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Exam 17: Multinational Financial Management

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Question 1

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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?

A) 0.43
B) 0.86
C) 1.41
D) 1.64
E) 2.27

F) B) and D)
G) A) and B)

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Question 2

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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?

A) -$396
B) -$243
C) $0
D) $243
E) $638

F) B) and C)
G) C) and D)

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Question 3

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Exchange rate quotations consist solely of direct quotations.

In Japan,90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return.In the United States,90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%.All securities are of equal risk,and 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?

Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars,and 1 Canadian dollar equals 0.71 U.S.dollars.If purchasing power parity (PPP) holds,what is the price of hockey pucks in the United States?

Tashakori Trucking,a U.S.-based company,is considering expanding its operations into a foreign country.The required investment at Time = 0 is $10 million.The firm forecasts total cash inflows of $4 million per year for 2 years,$6 million for the next 2 years,and then a possible terminal value of $8 million.In addition,due to political risk factors,Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million.However,the government of the host country will block 20% of all cash flows.Thus,cash flows that can be repatriated are 80% of those projected.Tashakori's cost of capital is 15%,but it adds one percentage point to all foreign projects to account for exchange rate risk.Under these conditions,what is the project's NPV?

If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market,then the forward currency is said to be selling at a discount to the spot rate.

Suppose 6 months ago a Swiss investor bought a 6-month U.S.Treasury bill at a price of $9,708.74,with a maturity value of $10,000.The exchange rate at that time was 1.420 Swiss francs per dollar.Today,at maturity,the exchange rate is 1.324 Swiss francs per dollar.What is the annualized rate of return to the Swiss investor?

If the United States is running a deficit trade balance with China,then in a free market we would expect the value of the Chinese yuan to depreciate against the U.S.dollar.

Suppose a U.S.firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received) .The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.50 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure.Essentially,the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

Suppose Stackpool Inc.had inventory in Britain valued at 240,000 pounds one year ago.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?

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.

Due to advanced communications technology and the standardization of general procedures,working capital management for multinational firms is no more complex than it is for large domestic firms.

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?

Legal and economic differences among countries,although important,do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

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

If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market,then the forward currency is said to be selling at a premium to the spot 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.

Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.