolume(sinceexportswillappearcheapertoforeigncountries).c.Whydoestheexchangeratenotalwaysadjusttoacurrentaccountdeficit?ANSWER:Insomecases,thehomecurrencywillremainstrongeventhoughacurrentaccountdeficitexists,sinceotherfactors(suchasinternationalcapitalflows)canoffsettheforcesplacedonthecurrencybythecurrentaccount.13.EffectsofTariffs.AssumeasimpleworldinwhichtheU.S.exportssoftdrinksandbeertoFranceandimportswinefromFrance.IftheU.S.imposeslargetariffsontheFrenchwine,explainthelikelyimpactonthevaluesoftheU.S.beveragefirms,U.S.wineproducers,theFrenchbeveragefirms,andtheFrenchwineproducers.ANSWER:TheU.S.wineproducersbenefitfromtheU.S.tariffs,whiletheFrenchwineproducersareadverselyaffected.TheFrenchgovernmentwouldlikelyretaliatebyimposingtariffsontheU.S.beveragefirms,whichwouldadverselyaffecttheirvalue.TheFrenchbeveragefirmswouldbenefit.15.DemandforExports.ArelativelysmallU.S.balanceoftradedeficitiscommonlyattributedtoastrongdemandforU.S.exports.WhatdoyouthinkistheunderlyingreasonforthestrongdemandforU.S.exports?ANSWER:ThestrongdemandforU.S.exportsiscommonlyattributedtostrongforeigneconomiesortoaweakdollar.Chapter35.InternationalFinancialMarkets.Recently,Wal-MartestablishedtworetailoutletsinthecityofShenzhen,China,whichhasapopulationof3.7million.Theseoutletsaremassiveandcontainproductspurchasedlocallyaswellasimports.AsWal-MartgeneratesearningsbeyondwhatitneedsinShenzhen,itmayremitthoseearningsbacktotheUnitedStates.Wal-MartislikelytobuildadditionaloutletsinShenzhenorinotherChinesecitiesinthefuture.a.ExplainhowtheWal-MartoutletsinChinawouldusethespotmarketinforeignexchange.ANSWER:TheWal-MartstoresinChinaneedothercurrenciestobuyproductsfromothercountries,andmustconverttheChinesecurrency(yuan)intotheothercurrenciesinthespotmarkettopurchasetheseproducts.Theyalsocouldusethespotmarkettoconvertexcessearningsdenominatedinyuanintodollars,whichwouldberemittedtotheU.S.parent.b.ExplainhowWal-MartmightutilizetheinternationalmoneymarketwhenitisestablishingotherWal-MartstoresinAsia.ANSWER:Wal-MartmayneedtomaintainsomedepositsintheEurocurrencymarketthatcanbeused(whenneeded)tosupportthegrowthofWal-Martstoresinvariousforeignmarkets.WhensomeWal-Martstoresinforeignmarketsneedfunds,theyborrowfrombanksintheEurocurrencymarket.Thus,theEurocurrencymarketservesasadepositorlendingsourceforWal-MartandotherMNCsonashort-termbasis.c.ExplainhowWal-Martcouldusetheinternationalbondmarkettofinancetheestablishmentofnewoutletsinforeignmarkets.ANSWER:Wal-MartcouldissuebondsintheEurobondmarkettogeneratefundsneededtoestablishnewoutlets.Thebondsmaybedenominatedinthecurrencythatisneeded;then,oncethestoresareestablished,someofthecashflowsgeneratedbythosestorescouldbeusedtopayinterestonthebonds.11.ForeignExchange.YoujustcamebackfromCanada,wheretheCanadiandollarwasworth$.70.YoustillhaveC$200fromyourtripandcouldexchangethemfordollarsattheairport,buttheairportforeignexchangedeskwillonlybuythemfor$.60.Nextweek,youwillbegoingtoMexicoandwillneedpesos.Theairportforeignexchangedeskwillsellyoupesosfor$.10perpeso.YoumetatouristattheairportwhoisfromMexicoandisonhiswaytoCanada.HeiswillingtobuyyourC$200for130pesos.ShouldyouaccepttheofferorcashtheCanadiandollarsinattheairport?Explain.ANSWER:Exchangewiththetourist.IfyouexchangetheC$forpesosattheforeignexchangedesk,thecross-rateis$.60/$10=6.Thus,theC$200wouldbeexchangedfor120pesos(computedas200×6).IfyouexchangeCanadiandollarsforpesoswiththetourist,youwillreceive130pesos.15.ExchangeRateEffectsonBorrowing.ExplainhowtheappreciationoftheJapaneseyenagainsttheU.S.dollarwouldaffectthereturntoaU.S.firmthatborrowedJapaneseyenandusedtheproceedsforaU.S.project.ANSWER:IftheJapaneseyenappreciatesovertheborrowingperiod,thisimpliesthattheU.S.firmconvertedyentoU.S.dollarsatalowerexchangeratethantherateatwhichitpaidforyenatthetimeitwouldrepaytheloan.Thus,itisadverselyaffectedbytheappreciation.Itscostofborrowingwillbehigherasaresultofthisappreciation.20.InterestRates.Whydointerestratesvaryamongcountries?WhyareinterestratesnormallysimilarforthoseEuropeancountriesthatusetheeuroastheircurrency?Offerareasonwhythegovernmentinterestrateofonecountrycouldbeslightlyhigherthanthatofthegovernmentinterestrateofanothercountry,eventhoughtheeuroisthecurrencyusedinbothcountries.ANSWER:Interestratesineachcountryarebasedonthesupplyoffundsanddemandforfundsforagivencurrency.However,thesupplyanddemandconditionsfortheeuroaredictatedbyallparticipatingcountriesinaggregate,anddonotvaryamongparticipatingcountries.Yet,thegovernmentinterestrateinonecountrythatusestheeurocouldbeslightlyhigherthanothersthatusetheeuroifitissubjecttodefaultrisk.Thehigherinterestratewouldreflectariskpremium.21.ForwardContract.TheWolfpackCorporationisaU.S.exporterthatinvoicesitsexportstotheUnitedKingdominBritishpounds.Ifitexpectsthatthepoundwillappreciateagainstthedollarinthefuture,shouldithedgeitsexportswithaforwardcontract?Explain.ANSWER:Theforwardcontractcanhedgefuturereceivablesorpayablesinforeigncurrenciestoinsulatethefirmagainstexchangeraterisk.Yet,inthiscase,theWolfpackCorporationshouldnothedgebecauseitwouldbenefitfromappreciationofthepoundwhenitconvertsthepoundstodollars.Chapter43.InflationEffectsonExchangeRates.AssumethattheU.S.inflationratebecomeshighrelativetoCanadianinflation.Otherthingsbeingequal,howshouldthisaffectthe(a)U.S.demandforCanadiandollars,(b)supplyofCanadiandollarsforsale,and(c)equilibriumvalueoftheCanadiandollar?ANSWER:DemandforCanadiandollarsshouldincrease,supplyofCanadiandollarsforsaleshoulddecrease,andtheCanadiandollar’svalueshouldincrease.12.FactorsAffectingExchangeRates.MexicotendstohavemuchhigherinflationthantheUnitedStatesandalsomuchhigherinterestratesthantheUnitedStates.InflationandinterestratesaremuchmorevolatileinMexicothaninindustrializedcountries.ThevalueoftheMexicanpesoistypicallymorevolatilethanthecurrenciesofindustrializedcountriesfromaU.S.perspective;ithastypicallydepreciatedfromoneyeartothenext,butthedegreeofdepreciationhasvariedsubstantially.Thebid/askspreadtendstobewiderforthepesothanforcurrenciesofindustrializedcountries.a.Identifythemostobviouseconomicreasonforthepersistentdepreciationofthepeso.ANSWER:ThehighinflationinMexicoplacescontinualdownwardpressureonthevalueofthepeso.b.Highinterestratesarecommonlyexpectedtostrengthenacountry’scurrencybecausetheycanencourageforeigninvestmentinsecuritiesinthatcountry,whichresultsintheexchangeofothercurrenciesforthatcurrency.Yet,thepeso’svaluehasdeclinedagainstthedollarovermostyearseventhoughMexicaninterestratesaretypicallymuchhigherthanU.S.interestrates.Thus,itappearsthatthehighMexicaninterestratesdonotattractsubstantialU.S.investmentinMexico’ssecurities.WhydoyouthinkU.S.investorsdonottrytocapitalizeonthehighinterestratesinMexico?ANSWER:ThehighinterestratesinMexicoresultfromexpectationsofhighinflation.Thatis,therealinterestrateinMexicomaynotbeanyhigherthantheU.S.realinterestrate.Giventhehighinflationaryexpectations,U.S.investorsrecognizethepotentialweaknessofthepeso,whichcouldmorethanoffsetthehighinterestrate(whentheyconvertthepesosbacktodollarsattheendoftheinvestmentperiod).Therefore,thehighMexicaninterestratesdonotencourageU.S.investmentinMexicansecurities,anddonothelptostrengthenthevalueofthepeso.c.Whydoyouthinkthebid/askspreadishigherforpesosthanforcurrenciesofindustrializedcountries?HowdoesthisaffectaU.S.firmthatdoessubstantialbusinessinMexico?ANSWER:Thebid/askspreadiswiderbecausethebanksthatprovideforeignexchangeservicesaresubjecttomoreriskwhentheymaintaincurrenciessuchasthepesothatcoulddeclineabruptlyatanytime.Awiderbid/askspreadadverselyaffectstheU.S.firmthatdoesbusinessinMexicobecauseitincreasesthetransactionscostsassociatedwithconversionofdollarstopesos,orpesostodollars.14.AggregateEffectsonExchangeRates.AssumethattheUnitedStatesinvestsheavilyingovernmentandcorporatesecuritiesofCountryK.Inaddition,residentsofCountryKinvestheavilyintheUnitedStates.Approximately$10billionworthofinvestmenttransactionsoccurbetweenthesetwocountrieseachyear.Thetotaldollarvalueoftradetransactionsperyearisabout$8million.Thisinformationisexpectedtoalsoholdinthefuture.BecauseyourfirmexportsgoodstoCountryK,yourjobasinternationalcashmanagerrequiresyoutoforecastthevalueofCountryK’scurrency(the“krank”)withrespecttothedollar.Explainhoweachofthefollowingconditionswillaffectthevalueofthekrank,holdingotherthingsequal.Then,aggregatealloftheseimpactstodevelopanoverallforecastofthekrank’smovementagainstthedollar.a.U.S.inflationhassuddenlyincreasedsubstantially,whileCountryK’sinflationremainslow.ANSWER:IncreasedU.S.demandforthekrank.Decreasedsupplyofkranksforsale.Upwardpressureinthekrank’svalue.b.U.S.interestrateshaveincreasedsubstantially,whileCountryK’sinterestratesremainlow.Investorsofbothcountriesareattractedtohighinterestrates.ANSWER:DecreasedU.S.demandforthekrank.Increasedsupplyofkranksforsale.Downwardpressureonthekrank’svalue.c.TheU.S.incomelevelincreasedsubstantially,whileCountryK’sincomelevelhasremainedunchanged.ANSWER:IncreasedU.S.demandforthekrank.Upwardpressureonthekrank’svalue.d.TheU.S.isexpectedtoimposeasmalltariffongoodsimportedfromCountryK.ANSWER:ThetariffwillcauseadecreaseintheUnitedStates’desireforCountryK’sgoods,andwillthereforereducethedemandforkranksforsale.Downwardpressureonthekrank’svalue.e.Combineallexpectedimpactstodevelopanoverallforecast.ANSWER:Twoofthescenariosdescribedaboveplaceupwardpressureonthevalueofthekrank.However,thesescenariosarerelatedtotrade,andtradeflowsarerelativelyminorbetweentheU.S.andCountryK.Theinterestratescenarioplacesdownwardpressureonthekrank’svalue.SincetheinterestratesaffectcapitalflowsandcapitalflowsdominatetradeflowsbetweentheU.S.andCountryK,theinterestratescenarioshouldoverwhelmallotherscenarios.Thus,whenconsideringtheimportanceofimplicationsofallscenarios,thekrankisexpectedtodepreciate.22.Speculation.BlueDemonBankexpectsthattheMexicanpesowilldepreciateagainstthedollarfromitsspotrateof$.15to$.14in10days.Thefollowinginterbanklendingandborrowingratesexist: Currency LendingRate BorrowingRate U.S.dollar 8.0% 8.3% Mexicanpeso 8.5% 8.7%AssumethatBlueDemonBankhasaborrowingcapacityofeither$10millionor70millionpesosintheinterbankmarket,dependingonwhichcurrencyitwantstoborrow.a.HowcouldBlueDemonBankattempttocapitalizeonitsexpectationswithoutusingdepositedfunds?Estimatetheprofitsthatcouldbegeneratedfromthisstrategy.ANSWER:BlueDemonBankcancapitalizeonitsexpectationsaboutpesos(MXP)asfollows:1.BorrowMXP70million2.ConverttheMXP70milliontodollars:MXP70,000,000×$.15=$10,500,0003.Lendthedollarsthroughtheinterbankmarketat8.0%annualizedovera10-dayperiod.Theamountaccumulatedin10daysis:$10,500,000×[1+(8%×10/360)]=$10,500,000×[1.002222]=$10,523,3334.Repaythepesoloan.Therepaymentamountonthepesoloanis:MXP70,000,000×[1+(8.7%×10/360)]=70,000,000×[1.002417]=MXP70,169,1675.Basedontheexpectedspotrateof$.14,theamountofdollarsneededtorepaythepesoloanis:MXP70,169,167×$.14=$9,823,6836.Afterrepayingtheloan,BlueDemonBankwillhaveaspeculativeprofit(ifitsforecastedexchangerateisaccurate)of:$10,523,333–$9,823,683=$699,650b.Assumealltheprecedinginformationwiththisexception:BlueDemonBankexpectsthepesotoappreciatefromitspresentspotrateof$.15to$.17in30days.Howcoulditattempttocapitalizeonitsexpectationswithoutusingdepositedfunds?Estimatetheprofitsthatcouldbegeneratedfromthisstrategy.ANSWER:BlueDemonBankcancapitalizeonitsexpectationsasfollows:1.Borrow$10million2.Convertthe$10milliontopesos(MXP):$10,000,000/$.15=MXP66,666,6673.Lendthepesosthroughtheinterbankmarketat8.5%annualizedovera30-dayperiod.Theamountaccumulatedin30daysis:MXP66,666,667×[1+(8.5%×30/360)]=66,666,667×[1.007083]=MXP67,138,8894.Repaythedollarloan.Therepaymentamountonthedollarloanis:$10,000,000×[1+(8.3%×30/360)]=$10,000,000×[1.006917]=$10,069,1705.Convertthepesostodollarstorepaytheloan.Theamountofdollarstobereceivedin30days(basedontheexpectedspotrateof$.17)is:MXP67,138,889×$.17=$11,413,6116.Theprofitsaredeterminedbyestimatingthedollarsavailableafterrepayingtheloan:$11,413,611–$10,069,170=$1,344,44123.SpeculationDiamondBankexpectsthattheSingaporedollarwilldepreciateagainstthedollarfromitsspotrateof$.43to$.42in60days.Thefollowinginterbanklendingandborrowingratesexist: Currency LendingRate BorrowingRate U.S.dollar 7.0% 7.2% Singaporedollar 22.0% 24.0%DiamondBankconsidersborrowing10millionSingaporedollarsintheinterbankmarketandinvestingthefundsindollarsfor60days.Estimatetheprofits(orlosses)thatcouldbeearnedfromthisstrategy.ShouldDiamondBankpursuethisstrategy?ANSWER:BorrowS$10,000,000andconverttoU.S.$:S$10,000,000×$.43=$4,300,000Investfundsfor60days.TherateearnedintheU.S.for60daysis:7%×(60/360)=1.17%Totalamountaccumulatedin60days:$4,300,000×(1+.0117)=$4,350,310ConvertU.S.