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Exam 18: Multinational Financial Management

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Question 21

True/False

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Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

A) True
B) False

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Question 22

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A box of chocolate 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) 1 U.S.dollar equals 0.69 Swiss francs
B) 1 U.S.dollar equals 0.85 Swiss francs
C) 1 U.S.dollar equals 1.21 Swiss francs
D) 1 U.S.dollar equals 1.29 Swiss francs
E) 1 U.S.dollar equals 1.44 Swiss francs

F) C) and D)
G) A) and E)

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Question 23

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A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs 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 francs.If the spot rate in 90 days is actually 1.638 francs, how much will the U.S.firm have saved or lost in U.S.dollars by hedging its exchange rate exposure?

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S.money market instruments.

Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return.In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% 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?

Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company's currency, will be worth less than was originally projected because of exchange rate changes.

Suppose that 1 British pound currently equals 1.62 U.S.dollars and 1 U.S.dollar equals 1.62 Swiss francs.What is the cross exchange rate between the pound and the franc?

When the value of the U.S.dollar appreciates against another country's currency, we may purchase more of the foreign currency with a dollar.

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Suppose the exchange rate between U.S.dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S.dollar and the euro is $1.00 = 1.64 euros.What is the cross-rate of Swiss francs to euros?

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

A foreign currency will, on average, depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed.

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U.S.corporations.

The Eurodollar market is essentially a long-term market; most loans and deposits in this market have maturities longer than one year.

The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

Which of the following is NOT a reason why companies move into international operations?

Suppose it takes 1.82 U.S.dollars today to purchase one British pound in the foreign exchange market, and currency forecasters predict that the U.S.dollar will depreciate by 12.0% against the pound over the next 30 days.How many dollars will a pound buy in 30 days?

If it takes $0.71 U.S.dollars to purchase one Swiss franc, how many Swiss francs can one U.S.dollar buy?