国际财务管理(英文版) 第11版 马杜拉 答案 Chapter 3
国际财务管理(英文版) 第11版 马杜拉 答案 Chapter 8
Chapter 8Relationships Among Inflation,Interest Rates, and Exchange Rates Lecture OutlinePurchasing Power Parity (PPP)Interpretations of PPPRationale Behind PPP TheoryDerivation of PPPUsing PPP to Estimate Exchange Rate EffectsGraphic Analysis of PPPTesting the PPP TheoryWhy PPP Does Not OccurPPP in the Long RunInternational Fisher Effect (IFE)Implications of the IFE for Foreign InvestorsDerivation of the IFEGraphic Analysis of the IFETests of the IFEWhy the IFE Does Not OccurComparison of IRP, PPP, and IFE TheoriesChapter ThemeThis chapter discusses the relationship between inflation and exchange rates according to the purchasing power parity (PPP) theory. Since this is one of the most popular subjects in inter-national finance, it is covered thoroughly. While PPP is a relevant theory, it should be emphasized that PPP will not always hold in reality. It does however, provide a foundation in understanding how inflation can affect exchange rates. The international Fisher effect (IFE) is also discussed in this chapter. This theory is also very important. Yet, it should again be emphasized that this theory does not always hold. If the PPP and IFE theories held consistently, decision making by MNCs would be much easier. Because these theories do not hold consistently, an MNC’s decision making is very challenging.Topics to Stimulate Class Discussion1. Provide reasoning for why highly inflated countries such as Brazil tend to have weak homecurrencies.2. Identify the inflation rate of your home country and some well-known foreign country. Thenidentify the percentage change of your home currency with respect to that foreign country.Did the currency change in the direction and by the magnitude that you would have expected according to PPP? If not, offer possible reasons for this discrepancy.3. Identify the quoted one-year interest rates in your home country and in a well-known foreigncountry as of one year ago. Also determine how your home currency changed relative to this foreign currency over the last year. Did the currency change according to the IFE theory? If not, does this information disprove IFE? Elaborate.4. Provide a simple explanation of the difference between interest rate parity (from the previouschapter), PPP (from this chapter), and IFE (from this chapter).Critical debateDoes PPP Eliminate Concerns about Long-Term Exchange Rate Risk?Proposition Yes. Studies have shown that exchange rate movements are related to inflation differentials in the long run. Based on PPP, the currency of a high-inflation country will depreciate against the home currency. A subsidiary in that country should generate inflated revenue from the inflation, which will help offset the adverse exchange effects when its earnings are remitted to the parent. If a firm is focused on long-term performance, the deviations from PPP will offset over time. In some years, the exchange rate effects may exceed the inflation effects, and in other years the inflation effects will exceed the exchange rate effects.Opposing view No. Even if the relationship between inflation and exchange rate effects is consistent, this does not guarantee that the effects on the firm will be offsetting. A subsidiary in a high-inflation country will not necessarily be able to adjust its price level to keep up with the increased costs of doing business there. The effects vary with each MNC’s situation. Even if the subsidiary can raise its prices to match the rising costs, there are short-term deviations from PPP. The investors who invest in an MNC’s stock may be concerned about short-term deviations fromPPP, because they will not necessarily hold the stock for the long term. Thus, investors may prefer that firms manage in a manner that reduces the volatility in their performance in short-run and long-run periods.With whom do you agree? State your reasons Examine the exchange rate policies of the major multinationals by referring to their annual reports. The Forbes listing of major multinationals on the web is a good starting point. In particular, consult the reports of Renault (France) and Phillips (Holland).ANSWER: It is possible that inflation and exchange rate effects will offset over the long run. However, many investors will not be satisfied because they may invest in the firm for just a few years or even a shorter term. Thus, they will prefer that MNCs assess their exposure to exchange rate risk and attempt to limit the risk.Answers to End of Chapter Questions1. PPP. Explain the theory of purchasing power parity (PPP). Based on this theory, what is ageneral forecast of the values of currencies in countries with high inflation?ANSWER: PPP suggests that the purchasing power of a consumer will be similar when purchasing goods in a foreign country or in the home country. If inflation in a foreign country differs from inflation in the home country, the exchange rate will adjust to maintain equal purchasing power.Currencies in countries with high inflation will be weak according to PPP, causing the purchasing power of goods in the home country versus these countries to be similar.2. Rationale of PPP. Explain the rationale of the PPP theory.ANSWER: When inflation is high in a particular country, foreign demand for goods in that country will decrease. In addition, that country’s demand for foreign goods should increase.Thus, the home currency of that country will weaken; this tendency should continue until the currency has weakened to the extent that a foreign country’s goods are no more attractive than the home country’s goods. Inflation differentials are offset by exchange rate changes. 