$backtoS$in60days:$4,350,310/$.42=S$10,357,881Theratetobepaidonloanis:.24×(60/360)=.04AmountowedonS$loanis:S$10,000,000×(1+.04)=S$10,400,000Thisstrategyresultsinaloss:S$10,357,881–S$10,400,000=–S$42,119DiamondBankshouldnotpursuethisstrategy.Chapter52.RiskofCurrencyFutures.Currencyfuturesmarketsarecommonlyusedasameansofcapitalizingonshiftsincurrencyvalues,becausethevalueofafuturescontracttendstomoveinlinewiththechangeinthecorrespondingcurrencyvalue.Recently,manycurrenciesappreciatedagainstthedollar.Mostspeculatorsanticipatedthatthesecurrencieswouldcontinuetostrengthenandtooklargebuypositionsincurrencyfutures.However,theFedintervenedintheforeignexchangemarketbyimmediatelysellingforeigncurrenciesinexchangefordollars,causinganabruptdeclineinthevaluesofforeigncurrencies(asthedollarstrengthened).Participantsthathadpurchasedcurrencyfuturescontractsincurredlargelosses.OnefloorbrokerrespondedtotheeffectsoftheFed'sinterventionbyimmediatelyselling300futurescontractsonBritishpounds(withavalueofabout$30million).Suchactionscausedevenmorepanicinthefuturesmarket.a.Explainwhythecentralbanksinterventioncausedsuchpanicamongcurrencyfuturestraderswithbuypositions.ANSWER:Futurespricesonpoundsroseintandemwiththevalueofthepound.However,whencentralbanksintervenedtosupportthedollar,thevalueofthepounddeclined,andsodidvaluesoffuturescontractsonpounds.Sotraderswithlong(buy)positionsinthesecontractsexperiencedlossesbecausethecontractvaluesdeclined.b.Explainwhythefloorbrokerswillingnesstosell300poundfuturescontractsatthegoingmarketratearousedsuchconcern.Whatmightthisactionsignaltootherbrokers?ANSWER:Normally,thisorderwouldhavebeensoldinpieces.Thisactioncouldsignaladesperatesituationinwhichmanyinvestorssellfuturescontractsatanyprice,whichplacesmoredownwardpressureoncurrencyfutureprices,andcouldcauseacrisis.c.Explainwhyspeculatorswithshort(sell)positionscouldbenefitasaresultofthecentralbanksintervention.ANSWER:ThecentralbankinterventionplaceddownwardpressureonthepoundandotherEuropeancurrencies.Thus,thevaluesoffuturescontractsonthesecurrenciesdeclined.Tradersthathadshortpositionsinfutureswouldbenefitbecausetheycouldnowcloseouttheirshortpositionsbypurchasingthesamecontractsthattheyhadsoldearlier.Sincethepricesoffuturescontractsdeclined,theywouldpurchasethecontractsforalowerpricethanthepriceatwhichtheyinitiallysoldthecontracts.d.Sometraderswithbuypositionsmayhaverespondedimmediatelytothecentralbanksinterventionbysellingfuturescontracts.Whywouldsomespeculatorswithbuypositionsleavetheirpositionsunchangedorevenincreasetheirpositionsbypurchasingmorefuturescontractsinresponsetothecentralbanksintervention?ANSWER:Centralbankinterventionsometimeshasonlyatemporaryeffectonexchangerates.Thus,theEuropeancurrenciescouldstrengthenafteratemporaryeffectcausedbycentralbankintervention.Tradershavetopredictwhethernaturalmarketforceswillultimatelyoverwhelmanypressureinducedasaresultofcentralbankintervention.]3.UsingCurrencyFutures.a.Howcancurrencyfuturesbeusedbycorporations?ANSWER:U.S.corporationsthatdesiretolockinapriceatwhichtheycansellaforeigncurrencywouldsellcurrencyfutures.U.S.corporationsthatdesiretolockinapriceatwhichtheycanpurchaseaforeigncurrencywouldpurchasecurrencyfutures.b.Howcancurrencyfuturesbeusedbyspeculators?ANSWER:Speculatorswhoexpectacurrencytoappreciatecouldpurchasecurrencyfuturescontractsforthatcurrency.Speculatorswhoexpectacurrencytodepreciatecouldsellcurrencyfuturescontractsforthatcurrency.8.ForwardversusFuturesContracts.Compareandcontrastforwardandfuturescontracts.ANSWER:Becausecurrencyfuturescontractsarestandardizedintosmallamounts,theycanbevaluableforthespeculatororsmallfirm(acommercialbanksforwardcontractsaremorecommonforlargeramounts).However,thestandardizedformatoffuturesforceslimitedmaturitiesandamounts.16.HedgingWithCurrencyOptions.WhenwouldaU.S.firmconsiderpurchasingacalloptiononeurosforhedging?WhenwouldaU.S.firmconsiderpurchasingaputoptiononeurosforhedging?ANSWER:Acalloptioncanhedgeafirmsfuturepayablesdenominatedineuros.Iteffectivelylocksinthemaximumpricetobepaidforeuros.AputoptiononeuroscanhedgeaU.S.firmsfuturereceivablesdenominatedineuros.Iteffectivelylocksintheminimumpriceatwhichitcanexchangeeurosreceived.17.SpeculatingWithCurrencyOptions.WhenshouldaspeculatorpurchaseacalloptiononAustraliandollars?WhenshouldaspeculatorpurchaseaputoptiononAustraliandollars?ANSWER:SpeculatorsshouldpurchaseacalloptiononAustraliandollarsiftheyexpecttheAustraliandollarvaluetoappreciatesubstantiallyovertheperiodspecifiedbytheoptioncontract.SpeculatorsshouldpurchaseaputoptiononAustraliandollarsiftheyexpecttheAustraliandollarvaluetodepreciatesubstantiallyovertheperiodspecifiedbytheoptioncontract.Chapter65.PeggedCurrencies.Whydoyouthinkacountrysuddenlydecidestopegitscurrencytothedollarorsomeothercurrency?Whenacurrencyisunabletomaintainthepeg,whatdoyouthinkarethetypicalforcesthatbreakthepeg?ANSWER:Acountrywillusuallyattemptapegtoreducespeculativeflowsthatoccurbecauseofexchangeratevolatility.Ittriestocomfortinvestorsbymakingthembelievethatthecurrencywillbestable.Insomecases,thepegisbrokenwhenthereareadverseconditionsinthecountrythatmakeinvestorsbelievethatthepegwillbebroken.Forexample,foreigninvestorsbecomeconcernedthatifthepegbreaks,thecurrencymaydeclineby20percentormoreagainsttheirhomecurrency.Thiswouldadverselyaffectthereturnontheirinvestment,sotheyattempttoliquidatetheirinvestmentandmovetheirfundoutofthatcurrencybeforethepegbreaks.Ifmanyinvestorshavethisconcernsimultaneously,theyareallsellingthatcurrencyatthesametime.Theyplacedownwardpressureonthecurrencybecausethereisalargersupplyofthecurrencyforsalethanthedemandforthecurrency.Thecentralbankmayattempttooffsettheseforcesbybuyingthecurrencyintheforeignexchangemarket.However,ithasalimitedamountofthatcurrencyasareserve,andmaybeoverwhelmedbymarketforces.9.DirectIntervention.Howcanacentralbankusedirectinterventiontochangethevalueofacurrency?Explainwhyacentralbankmaydesiretosmoothexchangeratemovementsofitscurrency.ANSWER:Centralbankscanusetheircurrencyreservestobuyupaspecificcurrencyintheforeignexchangemarketinordertoplaceupwardpressureonthatcurrency.Centralbankscanalsoattempttoforcecurrencydepreciationbyfloodingthemarketwiththatspecificcurrency(sellingthatcurrencyintheforeignexchangemarketinexchangeforothercurrencies).Abruptmovementsinacurrency’svaluemaycausemorevolatilebusinesscycles,andmaycausemoreconcerninfinancialmarkets(andthereforemorevolatilityinthesemarkets).Centralbankinterventionusedtosmoothexchangeratemovementsmaystabilizetheeconomyandfinancialmarkets.11.InterventionEffects.AssumethereisconcernthattheUnitedStatesmayexperiencearecession.HowshouldtheFederalReserveinfluencethedollartopreventarecession?HowmightU.S.exportersreacttothispolicy(favorablyorunfavorably)?WhataboutU.S.importingfirms?ANSWER:TheFederalReservewouldnormallyconsideraloosemoneypolicytostimulatetheeconomy.However,totheextentthatthepolicyputsupwardpressureoneconomicgrowthandinflation,itcouldweakenthedollar.AweakdollarisexpectedtofavorablyaffectU.S.exportingfirmsandadverselyaffectU.S.importingfirms.IftheU.S.interestratesriseinresponsetothepossibleincreaseineconomicgrowthandinflationintheU.S.,thiscouldoffsetthedownwardpressureontheU.S.dollar.Inthiscase,U.S.exportingandimportingfirmswouldnotbeaffectedasmuch.15.InterventionEffectsonCorporatePerformance.AssumeyouhaveasubsidiaryinAustralia.ThesubsidiarysellsmobilehomestolocalconsumersinAustralia,whobuythehomesusingmostlyborrowedfundsfromlocalbanks.YoursubsidiarypurchasesallofitsmaterialsfromHongKong.TheHongKongdollaristiedtotheU.S.dollar.YoursubsidiaryborrowedfundsfromtheU.S.parent,andmustpaytheparent$100,000ininteresteachmonth.Australiahasjustraiseditsinterestrateinordertoboostthevalueofitscurrency(Australiandollar,A$).TheAustraliandollarappreciatesagainstthedollarasaresult.Explainwhethertheseactionswouldincrease,reduce,orhavenoeffecton:a.Thevolumeofyoursubsidiary’ssalesinAustralia(measuredinA$),b.Thecosttoyoursubsidiaryofpurchasingmaterials(measuredinA$)c.ThecosttoyoursubsidiaryofmakingtheinterestpaymentstotheU.S.parent(measuredinA$).Brieflyexplaineachanswer.ANSWER:a.Thevolumeofthesalesshoulddeclineasthecosttoconsumerswhofinancetheirpurchaseswouldriseduetothehigherinterestrates.b.ThecostofpurchasingmaterialsshoulddeclinebecausetheA$appreciatesagainsttheHK$asitappreciatesagainsttheU.S.dollar.c.TheinterestexpensesshoulddeclinebecauseitwilltakefewerA$tomakethemonthlypaymentof$100,000.17.EffectsofIndirectIntervention.SupposethatthegovernmentofChilereducesoneofitskeyinterestrates.ThevaluesofseveralotherLatinAmericancurrenciesareexpectedtochangesubstantiallyagainsttheChileanpesoinresponsetothenews.a.ExplainwhyotherLatinAmericancurrenciescouldbeaffectedbyacutinChile’sinterestrates.ANSWER:Exchangeratesarepartiallydrivenbyrelativeinterestratesofthecountriesofconcern.WhenChile'sinterestratesdecline,thereisasmallerflowoffundstobeexchangedintoChileanpesosbecausetheChileinterestrateisnotasattractivetoinvestors.TheremaybeashiftofinvestmentintotheotherLatinAmericancountrieswhereinterestrateshavenotdeclined.However,iftheseLatinAmericancountriesareexpectedtoreducetheirratesaswell,theywillnotattractmorecapitalandmayevenattractlesscapitalflowsinthefuture,whichcouldreducetheirvalues.b.HowwouldthecentralbanksofotherLatinAmericancountrieslikelyadjusttheirinterestrates?Howwouldthecurrenciesofthesecountriesrespondtothecentralbankinterventions?ANSWER:Thecentralbankswouldlikelyattempttolowerinterestrates,whichcausesthecurrencytoweaken.Aweakercurrencyandlowerinterestratescanstimulatetheeconomy.c.HowwouldaU.S.firmthatexportsproductstoLatinAmericancountriesbeaffectedbythecentralbankinterventions?(AssumetheexportsaredenominatedinthecorrespondingLatinAmericancurrencyforeachcountry.)ANSWER:TheexporterisadverselyaffectediftheChileanpesoandothercurrenciesdepreciate.ItisfavorablyaffectedbytheappreciationofanyLatinAmericancurrencies.Chapter76.TestingInterestRateParity.Describeamethodfortestingwhetherinterestrateparityexists.Whyaretransactionscosts,currencyrestrictions,anddifferentialtaxlawsimportantwhenevaluatingwhethercoveredinterestarbitragecanbebeneficial?ANSWER:Atanypointintime,identifytheinterestratesoftheU.S.versussomeforeigncountry.Thendeterminetheforwardratepremium(ordiscount)thatshouldexistaccordingtointerestrateparity.Thendeterminewhetherthiscomputedforwardratepremium(ordiscount)isdifferentfromtheactualpremium(ordiscount).Evenifinterestrateparitydoesnothold,coveredinterestarbitragecouldbeofnobenefitiftransactionscostsortaxlawsoffsetanyexcessgain.Inaddition,currencyrestrictionsenforcedbyaforeigngovernmentmaydisrupttheactofcoveredinterestarbitrage.7.TestingIRP.Theone-yearinterestrateinSingaporeis11percent.Theone-yearinterestrateintheU.S.is6percent.ThespotrateoftheSingaporedollar(S$)is$.50andtheforwardrateoftheS$is$.46.Assumezerotransactionscosts.a.Doesinterestrateparityexist?ANSWER:No,becausethediscountislargerthantheinterestratedifferential.b.CanaU.S.firmbenefitfrominvestingfundsinSingaporeusingcoveredinterestarbitrage?ANSWER:No,becausethediscountonaforwardsaleexceedstheinterestrateadvantageofinvestinginSingapore.22.LimitationsofCoveredInterestArbitrage.Assumethattheone-yearU.S.interestrateis11percent,whiletheone-yearinterestrateinMalaysiais40percent.AssumethataU.S.bankiswillingtopurchasethecurrencyofthatcountryfromyouoneyearfromnowatadiscountof13percent.Wouldcoveredinterestarbitragebeworthconsidering?Isthereanyreasonwhyyoushouldnotattemptcoveredinterestarbitrageinthissituation?(Ignoretaxeffects.)ANSWER:Coveredinterestarbitragewouldbeworthconsideringsincethereturnwouldbe21.8percent,whichismuchhigherthantheU.S.interestrate.Assuminga$1,000,000initialinvestment,$1,000,000×(1.40)×.87=$1,218,000Yield=($1,218,000–$1,000,000)/$1,000,000=21.8%However,thefundswouldbeinvestedinMalaysia,whichcouldcausesomeconcernaboutdefaultriskorgovernmentrestrictionsonconvertibilityofthecurrencybacktodollars.30.ChangeintheForwardPremium.Attheendofthismonth,you(ownerofaU.S.firm)aremeetingwithaJapanesefirmtowhichyouwilltrytosellsupplies.Ifyoureceiveanorderfromthatfirm,youwillobtainaforwardcontracttohedgethefuturereceivablesinyen.Asofthismorning,theforwardrateoftheyenandspotratearethesame.Youbelievethatinterestrateparityholds.Thisafternoon,newsoccursthatmakesyoubelievethattheU.S.interestrateswillincreaseubstantiallybytheendofthismonth,andthattheJapaneseinterestratewillnotchange.However,yourexpectationsofthespotrateoftheJapaneseyenarenotaffectedatallinthefuture.HowwillyourexpecteddollaramountofreceivablesfromtheJapanesetransactionbeaffected(ifatall)bythenewsthatoccurredthisafternoon?Explain.ANSWER:IfU.S.interestratesincrease,thentheforwardrateoftheyenwillexhibitapremium.Therefore,ifyouhedgeyourreceivablesattheendofthismonth,thedollaramounttobereceivedwouldbehigher.31.InterpretingChangesintheForwardPremium.Assumethatinterestrateparityholds.Atthebeginningofthemonth,thespotrateoftheCanadiandollaris$.70,whiletheone-yearforwardrateis$.68.AssumethatU.S.interestratesincreasesteadilyoverthemonth.Attheendofthemonth,theone-yearforwardrateishigherthanitwasatthebeginningofthemonth.Yet,theoneyearforwarddiscountislarger(theone-yearpremiumismorenegative)attheendofthemonththanitwasatthebeginningofthemonth.ExplainhowtherelationshipbetweentheU.S.interestrateandtheCanadianinterestratechangedfromthebeginningofthemonthuntiltheendofthemonth.ANSWER:TheforwarddiscountatthebeginningofthemonthimpliesthattheU.S.interestrateislowerthantheCanadianinterestrate.Duringthemonth,theCanadianinterestratemusthaveincreasedbyagreaterdegreethantheU.S.interestrate.Attheendofthemonth,thegapbetweentheCanadiandollarandtheU.S.dollarisgreaterthanitwasatthebeginningofthemonth.Thisresultsinamorepronouncedforwarddiscount.Chapter84.ImplicationsofIFE.AssumeU.S.interestratesaregenerallyaboveforeigninterestrates.WhatdoesthissuggestaboutthefuturestrengthorweaknessofthedollarbasedontheIFE?ShouldU.S.investorsinvestinforeignsecuritiesiftheybelieveintheIFE?ShouldforeigninvestorsinvestinU.S.securitiesiftheybelieveintheIFE?ANSWER:TheIFEwouldsuggestthattheU.S.dollarwilldepreciateovertimeifU.S.interestratesarecurrentlyhigherthanforeigninterestrates.Consequently,foreigninvestorswhopurchasedU.S.securitieswouldonaveragereceiveasimilaryieldaswhattheyreceiveintheirowncountry,andU.S.investorsthatpurchasedforeignsecuritieswouldonaveragereceiveayieldsimilartoU.S.rates.11.IntegratingIRPandIFE.AssumethefollowinginformationisavailablefortheUnitedStatesandEurope: U.S. Europe Nominalinterestrate 4% 6% Expectedinflation 2% 5% Spotrate --- $1.13 One-yearforwardrate --- $1.10a.doesIRPhold?IRP（1+if）(1+p)=1+ihp=($1.10-$1.13)/$1.13=-0.02655(1+4%)(1-0.02655)<1.06soIRPdoesnothold.b.accordingtoPPP,whatistheexpectedspotrateoftheeuroinoneyear?PPPef=(1+lh)/(1+lf)-1=(1+2%)/(1+5%)-1=-0.02857Expectedspotrate=$1.13*(1-0.02857)=1.0977c.accordingtotheIFE,whatistheexpectedspotrateoftheeuroinoneyear?IFEef=(1+ih)/(1+if)-1=(1+4%)/(1+6%)-1=-0.01887Expectedspotrate=$1.13*(1-0.01887)=1.10868d.reconcileyouranswerstoparts(a)and(c).PartsaandccombinedsaythattheforwardratepremiumordiscountisexactlyequaltotheExpectedpercentageappreciationordepreciationoftheeuro.13.ApplyingIRPandIFE.AssumethatMexicohasaone-yearinterestratethatishigherthantheU.S.one-yearinterestrate.AssumethatyoubelieveintheinternationalFishereffect(IFE),andinterestrateparity.Assumezerotransactionscosts.EdisbasedintheU.S.andheattemptstospeculatebypurchasingMexicanpesostoday,investingthepesosinarisk-freeassetforayear,andthenconvertingthepesostodollarsattheendofoneyear.Eddidnotcoverhispositionintheforwardmarket.MariaisbasedinMexicoandsheattemptscoveredinterestarbitragebypurchasingdollarstodayandsimultaneouslysellingdollarsoneyearforward,investingthedollarsinarisk-freeassetforayear,andthenconvertingthedollarsbacktopesosattheendofoneyear.DoyouthinktherateofreturnonEd’sinvestmentwillbehigherthan,lowerthan,orthesameastherateofreturnonMaria’sinvestment?Explain.ANSWER:Maria’srateofreturnwillbehigher.Sinceinterestrateparityexists,shewillearnwhateverthelocalrisk-freeinterestrateisinMexico.Ed’sexpectedrateofreturniswhatevertherisk-freerateisintheU.S.(basedontheIFE).19.TestingPPP.InflationdifferentialsbetweentheU.S.andotherindustrializedcountrieshavetypicallybeenafewpercentagepointsinanygivenyear.Yet,inmanyyearsannualexchangeratesbetweenthecorrespondingcurrencieshavechangedby10percentormore.WhatdoesthisinformationsuggestaboutPPP?ANSWER:Theinformationsuggeststhatthereareotherfactorsbesidesinflationdifferentialsthatinfluenceexchangeratemovements.Thus,theexchangeratemovementswillnotnecessarilyconformtoinflationdifferentials,andthereforePPPwillnotnecessarilyhold.31.InflationandInterestRateEffects.TheopeningofRussia'smarkethasresultedinahighlyvolatileRussiancurrency(theruble).Russia'sinflationhascommonlyexceeded20percentpermonth.Russianinterestratescommonlyexceed150percent,butthisissometimeslessthantheannualinflationrateinRussia.a.ExplainwhythehighRussianinflationhasputseverepressureonthevalueoftheRussianruble.ANSWER:AsRussianpriceswereincreasing,thepurchasingpowerofRussianconsumerswasdeclining.ThiswouldencouragethemtopurchasegoodsintheU.S.andelsewhere,whichresultsinalargesupplyofrublesforsale.GiventhehighRussianinflation,foreigndemandforrublestopurchaseRussiangoodswouldbelow.Thus,theruble’svalueshoulddepreciateagainstthedollar,andagainstothercurrencies.b.DoestheeffectofRussianinflationonthedeclineintheruble’svaluesupporttheP ppt 关于艾滋病ppt课件精益管理ppt下载地图下载ppt可编辑假如ppt教学课件下载triz基础知识ppt heory?HowmighttherelationshipbedistortedbypoliticalconditionsinRussia?ANSWER:ThegeneralrelationshipsuggestedbyPPPissupported,buttheruble’svaluewillnotnormallymoveexactlyasspecifiedbyPPP.ThepoliticalconditionsthatcouldrestricttradeorcurrencyconvertibilitycanpreventRussianconsumersfromshiftingtoforeigngoods.Thus,therublemaynotdeclinebythefulldegreetooffsettheinflationdifferentialbetweenRussiaandtheU.S.Furthermore,thegovernmentmaynotallowtherubletofloatfreelytoitsproperequilibriumlevel.c.DoesitappearthatthepricesofRussiangoodswillbeequaltothepricesofU.S.goodsfromtheperspectiveofRussianconsumers(afterconsideringexchangerates)?Explain.ANSWER:RussianpricesmightbehigherthanU.S.prices,evenafterconsideringexchangerates,becausetherublemightnotdepreciateenoughtofullyoffsettheRussianinflation.Theexchangeratecannotfullyadjustiftherearebarriersontradeorcurrencyconvertibility.d.WilltheeffectsofthehighRussianinflationandthedeclineintherubleoffseteachotherforU.S.importers?Thatis,howwillU.S.importersofRussiangoodsbeaffectedbytheconditions?ANSWER:U.S.importerswilllikelyexperiencehigherprices,becausetheRussianinflationmaynotbecompletelyoffsetbythedeclineintheruble’svalue.ThismaycauseareductionintheU.S.demandforRussiangoods.Chapter92.ForecastingwithaForwardRate.Assumethatthefour-yearannualizedinterestrateintheUnitedStatesis9percentandthefour-yearannualizedinterestrateinSingaporeis6percent. Assumeinterestrateparityholdsforafour-yearhorizon. AssumethatthespotrateoftheSingaporedollaris$.60. Iftheforwardrateisusedtoforecastexchangerates,whatwillbetheforecastfortheSingaporedollar’sspotrateinfouryears? Whatpercentageappreciationordepreciationdoesthisforecastimplyoverthefour-yearperiod?ANSWER:Thefour-yearcompoundedreturnoninvestmentsineachofthesecountriesiscomputedasfollows:CountryFour‑Year Compounded ReturnU.S.