Exam 17: Multinational

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?

Stover Corporation, a U.S.based importer, 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?

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 DeGraw Corporation, a U.S.exporter, sold a solar heating station to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar.In order to close the sale, DeGraw agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction.The terms were net 6 months.If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would DeGraw actually receive after it exchanged yen for U.S.dollars?

Which of the following statements is NOT CORRECT?

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

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.

cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.

Suppose in the spot market 1 U.S.dollar equals 1.60 Canadian dollars.6-month Canadian securities have an annualized return of 6% 6-month U.S.securities have an annualized return of 6.5% and a periodic return of 3.25%.If interest rate parity holds, what is the U.S.dollar-Canadian dollar exchange rate in the 180-day forward market?

one U.S.dollar buys 1.64 Canadian dollars, how many U.S.dollars can you purchase for one Canadian dollar?

box of 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?

Blenman Corporation, based in the United States, arranged a 2-year, $1,000,000 loan to fund a project in Mexico.The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments.The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due.The loan was not hedged in the foreign exchange market.Thus, Blenman must convert U.S.funds to Mexican pesos to make its payments.If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective interest rate will Blenman end up paying on the loan?

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

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.

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 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?

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

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

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.

Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners.If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?