3. Testing PPP. Explain how you could determine whether PPP exists. Describe a limitation intesting whether PPP holds.ANSWER: One method is to choose two countries and compare the inflation differential to the exchange rate change for several different periods. Then, determine whether the exchange rate changes were similar to what would have been expected under PPP theory.A second method is to choose a variety of countries and compare the inflation differential ofeach foreign country relative to the home country for a given period. Then, determine whether the exchange rate changes of each foreign currency were what would have been expected based on the inflation differentials under PPP theory.A limitation in testing PPP is that the results will vary with the base period chosen. The baseperiod should reflect an equilibrium position, but it is difficult to determine when such a period exists.4. Testing PPP. Inflation differentials between the U.S. and other industrialized countries havetypically been a few percentage points in any given year. Yet, in many years annual exchange rates between the corresponding currencies have changed by 10 percent or more.What does this information suggest about PPP?ANSWER: The information suggests that there are other factors besides inflation differentials that influence exchange rate movements. Thus, the exchange rate movements will not necessarily conform to inflation differentials, and therefore PPP will not necessarily hold.5. Limitations of PPP. Explain why PPP does not hold.ANSWER: PPP does not consistently hold because there are other factors besides inflation that influences exchange rates. Thus, exchange rates will not move in perfect tandem with inflation differentials. In addition, there may not be substitutes for traded goods. Therefore, even when a country’s inflation increases, the foreign demand for its products will not necessarily decrease (in the manner suggested by PPP) if substitutes are not available.6. Implications of IFE. Explain the international Fisher effect (IFE). What is the rationale forthe existence of the IFE? What are the implications of the IFE for firms with excess cash that consistently invest in foreign Treasury bills? Explain why the IFE may not hold.ANSWER: The IFE suggests that a currency’s value will adjust in accordance with the differential in interest rates between two countries.The rationale is that if a particular currency exhibits a high nominal interest rate, this may reflect a high anticipated inflation. Thus, the inflation will place downward pressure on the currency’s value if it occurs.The implications are that a firm that consistently purchases foreign Treasury bills will on average earn a similar return as on domestic Treasury bills.The IFE may not hold because exchange rate movements react to other factors in addition to interest rate differentials. Therefore, an exchange rate will not necessarily adjust in accordance with the nominal interest rate differentials, so that IFE may not hold.7. Implications of IFE. Assume UK interest rates are generally above foreign interest rates.What does this suggest about the future strength or weakness of the pound based on the IFE?Should UK investors invest in foreign securities if they believe in the IFE? Should foreign investors invest in UK securities if they believe in the IFE?ANSWER: The IFE would suggest that the pound will depreciate over time if UK interest rates are currently higher than foreign interest rates. Consequently, foreign investors who purchased UK securities would on average receive a similar yield as what they receive in their own country, and UK investors who purchased foreign securities would on average receive a yield similar to UK rates.8. Comparing Parity Theories. Compare and contrast interest rate parity (discussed in theprevious chapter), purchasing power parity (PPP), and the international Fisher effect (IFE).ANSWER: Interest rate parity can be evaluated using data at any one point in time to determine the relationship between the interest rate differential of two countries and the forward premium (or discount). PPP suggests a relationship between the inflation differential of two countries and the percentage change in the spot exchange rate over time. IFE suggestsa relationship between the interest rate differential of two countries and the percentagechange in the spot exchange rate over time. IFE is based on nominal interest rate differentials, which are influenced by expected inflation. Thus, the IFE is closely related to PPP.9. Real Interest Rate. One assumption made in developing the IFE is that all investors in allcountries have the same real interest rate. What does this mean?ANSWER: The real return is the nominal return minus the inflation rate. If all investors require the same real return, then the differentials in nominal interest rates should be solely due to differentials in anticipated inflation among countries.10. Interpreting Inflationary Expectations. If investors in the UK and Canada require the samereal interest rate, and the nominal rate of interest is 2 percent higher in Canada, what does this imply about expectations of UK inflation and Canadian inflation? What do these inflationary expectations suggest about future exchange rates?ANSWER: Expected inflation in Canada is 2 percent above expected inflation in the UK. If these inflationary expectations come true, PPP would suggest that the value of the Canadian dollar should depreciate by 2 percent against the pound.11. PPP Applied to the Euro. Assume that several European countries that use the euro as theircurrency experience higher inflation than the United States, while two other European countries that use the euro as their currency experience lower inflation than the United States.According to PPP, how will the euro’s value against the dollar be affected?ANSWER: The high European inflation overall would reduce the U.S. demand for European products, increase the European demand for U.S. products, and cause the euro to depreciate against the dollar.According to the PPP theory, the euro's value would adjust in response to the weighted inflation rates of the European countries that are represented by the euro relative to the inflation in the U.S. If the European inflation rises, while the U.S. inflation remains low, there would be downward pressure on the euro.12. Source of Weak Currencies. Currencies of some Latin American countries, such as Braziland Venezuela, frequently weaken against most other currencies. What concept in this chapter explains this occurrence? Why don’t all U.S.-based MNCs use forward contracts to hedge their future remittances of funds from Latin American countries to the U.S. even if they expect depreciation of the currencies against the dollar?ANSWER: Latin American countries typically have very high inflation, as much as 200 percent or more. PPP theory would suggest that currencies of these countries will depreciateagainst the U.S. dollar (and other major currencies) in order to retain purchasing power across countries. The high inflation discourages demand for Latin American imports and places downward pressure in their Latin American currencies. Depreciation of the currencies offsets the increased prices on Latin American goods from the perspective of importers in other countries.Interest rate parity forces the forward rates to contain a large discount due to the high interest rates in Latin America, which reflects a disadvantage of hedging these currencies. The decision to hedge makes more sense if the expected degree of depreciation exceeds the degree of the forward discount. Also, keep in mind that some remittances cannot be perfectly hedged anyway because the amount of future remittances is uncertain.13. PPP. Japan has typically had lower inflation than the United States. How would one expectthis to affect the Japanese yen’s value? Why does this expected relationship not always occur?ANSWER: Japan’s low inflation should place upward pressure on the yen’s value. Yet, other factors can sometimes offset this pressure. For example, Japan heavily invests in U.S.securities, which places downward pressure on the yen’s value.14. IFE. Assume that the nominal interest rate in Mexico is 48 percent and the interest rate in theUnited States is 8 percent for one-year securities that are free from default risk. What does the IFE suggest about the differential in expected inflation in these two countries? Using this information and the PPP theory, describe the expected nominal return to U.S. investors who invest in Mexico.ANSWER: If investors from the U.S. and Mexico required the same real (inflation-adjusted) return, then any difference in nominal interest rates is due to differences in expected inflation. Thus, the inflation rate in Mexico is expected to be about 40 percent above the U.S.inflation rate.According to PPP, the Mexican peso should depreciate by the amount of the differential between U.S. and Mexican inflation rates. Using a 40 percent differential, the Mexican peso should depreciate by about 40 percent. Given a 48 percent nominal interest rate in Mexico and expected depreciation of the peso of 40 percent, U.S. investors will earn about 8 percent.(This answer used the inexact formula, since the concept is stressed here more than precision.)15. IFE. Shouldn’t the IFE discourage investors from attempting to capitalize on higher foreigninterest rates? Why do some investors continue to invest overseas, even when they have no other transactions overseas?ANSWER: According to the IFE, higher foreign interest rates should not attract investors because these rates imply high expected inflation rates, which in turn imply potential depreciation of these currencies. Yet, some investors still invest in foreign countries where nominal interest rates are high. This may suggest that some investors believe that (1) the anticipated inflation rate embedded in a high nominal interest rate is overestimated, or (2) the potentially high inflation will not cause substantial depreciation of the foreign currency (which could occur if adequate substitute products were not available elsewhere), or (3) thereare other factors that can offset the possible impact of inflation on the foreign currency’s value.16. Changes in Inflation. Assume that the inflation rate in Brazil is expected to increasesubstantially. How will this affect Brazil’s nominal interest rates and the value of its currency (called the real)? If the IFE holds, how will the nominal return to UK investors who invest in Brazil be affected by the higher inflation in Brazil? Explain.ANSWER: Brazil’s nominal interest rate would likely increase to maintain the real return required by Brazilian investors. The Brazilian real would be expected to depreciate according to the IFE. If the IFE holds, the return to UK investors who invest in Brazil would not be affected. Even though they now earn a higher nominal interest rate, the expected decline in the Brazilian real offsets the additional interest to be earned.17. Comparing PPP and IFE. How is it possible for PPP to hold if the IFE does not?ANSWER: For the IFE to hold, the following conditions are necessary:(1) investors across countries require the same real returns,(2) the expected inflation rate embedded in the nominal interest rate occurs,(3) the exchange rate adjusts to the inflation rate differential according to PPP.If conditions (1) or (2) do not hold, PPP may still hold, but investors may achieve consistently higher returns when investing in a foreign country’s securities. Thus, IFE would be refuted.18. Estimating Depreciation Due to PPP. Assume that the spot exchange rate of the Britishpound is $1.73. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?ANSWER: According to PPP, the exchange rate of the pound will depreciate by 4.7 percent.Therefore, the spot rate would adjust to $1.73 × [1 + (–.047)] = $1.65.19. Forecasting the Future Spot Rate Based on IFE. Assume that the spot exchange rate of theSingapore dollar is £0.35. The one-year interest rate is 11 percent in the United Kingdom and7 percent in Singapore. What will the spot rate be in one year according to the IFE? (Youmay use the approximate formula to answer this question.)ANSWER: £0.35 × (1 + .04) = £0.36420. Deriving Forecasts of the Future Spot Rate. As of today, assume the following informationis available:UK MexicoReal rate of interest requiredinvestors 2% 2%byNominal interest rate 11% 15%Spot rate — £0.05One-year forward rate — £0.049a. Use the forward rate to forecast the percentage change in the Mexican peso over the nextyear.ANSWER: (£0.049– £0.05)/£0.05 = –.02, or –2%b. Use the differential in expected inflation to forecast the percentage change in theMexican peso over the next year.ANSWER: 11% – 15% = –4%; the negative sign represents depreciation of the peso.c. Use the spot rate to forecast the percentage change in the Mexican peso over the next year.ANSWER: zero percent change21. Inflation and Interest Rate Effects. The opening of Russia's market has resulted in a highlyvolatile Russian currency (the rouble). Russia's inflation has commonly exceeded 20 percent per month. Russian interest rates commonly exceed 150 percent, but this is sometimes less than the annual inflation rate in Russia.a. Explain why the high Russian inflation has put severe pressure on the value of theRussian rouble.ANSWER: As Russian prices were increasing, the purchasing power of Russian consumers