(1.09)4–1=41%Singapore(1.06)4–1=26%Thentheappropriatefour-yearforwardratepremiumoftheSingaporedollarwouldbeThus,thefour-yearforwardrateshouldcontainan11.9%premiumabovetoday’sspotrateof$.60,whichmeanstheforwardrateis$.60((1+.119)=$.6714. TheforecastfortheSingaporedollar’sspotrateinfouryearsis$.6714,whichrepresentsanappreciationof11.9%overthefour-yearperiod.7.Market-BasedForecasting.Explainthemarket-basedtechniqueforforecastingexchangerates.Whatistherationaleforusingmarket-basedforecasts?Iftheeuroappreciatessubstantiallyagainstthedollarduringaspecificperiod,wouldmarket-basedforecastshaveoverestimatedorunderestimatedtherealizedvaluesoverthisperiod?Explain.ANSWER:Market-basedforecastsshouldreflectanexpectationofthemarketonfuturerates.Ifthemarket’sexpectationdifferedfromexistingrates,thenthemarketparticipantsshouldreactbytakingpositionsinvariouscurrenciesuntilthecurrentratesdoreflectanexpectationofthefuture.Themarketdeterminesthespotexchangerateandforwardexchangerate.Thesemarket-basedratescanbeusedtoforecastsinceiftheywerenotgoodindicatorsofthefuturerates,speculatorswouldtakepositions.Thisspeculativemovementwouldforcetheratestogravitatetowardtheexpectationofthefuturespotrate.Market-basedforecastswouldhaveunderestimatedtherealizedvaluesoftheeurooverthisperiodbecausetheactualvalueswereabovethespotratesandforwardratesquotedearlier.17.ForeignExchangeMarketEfficiency.Assumethatforeignexchangemarketswerefoundtobeweak-formefficient.Whatdoesthissuggestaboututilizingtechnicalanalysistospeculateineuros?IfMNCsbelievethatforeignexchangemarketsarestrong-formefficient,whywouldtheydeveloptheirownforecastsoffutureexchangerates?Thatis,whywouldn’ttheysimplyusetoday’squotedratesasindicatorsaboutfuturerates?Afterall,today’squotedratesshouldreflectallrelevantinformation.ANSWER:Technicalanalysisshouldnotbeabletoachieveexcessprofitsifforeignexchangemarketsareweak-formefficient.Today’sratesdonotprovideinformationabouttherangeofpossibleoutcomes.MNCsmaydesiretoassesstherangeofpossibleoutcomes.18.InterpretinganUnbiasedForwardRate.Assumethattheforwardrateisanunbiasedbutnotnecessarilyaccurateforecastofthefutureexchangerateoftheyenoverthenextseveralyears.Basedonthisinformation,doyouthinkRavenCo.shouldhedgeitsremittanceofexpectedJapaneseyenprofitstotheU.S.parentbysellingyenforwardcontracts?Whywouldthisstrategybeadvantageous?Underwhatconditionswouldthisstrategybackfire?ANSWER:Iftheforwardrateisanunbiasedforecast,theamountofdollarsreceivedfromremittanceswhenhedgingshouldbethesame(onaverage,overtime)astheamountofdollarsreceivedfromremittanceswhennothedging.Undertheseconditions,Ravenmaybeabletomoreaccuratelypredictthedollarcashflowsthatwillresultfromremittedforeigncashflows,withoutreducingtheexpectedamountofdollarcashflowsreceived.Thisstrategycouldbackfireinthoseperiodsthatthespotrateofyenatthetimeofremittancesexceedsthepreviouslyagreeduponforwardrateatwhichtheyenwouldbeconvertedtodollars.23.InterpretingForecastBiasInformation.ThetreasurerofGlencoe,Inc.,detectedaforecastbiaswhenusingthe30-dayforwardrateoftheeurotoforecastfuturespotratesoftheeuroovervariousperiods.Hebelieveshecanusethisinformationtodeterminewhetherimportsorderedeveryweekshouldbehedged(paymentismade30daysaftereachorder).Glencoe’spresidentsaysthatinthelongruntheforwardrateisunbiasedandthatthetreasurershouldnotwastetimetryingto“beattheforwardrate”butshouldjusthedgeallorders.Whoiscorrect?ANSWER:Eveniftheforwardrateisunbiasedoverthelongrun,Glencoecouldsavemoneyifitcouldeffectivelydetectaforwardbias(assumingthatthebiaswouldcontinueafterbeingdetected).Glencoemaydecidetohedgeonlywhentheforwardrateisexpectedtobelessthanthefuturespotrate.TheTreasureriscorrectifthebiascontinuesbeyondthepointatwhichitisdetected.Chapter101.AssessingTransactionExposureYouremployer,alargeMNC,hasaskedyoutoassessitstransactionexposure.Itsprojectedcashflowsareasfollowsforthenextyear: Currency Totalinflow Totaloutflow CurrentexchangerateinU.S.Dolores Danishkrone(DK) DK50000000 40000000 $.15 Britishpound Pound2000000 1000000 $1.50AssumethatthemovementsintheDanishkroneandthepoundarehighlycorrelated.Provideyourassessmentastoyourfirm’sdegreeoftransactionexposure(astowhethertheexposureishighorlow).Substantiateyouranswer.Solution:FortheDanishkrone,thewillbeanetinflows50000000-40000000=DK10000000FortheBritishpound,therewillbeaetinflows2000000-1000000=Pound1000000SotheMNC’sexpectedcashflowsituationisnetinflowsintwocurrencies.AndthemovementsintheDanishkroneandthepoundarehighlycorrelated;theMNC’sexposureisrelativelyhigh.Thekroneandpoundvaluesmoveintandemagainstthedollar.Boththekroneandthepoundexposureshowpositivenetinflows.Thus,theirexposureshouldbemagnifiediftheirexchangeratesagainsttheU.S.dollarcontinuetobehighlycorrelated.5.TransactionversusEconomicExposure.Compareandcontrasttransactionexposureandeconomicexposure.WhywouldanMNCconsiderexaminingonlyits“net”cashflowsineachcurrencywhenassessingitstransactionexposure?ANSWER:Transactionexposureisdueonlytointernationaltransactionsbyafirm.Economicexposureincludesanyformbywhichthefirm’scashflowwillbeaffected.Foreigncompetitionmayincreaseduetocurrencyfluctuations.Thiscouldaffectthefirm’scashflow,butdidnotaffectthevalueofanyongoingtransactions.Thus,itrepresentsaformofeconomicexposurebutnottransactionexposure.Transactionexposureisasubsetofeconomicexposure.Considerationofallcashflowsinaparticularcurrencyisnotnecessarywhensomeinflowsandoutflowsoffseteachother.Onlynetcashflowsarenecessary.13.EconomicExposure.SoonerCo.isaU.S.wholesalecompanythatimportsexpensivehigh-qualityluggageandsellsittoretailstoresaroundtheUnitedStates.Itsmaincompetitorsalsoimporthigh-qualityluggageandsellittoretailstores.Noneofthesecompetitorshedgetheirexposuretoexchangeratemovements.ThetreasurerofSoonerCo.toldtheboardofdirectorsthatthefirm’sperformancewouldbemorevolatileovertimeifithedgeditsexchangerateexposure.Howcouldafirm’scashflowsbemorestableasaresultofsuchhighexposuretoexchangeratefluctuations?ANSWER:IfSoonerCompanyhedgeditsimports,thenitwouldhaveanadvantageoverthecompetitionwhenthedollarweakened(sinceitscompetitorswouldpayhigherpricesfortheluggage),andcouldpossiblygainmarketshareorwouldhaveahigherprofitmargin.Itwouldbeatadisadvantagerelativetothecompetitionwhenthedollarstrengthenedandmaylosemarketshareorbeforcedtoacceptalowerprofitmargin.WhenSoonerCompanydoesnothedge,theamountpaidforimportswoulddependonexchangeratemovements,butthisisalsotrueforallofitscompetitors.Thus,Soonerismorelikelytoretainitsexistingmarketshare.21.CurrencyCorrelations.KopetskyCo.hasnetreceivablesinseveralcurrenciesthatarehighlycorrelatedwitheachother.Whatdoesthisimplyaboutthefirm’soveralldegreeoftransactionexposure?Arecurrencycorrelationsperfectlystableovertime?WhatdoesyouranswerimplyaboutKopetskyCo.oranyotherfirmusingpastdataoncorrelationsasanindicatorforthefuture?ANSWER:Itsexposureishighsinceallcurrenciesmoveintandem—nooffsettingeffectislikely.Ifoneofthesecurrenciesdepreciatessubstantiallyagainstthefirm’slocalcurrency,allotherswillaswell,andthisreducesthevalueofthesenetreceivables.No!Thus,pastcorrelationswillnotserveasperfectforecastsoffuturecorrelations.Firmscannotpresumethatpastcorrelationswillbeperfectlyaccurateforecastsoffuturecorrelations.Yet,historicaldatamaystillbeusefulifthegeneralrankingofcorrelationsissomewhatstable.29.ExposureofanMNC’sSubsidiary.DeckoCo.isaU.S.firmwithaChinesesubsidiarythatproducescellphonesinChinaandsellstheminJapan.ThissubsidiarypaysitswagesanditsrentinChineseyuan,whichispresentlytiedtothedollar.ThecellphonessoldtoJapanaredenominatedinJapaneseyen.AssumethatDeckoCo.expectsthattheChineseyuanwillcontinuetostayfixedagainstthedollar.Thesubsidiary’smaingoalistogenerateprofitsforitselfanditreinveststheprofits.ItdoesnotplantoremitanyfundstotheU.S.parent.a.AssumethattheJapaneseyenstrengthensagainsttheU.S.dollarovertime.HowwouldthisbeexpectedtoaffecttheprofitsearnedbytheChinesesubsidiary?b.IfDeckoCo.hadestablisheditssubsidiaryinTokyo,JapaninsteadofChina,woulditssubsidiary’sprofitsbemoreexposedorlessexposedtoexchangeraterisk?c.WhydoyouthinkthatDeckoCo.establishedthesubsidiaryinChinainsteadofJapan?Assumenomajorcountryriskbarriers.d.IftheChinesesubsidiaryneedstoborrowmoneytofinanceitsexpansionandwantstoreduceitsexchangeraterisk,shoulditborrowU.S.dollars,Chineseyuan,orJapaneseyen?ANSWER:a.Iftheyenappreciatesagainstthedollar,itappreciatesagainsttheyuan,whichresultsinhigheryuancashflowstotheChinesesubsidiary.b.IfthesubsidiarywasestablishedinTokyo,Japan,itwouldbelessexposedtoexchangeraterisk.c.DeckoCo.mayhaveestablishedthesubsidiaryinordertotakeadvantageofthelow-costlaborinChina.d.Ifthesubsidiaryneedstoborrowmoney,itshouldborrowJapaneseyen,becauseitsrevenueisalsodenominatedinyen.Chapter1112.RealCostofHedgingPayables.AssumethatLorasCorp.importedgoodsfromNewZealandandneeds100,000NewZealanddollars180daysfromnow.Itistryingtodeterminewhethertohedgethisposition.LorashasdevelopedthefollowingprobabilitydistributionfortheNewZealanddollar. PossibleValueofNewZealandDollarin180Days Probability $0.40 5% 0.45 10 0.48 30 0.50 30 0.53 20 0.55 5The180-dayforwardrateoftheNewZealanddollaris$.52.ThespotrateoftheNewZealanddollaris$.49.Developatableshowingafeasibilityanalysisforhedging.Thatis,determinethepossibledifferencesbetweenthecostsofhedgingversusnohedging.Whatistheprobabilitythathedgingwillbemorecostlytothefirmthannothedging?Determinetheexpectedvalueoftheadditionalcostofhedging.Solution:Forwardrate=$0.52 PossibleValueofNewZealandDollarin180Days Probability NominalCostofHedging$ AmountinNeededifUnhedged$ RealCostofHedging$ $0.40 5% 52,000 40,000 12,000 0.45 10 52,000 45,000 7,000 0.48 30 52,000 48,000 4,000 0.50 30 52,000 50,000 2,000 0.53 20 52,000 53,000 -1,000 0.55 5 52,000 55,000 -3,000Thereisa75%probabilitythathedgingwillbemorecostlythannohedge.5%($12,000)+10%($7,000)+30%($4,000)+30%($2,000)+20%(–$1,000)+5%(–$3,000)=$600+$700+$1200+$600–$200–$150=$2,75020.ForwardHedging.ExplainhowaMalaysianfirmcanusetheforwardmarkettohedgeperiodicpurchasesofU.S.goodsdenominatedinU.S.dollars.ExplainhowaFrenchfirmcanuseforwardcontractstohedgeperiodicsalesofgoodssoldtotheUnitedStatesthatareinvoicedindollars.ExplainhowaBritishfirmcanusetheforwardmarkettohedgeperiodicpurchasesofJapanesegoodsdenominatedinyen.ANSWER:AMalaysianfirmcanpurchasedollarsforwardwithringgit,whichlocksintheexchangerateatwhichittradesitsringgitfordollars.TheFrenchfirmcouldpurchaseeurosforwardwithdollars.TheBritishfirmcannegotiateaforwardcontractwithabanktoexchangepoundsforyenatafuturepointintime.23.ForwardHedging.WedcoTechnologyofNewJerseyexportsplasticsproductstoEurope.Wedcodecidedtopriceitsexportsindollars.TelematicsInternational,Inc.(ofFlorida),exportscomputernetworksystemstotheUnitedKingdom(denominatedinBritishpounds)andothercountries.Telematicsdecidedtousehedgingtechniquessuchasforwardcontractstohedgeitsexposure.a.DoesWedco’sstrategyofpricingitsmaterialsforEuropeancustomersindollarsavoideconomicexposure?Explain.ANSWER:Wedcoavoidstransactionexposurebutnoteconomicexposure.Iftheeuroweakensagainstthedollar,EuropeancustomerswouldhavetopaymoreforWedco’smaterials.Thismayencouragethecustomerstopurchasetheirmaterialsfromotherfirms.b.ExplainwhytheearningsofTelematicsInternational,Inc.,wereaffectedbychangesinthevalueofthepound.WhymightTelematicsleaveitsexposureunhedgedsometimes?ANSWER:TelematicsInternational,Inc.hassalestoEuropeancustomers,whicharedenominatedinBritishpounds.WhileTelematics’poundreceivablesarehedged,theforwardratechangesovertimeandissomewhatdependentonthespotrateatthetime.Telematicsmayconsiderremainingunhedgedwheneveritexpectsthepoundtoappreciate.25.TheLong-TermHedgeDilemma.St.LouisInc.,whichreliesonexporting,denominatesitsexportsinpesosandreceivespesoseverymonth.Itexpectsthepesotoweakenovertime.St.Louisrecognizesthelimitationofmonthlyhedging.Italsorecognizesthatitcouldremoveitstransactionexposurebydenominatingtheexportsindollarsbutthatitisstillwouldbesubjecttoeconomicexposure.Thelong-termhedgingtechniquesarelimitedandthefirmdoesnotknowhowmanypesositwillreceiveinthefuture,soitwouldhavedifficultyevenifalong-termhedgingmethodwasavailable.Howcanthisbusinessrealisticallydealwiththisdilemmatoreduceitsexposureoverthelong-term?ANSWER:IfitexpectsthattheweaknessofthepesoovertimeisattributedtohighinflationinMexico,itmaybeabletoincreaseitsprice(inpesos)foritsexports.Thatis,itmayretainitssalesatthehigherpesopriceifitscompetitorshaveincreasedtheirprices.Thisstrategymayoffsettheweaknessofthepeso,sothatitcouldgeneratethesamedollarcashflows.Ifitisunabletoincreaseitspriceduetocompetitivepressure,itshouldconsidermovingsomeofitsproductiontoMexico.Aportionofthepesorevenuecouldbeusedtocovertheexpensesinpesos,sothatitwouldhavelessexposure.30.ComparisonofTechniquesforHedgingPayables.SMUCorp.hasfuturereceivablesof4,000,000NewZealanddollars(NZ$)inoneyear.Itmustdecidewhethertouseoptionsoramoneymarkethedgetohedgethisposition.Useanyofthefollowinginformationtomakethedecision.Verifyyouranswerbydeterminingtheestimate(orprobabilitydistribution)ofdollarrevenuetobereceivedinoneyearforeachtypeofhedge. SpotrateofNZ$ $.54 One-yearcalloption Exerciseprice=$.50;Premium=$.07 One-yearputoption Exerciseprice=$.52;Premium=$.03 U.S. NewZealand One-yeardepositrate 9% 6% One-yearborrowingrate 11％ 8％ Rate Probability ForecastedspotrateofNZ$ $.50 20% .51 50 .53 30Chapter122.AssessingEconomicExposure.AlaskaInc.planstocreateandfinanceasubsidiaryinMexicothatproducescomputercomponentsatalowcostandexportsthemtoothercountries.Ithasnootherinternationalbusiness.ThesubsidiarywillproducecomputersandexportthemtoCaribbeanislandsandwillinvoicetheproductsinU.S.dollars.Thevaluesofthecurrenciesintheislandsareexpectedtoremainverystableagainstthedollar.Thesubsidiarywillpaywages,rent,andotheroperatingcostsinMexicanpesos.Thesubsidiarywillremitearningsmonthlytotheparent.a.WouldAlaska’scashflowsbefavorablyorunfavorablyaffectediftheMexicanpesodepreciatesovertime?ANSWER:Alaska’scashflowswouldbefavorablyaffected,becauseithasonlycashoutflowsinpesos,andcanperiodicallyconvertdollarstocoveritsexpensesinpesos.b.AssumethatAlaskaconsiderspartialfinancingofthissubsidiarywithpesoloansfromMexicanbanksinsteadofprovidingallthefinancingwithitsownfunds.Wouldthisalternativeformoffinancingincrease,decrease,orhavenoeffectonthedegreetowhichAlaskaisexposedtoexchangeratemovementsofthepeso?ANSWER:Alaska’ssubsidiaryalreadyhascashoutflowsinpesoswithnocashinflowsinpesos.Thepartialfinancingwithpesoswouldincreasethecashoutflowsinpesos,whichresultsinagreaterexposuretothepossibleappreciationofthepeso.3.ManagingEconomicExposure.St.PaulCo.doesbusinessintheUnitedStatesandNewZealand.Inattemptingtoassessitseconomicexposure,itcompiledthefollowinginformation.a.St.Paul’sU.S.salesaresomewhataffectedbythevalueoftheNewZealanddollar(NZ$),becauseitfacescompetitionfromNewZealandexporters.ItforecaststheU.S.salesbasedonthefollowingthreeexchangeratescenarios: ExchangeRateofNZ$ RevenuefromU.S.Business(inmillions) NZ$=$.48 $100 NZ$=.50 105 NZ$=.54 110b.ItsNewZealanddollarrevenueonsalestoNewZealandinvoicesinNewZealanddollarsareexpectedtobeNZ$600million.c.Itsanticipatedcostofgoodssoldisestimatedat$200millionfromthepurchaseofU.S.materialsandNZ$100millionfromthepurchaseofNewZealandmaterials.d.Fixedoperatingexpensesareestimatedat$30million.e.Variableoperatingexpensesareestimatedat20percentoftotalsales(afterincludingNewZealandsale,translatedtoadollaramount).f.Interestexpensesisestimatedat$20milliononexistingU.S.loans,andthecompanyhasnoexcitingNewZealandloans.CreateaforecastedincomestatementforSt.PaulCo.undereachofthethreeexchangeratescenarios.ExplainhowSt.Paul’sprojectedearningsbeforetaxesareaffectedbypossibleexchangeratemovements.ExplainhowitcanrestructureitsoperationstoreducethesensitivityofitsearningstoexchangeratemovementswithoutreducingitsvolumeofbusinessinNewZealand.Theanswers: inMillions NZ$=$.48 NZ$=.50 NZ$=.54 Sales: (1)U.S. $100 $105 $110 (2)NewZealand NZ$600=288 NZ$600=300 NZ$600=324 (3)Total $388 $405 $434 Costofgodssold: (4)U.S. $200 $200 $200 (5)NewZealand NZ$100=48 NZ$100=50 NZ$100=54 (6)Total $248 $250 $254 (7)Grossprofit $140 $155 $180 Operatingexpenses: (8)U.S.-Fixed $30 $30 $30 (9)U.S.-Variable $388*.2=77.6 $405*.2=81 $434*.2=86.8 (10)Total $107.6 $111 $116.8 (11)EBIT $32.4 $44 $63.2 Interestexpense: (12)U.S. $20 $20 $20 (13)EBT $12.4 $24 $43.2TheforecastedincomestatementsshowthatSt.PaulCompanyisfavorablyaffectedbyastrongNewZealanddollar(sinceitsNZ$inflowpaymentsexceeditsNZ$outflowpayments).St.PaulCompanycouldreduceitseconomicexposurewithoutreducingitsNewZealandrevenuesbyshiftingexpensesfromtheU.S.toNewZealand.Inthisway,itsNZ$outflowpaymentswouldbemoresimilartoitsNZ$inflowpayments.4.ReducingEconomicExposure.AlbanyCorp.isaU.S.-basedMNCthathasalargegovernmentcontractwithAustralia.ThecontractwillcontinueforseveralyearsandgeneratemorethanhalfofAlbany'stotalsalesvolume.TheAustraliangovernmentpaysAlbanyinAustraliandollars.About10percentofAlbany'soperatingexpensesareinAustraliandollars;allotherexpensesareinU.S.dollars.ExplainhowAlbanyCorp.canreduceitseconomicexposuretoexchangeratefluctuations.ANSWER:AlbanymayasktheAustraliangovernmenttoprovidepaymentinU.S.dollars.Alternatively,AlbanycouldattempttoshiftsomeofitsexpensestoAustralia,byeitherpurchasingAustraliansuppliesorshiftingpartoftheproductionprocesstoAustralia.ThesestrategieswillincreaseAustraliandollaroutflows,sothattheAustraliandollarinflowsandoutflowsaremorebalanced.7.ComparingDegreesofTranslationExposure.NelsonCo.isaU.S.firmwithannualexportsalestoSingaporeofaboutS$800million.ItsmaincompetitorisMezCo.,alsobasedintheUnitedStates,withasubsidiaryinSingaporethatgeneratesaboutS$800millioninannualsales.Anyearningsgeneratedbythesubsidiaryarereinvestedtosupportitsoperations.Basedontheinformationprovided,whichfirmissubjecttoahigherdegreeoftranslationexposure?Explain.ANSWER:SinceNelsonCompanydoesnothaveanysubsidiaries,itsexposuretoexchangeratefluctuationswouldnotbeclassifiedastranslationexposure.Conversely,MezCompanyissubjecttotranslationexposure.8.ComparingDegreesofEconomicExposure.CarltonCo.andPalmer,Inc.,areU.S.-basedMNCswithsubsidiariesinMexicothatdistributemedicalsupplies(producedintheUnitedStates)tocustomersthroughoutLatinAmerica.Bothsubsidiariespurchasetheproductsatcostandselltheproductsat90percentmarkup.Theotheroperatingcostsofthesubsidiariesareverylow.CarltonCo.hasaresearchanddevelopmentcenterintheUnitedStatesthatfocusesonimprovingitsmedicaltechnology.Palmer,Inc.,hasasimilarcenterbasedinMexico.Theparentofeachfirmsubsidizesitsrespectiveresearchanddevelopmentcenteronanannualbasis.Whichfirmissubjecttoahigherdegreeofeconomicexposure?Explain.ANSWER:CarltonCompanyissubjecttoahigherdegreeofeconomicexposurebecauseitdoesnothavemuchoffsettingcostinMexico.PalmerInc.incurscostsinMexicoforitsresearchanddevelopmentcenter.PAGE25