was declining. This would encourage them to purchase goods in the UK and elsewhere, which results in a large supply of roubles for sale. Given the high Russian inflation, foreign demand for roubles to purchase Russian goods would be low. Thus, the rouble’s value should depreciate against the dollar, and against other currencies.b. Does the effect of Russian inflation on the decline in the rouble’s value support the PPPtheory? How might the relationship be distorted by political conditions in Russia?ANSWER: The general relationship suggested by PPP is supported, but the rouble’s value will not normally move exactly as specified by PPP. The political conditions that could restrict trade or currency convertibility can prevent Russian consumers from shifting to foreign goods. Thus, the rouble may not decline by the full degree to offset the inflation differential between Russia and the UK Furthermore, the government may not allow the rouble to float freely to its proper equilibrium level.c. Does it appear that the prices of Russian goods will be equal to the prices of UK goodsfrom the perspective of Russian consumers (after considering exchange rates)? Explain.ANSWER: Russian prices might be higher than UK prices, even after considering exchange rates, because the rouble might not depreciate enough to fully offset the Russian inflation. The exchange rate cannot fully adjust if there are barriers on trade or currency convertibility.d. Will the effects of the high Russian inflation and the decline in the rouble offset eachother for UK importers? That is, how will UK importers of Russian goods be affected by the conditions?ANSWER: UK importers will likely experience higher prices, because the Russian inflation may not be completely offset by the decline in the rouble’s value. This may cause a reduction in the UK demand for Russian goods.22. IFE Application to Asian Crisis. Before the Asian crisis, many investors attempted tocapitalize on the high interest rates prevailing in the Southeast Asian countries although the level of interest rates primarily reflected expectations of inflation. Explain why investors behaved in this manner.Why does the IFE suggest that the Southeast Asian countries would not have attracted foreign investment before the Asian crisis despite the high interest rates prevailing in those countries?ANSWER: The investors' behavior suggests that they did not expect the international Fisher effect (IFE) to hold. Since central banks of some Asian countries were maintaining their currencies within narrow bands, they were effectively preventing the exchange rate from depreciating in a manner that would offset the interest rate differential. Consequently, superior profits from investing in the foreign countries were possible.If investors believed in the IFE, the Asian countries would not attract a high level of foreign investment because of exchange rate expectations. Specifically, the high nominal interest rate should reflect a high level of expected inflation. According to purchasing power parity (PPP), the higher interest rate should result in a weaker currency because of the implied market expectations of high inflation.23. IFE Applied to the Euro. Given the recent conversion of several European currencies to theeuro, explain what would cause the euro’s value to change against the dollar according to the IFE.ANSWER: If interest rates change in these European countries whose home currency is the euro, the expected inflation rate in those countries change, so that the inflation differential between those countries and the U.S. changes. Thus, there may be an impact on the value of the euro, because a change in the inflation differential affects trade flows and therefore affects the exchange rate.Advanced Questions24. IFE. Beth Miller does not believe that the international Fisher effect (IFE) holds. Currentone-year interest rates in Europe are 5 percent, while one-year interest rates in the U.S. are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.10.a. According to the IFE, what should the spot rate of the euro in one year be?b. If the spot rate of the euro in one year is $1.00, what is Beth’s percentage return from herstrategy?c. If the spot rate of the euro in one year is $1.08, what is Beth’s percentage return from herstrategy?d. What must the spot rate of the euro be in one year for Beth’s strategy to be successful?ANSWER:a.%90.11)05.1()03.1(1)1()1(−=−=−++=f h f i i eIf the IFE holds, the euro should depreciate by 1.90 percent in one year. This translates to a spot rate of $1.10 × (1 – 1.90%) = $1.079.b.1. Convert dollars to euros: $100,000/$1.10 = €90,909.092. Invest euros for one year and receive €90,909.09 × 1.05 = €95,454.553. Convert euros back to dollars and receive €95,454.55 × $1.00 = $95,454.55The percentage return is $95,454.55/$100,000 – 1 = –4.55%.c.1. Convert dollars to euros: $100,000/$1.10 = €90,909.092. Invest euros for one year and receive €90,909.09 × 1.05 = €95,454.553. Convert euros back to dollars and receive €95,454.55 × $1.08 = $103,090.91The percentage return is $103,090.91/$100,000 – 1 = 3.09%.d. Beth’s strategy would be successful if the spot rate of the euro in one year is greater than$1.079.25. Integrating IRP and IFE. Assume the following information is available for the U.S. andEurope:U.S. Europe Nominal interest rate 4% 6%Expected inflation 2% 5%Spot rate ----- $1.13One-year forward rate ----- $1.10a. Does IRP hold?b. According to PPP, what is the expected spot rate of the euro in one year?c. According to the IFE, what is the expected spot rate of the euro in one year?d. Reconcile your answers to parts (a). and (c).ANSWER:a.%89.11)06.1()04.1(1)1()1(−=−=−++=f h i i pTherefore, the forward rate of the euro should be $1.13 × (1 – 1.89%) = $1.109. IRP does not hold in this case.b.%86.21)05.1()02.1(1)1()1(−=−=−++=f h f I I eAccording to PPP, the expected spot rate of the euro in one year is $1.13 × (1 – 2.86%) = $1.098.c.%89.11)06.1()04.1(1)1()1(−=−=−++=f h f i i eAccording to the IFE, the expected spot rate of the euro in one year is $1.13 × (1 – 2.86%) = $1.098.Parts a and c combined say that the forward rate premium or discount is exactly equal to theexpectedpercentage appreciation or depreciation of the euro.26. IRP. The one-year risk-free interest rate in Mexico is 10%. The one-year risk-free rate in theUK is 2%. Assume that interest rate parity exists. The spot rate of the Mexican peso is £0.14.a. What is the forward rate premium?b. What is the one-year forward rate of the peso?c. Based on the international Fisher effect, what is the expected change in the spot rate over thenext year?d.If the spot rate changes as expected according to the IFE, what will be the spot rate in oneyear?pare your answers to (b) and (d) and explain the relationship.ANSWER:a. According to interest rate parity, the forward premium is07273.1)10.1()02.1(−=−++b. The forward rate is £0.14 × (1 – .07273) = £0.1298.c. According to the IFE, the expected change in the peso is:07273.1)10.1()02.1(−=−++or –7.273%d. £.14 × (1 – .07273) = £0.1298e. The answers are the same. When IRP holds, the forward rate premium and the expected percentage change in the spot rate are derived in the same manner. Thus, the forward premium serves as the forecasted percentage change in the spot rate according to IFE.27. Testing the PPP. How could you use regression analysis to determine whether therelationship specified by PPP exists on average? Specify the model, and describe how you would assess the regression results to determine if there is a significant difference from the relationship suggested by PPP.ANSWER: A regression model could be applied to historical data to test PPP. The model isspecified as:()e a a 1+I 1 + I u f 01U.S.f =+−⎡⎣⎢⎤⎦⎥+1where e f is the percentage change in the foreign currency’s exchange rate, I U.S. and I f are U.S.and foreign inflation rates, a 0 is a constant, a 1 is the slope coefficient, and u is an error term. If PPP holds, a 0 should equal zero, and a 1 should equal 1. A t-test on a 0 and a 1 is shown below.t -test for a : t = a 0s.e. of a t -test for a : t = a1s.e. of a 0001 1 1−−。
国际财务管理(英文版) 第11版 马杜拉 答案 Chapter 19
Chapter 19International Cash Management Lecture OutlineCash Flow Analysis: Subsidiary PerspectiveSubsidiary ExpensesRevenueSubsidiarySubsidiary Dividend PaymentsSubsidiary Liquidity ManagementCentralized Cash ManagementTechniques to Optimize Cash FlowsAccelerating Cash InflowsMinimizing Currency Conversion CostsManaging Blocked FundsManaging Intersubsidiary Cash TransfersComplications in Optimizing Cash FlowCharacteristicsCompany-RelatedRestrictionsGovernmentCharacteristics of Banking SystemsInvesting Excess CashHow to Invest Excess CashCentralized Cash ManagementDetermining the Effective YieldImplications of Interest Rate ParityUse of the Forward Rate as a ForecastUse of Exchange Rate ForecastsDiversifying Cash Across CurrenciesHedgingDynamicChapter ThemeThis chapter emphasizes the decisions involved in the management of cash by an MNC. The additional opportunities and risks of cash management for an MNC versus a domestic firm should be stressed. There are actually three key components of the chapter. The first is distinguishing between subsidiary control over excess cash versus centralized control. An argument is made in favor of centralized control. The second component is optimizing cash flow. Several techniques are recommended to optimize cash flow. Finally, the decision of where to invest excess cash should be discussed with consideration of all factors that need to be incorporated for this decision.Topics to Stimulate Class Discussion1. Should international cash management be conducted at the subsidiary level or at the centralizedlevel? Elaborate.2. What is the use of netting to an MNC?3. How can a firm deal with blocked funds?4. Assume that as a treasurer of a U.S. corporation, you believe that the British pound’s forward rateis an accurate forecast of the pound’s future spot rate. What does this imply about your decision of whether to invest cash in the U.S. or in the U.K.?Critical debateShould a MNC’s subsidiaries operate their own cash management policies?Yes. Ultimately cash management means that everything is controlled from the Propositioncentre. Different countries and indeed different products have very different working capital requirements. Centralization could easily lead to poor working capital management and cash flow difficulties.No. Trade between subsidiaries accounts for about a large percentage of Opposingviewworld exports, there has to be coordination between subsidiaries, also customers can be MNC’s so coordination is also required in debt collection. Also, there are considerable exchangerate savings to be madeWith whom do you agree? Think carefully about the arguments for and against allowing subsidiaries to manage their own cash. What are the problems with each of the arguments? Is there a solution that avoids the main drawbacks?ANSWER: For is the argument that the business is more efficient when such matters are run centrally. There are many systems nowadays run centrally from road tax to supermatrket clubcards. However, against is the argument that motivation is lost by running the business from the centre. Is autonomy worth the loss of efficiency if it means a better motivated workforce. Does this answer depend on the type of business?Answers to End of Chapter Questions1. International Cash Management. Discuss the general functions involved in international cashmanagement. Explain how the MNC’s optimization of cash flow can distort the profits of each subsidiary.ANSWER: The general functions of international cash management are optimizing cash flows and investing excess cash. These functions combined will lead to efficient usage of funds.When subsidiaries adjust their cash transactions between each other to reduce taxes or financing costs, their individual performances are distorted. For example, a subsidiary that makes a late payment to another subsidiary (due to its shortage of funds) benefits in that it avoided a short-term loan by delaying payment. The recipient subsidiary was hampered due to not receiving funds earlier (since the present value of the late payment is lower).2. Netting. Explain the benefits of netting. How can a centralized cash management system bebeneficial to the MNC?ANSWER: Netting is a centralized compilation of inter-subsidiary cash flows. It is designed to reduce currency conversion costs and processing costs associated with payments between subsidiaries. By specifying a single net payment to be made instead of all individual payments owed between subsidiaries, transactions costs are reduced and cash flows may be forecasted more accurately.A centralized cash management system is beneficial in that it allows for netting, which can reducetransactions costs and improve cash budgeting. In addition, it can increase yields on short-term investments by pooling excess cash of various subsidiaries.3. Leading and Lagging. How can an MNC implement leading and lagging techniques to helpsubsidiaries in need of funds?ANSWER: A subsidiary in need of funds would receive cash inflows from another subsidiary sooner than is required. This early payment provides the necessary funds. If the subsidiary in need of funds is making payment, it may be allowed by the MNC parent or recipient subsidiary to delay on its payment.4. International Fisher Effect. If a U.S. firm believes that the international Fisher effect holds, whatare the implications regarding a strategy of continually attempting to generate high returns from investing in currencies with high interest rates?ANSWER: High interest rate currencies will typically depreciate to offset their interest rate advantage (on average) according to the IFE. Therefore, this strategy will on average provide similar returns as a domestic investment, and the strategy is not worthwhile.5. Investing Strategy. Trumpington ltd has £2 million in excess cash that it has invested in Mexicoat an annual interest rate of 60 percent. The UK interest rate is 9 percent. By how much would the Mexican peso have to depreciate to cause such a strategy to backfire?1 +9%-1 = -31.875%1 +60%ANSWER: If the peso depreciates by more than 31.875 percent, the effective yield on the Mexican deposit will be less than the domestic yield.6. Investing Strategy. Why would a UK firm consider investing short-term funds in euros evenwhen it does not have any future cash outflows in euros?ANSWER: The interest rate on the euro may be higher, or the euro may have a high probability of appreciating. Also the firm may invest in euros today to hedge a future payment in euros.7. Covered Interest Arbitrage. Granville SA has 2 million euro in cash available for 90 days. It isconsidering the use of covered interest arbitrage, since the euro’s 90-day interest rate is higher than the euro interest rate. What will determine whether this strategy is feasible?ANSWER: If interest rate parity exists, then the forward rate of the euro contains a discount that sufficiently offsets the higher interest rate on euros. Consequently, the act of covered interest arbitrage would not be feasible.8. Effective Yield. Corlins plc has £1 million in cash available for 30 days. It can earn 1 percent on a30-day investment in the United Kingdom. Alternatively, if it converts the pounds to South African rand, it can earn 1 ½ percent on a rand deposit. The spot rate of the rand is £0.09. The spot rate 30 days from now is expected to be £0.08. Should Corlins invest its cash in the United Kingdom or in South Africa? Explain your answer.ANSWER: If Corlins plc invests in a Mexican deposit, it will convert £1 million to 11,111,111R which will accumulate to 11,277,778R after one month (due to the 1 1/2% interest rate). If the spot rate of the rand is £0.08 after one month, the rand will be converted to £902,222, which is less than the amount of pounds the firm started with. Thus, the Corlins plc should invest its cash in the UK. An alternative approach is to note that the value of the rand is going to fall by (0.08 –0.09)/0.09 = -11.1% much greater than the difference in interest rates.9. Effective Yield. Rollins plc has £3 million in cash available for 180 days. It can earn 7 percent ona UK Treasury bill or 9 percent on a US Treasury bill. The US investment does require conversionof pounds to dollars. Assume that interest rate parity holds and that Rollins believes the 180-day forward rate is a reliable predictor of the spot rate to be realized 180 days from now. Would the British investment provide an effective yield that is below, above, or equal to the yield on the U.S.investment? Explain your answer.ANSWER: If the forward rate is an accurate forecast of the future spot rate, then the return on a foreign investment without covering the currency exposure will be the same as if it was covered.The uncovered foreign investment, like the act of covered interest arbitrage, will generate a return similar to the domestic return (given that interest rate parity exists).10. Effective Yield. Repeat question 9, but this time assume that Rollins plc expects the 180-dayforward rate of the dollar to substantially overestimate the spot rate to be realized in 180 days.ANSWER: In this case, the future spot rate will be less than the forward rate. If it was equal to the forward rate, the foreign return would have been similar to the domestic return for Rollins Inc.(as explained in the answer to question 9). If the future spot rate is lower than the forward rate, the U.S. firm will receive less when converting the pounds back to dollars. Thus, the foreign return is expected to be less than the domestic return.11. Effective Yield. Repeat question 9, but this time assume that the Rollins plc expects the 180-dayforward rate of the pound to substantially underestimate the spot rate to be realized in 180 days.ANSWER: In this case, Rollins will receive more when converting the pounds back to dollars than the amount necessary to match the domestic return. Thus, the foreign return is expected to be greater than the domestic return.12. Effective Yield. Assume that the one-year UK interest rate is 10 percent and the one-year USinterest rate is 13 percent. If a UK firm invests its funds in the US, by what percentage will the dollar have to depreciate to make its effective yield the same as the UK interest rate from the UK firm’s perspective?ANSWER:(1 + 10%) – 1 = about –2.65%(113%)+13. Investing in a Currency Portfolio. Why would a firm consider investing in a portfolio of foreigncurrencies instead of just a single foreign currency?ANSWER: A portfolio of currencies reduces the probability of the foreign investment backfiring due to depreciation in the currencies denominating the investment. If all funds are in an investment denominated in a single foreign currency, risk of that currency substantially depreciating is relatively high (compared to an entire portfolio of currencies substantially depreciating).14. Interest Rate Parity. Trellis ltd has determined that the interest rate on euros is 16 percent whilethe UK interest rate is 11 percent for one-year Treasury bills. The one-year forward rate of the euro has a discount of 7 percent. Does interest rate parity exist? Can Trellis achieve a higher effective yield by using covered interest arbitrage than by investing in UK Treasury bills? Explain.ANSWER: If interest rate parity (IRP) existed, the forward rate of the euro should have a discount reflecting the interest rate differential:(1 + 11%) – 1 = –4.31% (discount)=Forwarddiscount(1 + 16%)Since the euro’s actual discount exceeds that percentage, IRP does not exist. However, Dallas Company would achieve a lower effective yield if attempting covered interest arbitrage than if it invests in UK Treasury bills, because the euro’s forward discount more than offsets the interest rate differential.15. Diversified Investments. Hofstra ltd has no business outside the UK but has cash invested in sixEuropean countries, each of which uses the euro as its local currency. Are Hofstra’s short-term investments well diversified and subject to a low degree of exchange rate risk? Explain.ANSWER: The short-term investments are not well diversified, because the entire portfolio of investments is denominated in euros. If the euro weakens against the pound, the return on all short-term securities denominated in euros will decline from the perspective of the UK firm.16. Investing Strategy. Should McNeese ltd consider investing funds in Latin American countrieswhere it may expand facilities? The interest rates are high, and the proceeds from the investments could be used to help support the expansion. When would this strategy backfire?ANSWER: McNeese could benefit from investing at a high interest rate. However, this strategy could backfire if the currency weakens over time, because McNeese could have converted pounds later (at the time of expansion) at a more favourable exchange rate. The tradeoff is a higher interest rate if it invests funds now, versus a more favourable exchange rate if it invests funds later.17. Impact of a crisis. Palos SA (Spain) commonly invests some of its excess euros in foreigngovernment short-term securities in order to earn a higher short-term interest rate on its cash. Describe how the potential return and risk of this strategy may be affected by financial crisis.ANSWER: A financial crisis si likely to mean higher interest rates due to the greater risk. If the euros invested are excesss, then Palos might like to a certain extent to take the risk if it feels that the financial crisis is unwarranted. In this respect ti might use information from its local interests if there are any. Using specialist information in this way would lead to Palos earning excess returns as a reward for the information.Advanced Questions18. Investing in a Portfolio. Poppleton ltd plans to invest its excess cash in South African rand forone year. The one-year South African interest rate is 19 percent. The probability of the rand’s percentage change in value during the next year is shown below:Possible rate of change in the South African rand overthe life of theinvestmentProbability ofoccurrence-15% 20%-4 50%0 30%What is the expected value of the effective yield based on this information? Given that the UKinterest rate for one year is 7 percent, what is the probability that a one-year investment in pesos will generate a lower effective yield than could be generated if Poppleton ltd simply invested domestically?ANSWER:Effective Yield if thisP ossible Rate of Rate of Change in theChange in Peso Probability Peso Does Occur –15% 20% (1.19) [1 + (–15%)] – 1 = 1.15% –4% 50% (1.19) [1 + (–4%)] – 1 = 14.24% 0% 30% (1.19) [1 + (0%)] – 1 = 19.00%E(r) = 20% (1.15%) + 50% (14.24%) + 30% (19.00%)= 0.23% + 7.12% + 5.70%= 13.05%There is a 20% probability that the rand’s effective yield will be less than the domestic yield.19. Effective Yield of Portfolio. Ithaca (Greece) considers placing 30 percent of its excess funds in a one-year Singapore dollar deposit and the remaining 70 percent of its funds in a one-year US dollar deposit. The Singapore one-year interest rate is 15 percent, while the US one-year interest rate is 10 percent. The possible percentage changes in the two currencies for the next year are forecasted as follows:currency Possible percentage change in the spot rate over the investmenthorizonProbability of that change in the spot rateoccurringSingapore dollar -2% 20%Singapore dollar 1 60Singapore dollar 3 20US dollar 1 50US dollar 4 40US dollar 6 10Given this information, determine the possible effective yields of the portfolio and the probability associated with each possible portfolio yield. Given a one-year euro interest rate of 8 percent, what is the probability that the portfolio’s effective yield will be lower than the yield achieved from investing in the United States? (assume that the movements on the two currencies are not correlated)ANSWER:Possible % Change Effective Yield Based on thein the Singapore Dollar% Change in the Singapore Dollar –2% (1.15) [1 + (–2%)] – 1 = 12.7%1% (1.15) [1 + (1%)] – 1 = 16.15%3% (1.15) [1 + (3%)] – 1 = 18.45%Possible % Change in Effective Yield Based on thethe US Dollar % Change in the US Dollar1% (1.13) [1 + (1%)] – 1 = 14.13%4% (1.13) [1 + (4%)] – 1 = 17.52%6% (1.13) [1 + (6%)] – 1 = 19.78%Possible JointEffective Yield Computation of Computation of EffectiveS$ C$ Joint Probability Yield of Portfolio12.7% 14.13% (20%)(50%) = 10% .3(12.7%) + .7(14.13%) = 13.701%12.7 17.52 (20%)(40%) = 8% .3(12.7%) + .7(17.52%) = 16.074%12.7 19.78 (20%)(10%) = 2% .3(12.7%) + .7(19.78%) = 17.656%16.15 14.13 (60%)(50%) = 30% .3(16.15%) + .7(14.13%) =14.736%16.15 17.52 (60%)(40%) = 24% .3(16.15%) + .7(17.52%) =17.109%16.15 19.78 (60%)(10%) = 6% .3(16.15%) + .7(19.78%) =18.691%18.45 14.13 (20%)(50%) = 10% .3(18.45%) + .7(14.13%) =15.426%18.45 17.52 (20%)(40%) = 8% .3(18.45%) + .7(17.52%) =17.799%18.45 19.78 (20%)(10%) = 2% .3(18.45%) + .7(19.78%) =19.381%100%There is a 0% chance that the portfolio will generate a lower return than a euro investment (determined by the table above).。
国际财务管理作业3(题目及参考答案)
国际财务管理作业31、远期外汇交易（1）（远期汇率计算）某日英国伦敦的外汇市场报价如下：英镑对美元的即期汇率为：1GBP ＝USD1.5392 / 1.5402，2个月的远期点数21/24；英镑对法国法郎的即期汇率为：1GBP＝FRF7.6590 / 7.6718，2个月的远期点数252/227，试计算：英镑对美元以及英镑对法国法郎两个月的远期汇率分别为多少？解：英镑对美元两个月的远期汇率1GBP＝USD（1.5392+0.0021）/ （1.5402+0.0024）1GBP＝USD1.5413/1.5426英镑对法国法郎两个月的远期汇率1GBP＝FRF(7.6590-0.0252) / (7.6718-0.0227)1GBP＝FRF7.6338/7.6491（2）巴黎外汇市场美元对欧元的即期汇率是1美元=0.8200-0.8240欧元，三个月远期贴水为340-330，我某公司出口一批机床，原报价每台机床30 000欧元。
现法国进口商要求我改用美元向其报价，且三个月后才能收汇。
问我应改报多少美元?解：（1）首先弄清l美元=0.8200-0.8240欧元为直接标价法，直接标价法下升水加贴水减三个月后美元对欧元的汇率：1美元=(0.8200-0.0340)-(0.8240-0.0330)欧元即l美元=0.7860-0.7910欧元（2）其次清楚0.7860为买入价，0.7910为卖出价（3）再有改报多少美元，最初报价30 000欧元，表明最后要得到的是欧元，这样改报的美元数应该能够换回所需要的欧元数，那么卖给银行美元用买入价即改报美元数：30 000／0.7860=38170美元（3）P教材85：第四题解：收：5000÷100×81.21=4060.5万元人民币减少损失为50万元（4）某个澳大利亚进口商从日本进口一批商品，日本厂商要求澳方在3个月内支付10亿日元的货款。
当时外汇市场的行情是：即期汇率：1澳元＝100.00～100.12日元3月期远期汇水数：2.00～1.90故3月期远期汇率为：1 澳元＝98.00～98.22日元如果该澳大利亚进口商在签订进口合同时预测3个月后日元对澳元的即期汇率将会升值到：1澳元＝80.00—80.10日元问题：1）若澳大利亚进口商不采取避免汇率风险的保值措施，现在就支付10亿日元，则需要多少澳元?2)若现在不采取保值措施，而是延迟到3个月后支付10亿日元，则到时需要支付多少澳元?3)若该澳大利亚进口商现在采取套期保值措施，应该如何进行?3个月后他实际支付多少澳元?解：1)该澳大利亚进口商签订进口合同时就支付10亿日元，需要以1澳元＝100.00日元的即期汇率向银行支付10亿/100.00=0.1亿澳元，即10,000,000澳元。
国际财务管理英文版第版马杜拉答案Chapter
Chapter 3International Financial Markets Lecture OutlineMotives for Using International Financial Markets Motives for Investing in Foreign MarketsMotives for Providing Credit in Foreign MarketsMotives for Borrowing in Foreign MarketsForeign Exchange MarketHistory of Foreign ExchangeForeign Exchange TransactionsExchange QuotationsForeignInterpretingCurrency Futures and Options MarketsInternational Money MarketOrigins and DevelopmentStandardizing Global Bank RegulationsInternational Credit MarketSyndicated LoansInternational Bond MarketEurobond MarketDevelopment of Other Bond MarketsComparing Interest Rates Among CurrenciesInternational Stock MarketsIssuance of Foreign Stock in the U.S.Issuance of Stock in Foreign MarketsComparison of International Financial MarketsHow Financial Markets Affect an MNC’s ValueChapter ThemeThis chapter identifies and discusses the various international financial markets used by MNCs. These markets facilitate day-to-day operations of MNCs, including foreign exchange transactions, investing in foreign markets, and borrowing in foreign markets.Topics to Stimulate Class Discussion1. Why do international financial markets exist?2. How do banks serve international financial markets?3. Which international financial markets are most important to a firm that consistently needsshort-term funds? What about a firm that needs long-term funds?Critical debateShould firms that go public engage in international offerings?Proposition Yes. When a firm issues shares to the public for the first time in an initial public offering (IPO), it is naturally concerned about whether it can place all of its shares at a reasonable price. It will be able to issue its shares at a higher price by attracting more investors. It will increase its demand by spreading the shares across countries. The higher the price at which it can issue shares, the lower is its cost of using equity capital. It can also establish a global name by spreading shares across countries.Opposing view No. If a firm spreads its shares across different countries at the time of the IPO, there will be less publicly traded shares in the home country. Thus, it will not have as much liquidity in the secondary market. Investors desire shares that they can easily sell in the secondary market, which means that they require that the shares have liquidity. To the extent that a firm reduces its liquidity in the home country by spreading its share across countries, it may not attract sufficient home demand for the shares. Thus, its efforts to create global name recognition may reduce its name recognition in the home country.With whom do you agree? State your reasons. Use InfoTrac or some other search engine to learn more about this issue. Which argument do you support? Offer your own opinion on this issue.ANSWER: The key is that students recognize the tradeoff involved. A firm that engages in a relatively small IPO will have limited liquidity even when all of the stock is issued in the home country. Thus, it should not consider issuing stock internationally. However, firms with larger stock offerings may be in a position to issue a portion of their shares outside the home country. They should not spread the stocks across several countries, but perhaps should target one or two countries where they conduct substantial business. They want to ensure sufficient liquidity in each of the foreign countries where they sell shares.Stock Markets are inefficientPropositionI cannot believe that if the value of the euro in terms of, say, the British pound increases three days in a row, on the fourth day there is still a 50:50 chance that it will go up or down in value. I think that most investors will see a trend and will buy, therefore the price is morelikely to go up. Also, if the forward market predicts a rise in value, on average, surely it is going to rise in value. In other words, currency prices are predictable. And finally, if it were so unpredictable and therefore unprofitable to the speculator, how is it that there is such a vast sum of money being traded every day for speculative purposes – there is no smoke without fire.The simple answer is that if that is what you believe, buy currencies that have viewOpposingincreased three days in a row and on average you should make a profit, buy currencies where the forward market shows an increase in value. The fact is that there are a lot of investors with just your sort of views. The market traders know all about such beliefs and will price the currency so that such easy profit (their loss) cannot be made. Look at past currency rates for yourself, check all fourth day changes after three days of rises, any difference is going to be not enough to cover transaction costs or trading expenses and the slight inaccuracy in your figures which are likely to be closing day mid point of the bid/ask spread. No, all currency movements are related to information and no-one knows if tomorrows news will be better or worse than expected.With whom do you agree? Could there be undiscovered patterns? Could some movements not be related to information? Could some private news be leaking out?ANSWER: Clearly there are no obvious patterns. Discussion on the impossibility of obvious patterns is worth emphasizing. However, does market inefficiency necessarily involve patterns, could market manipulation be occasional. There is worrying evidence from share price movements that there is unusual movement before announcements on many occasions, so the ideathat traders do not occasionally collude and move the price without supporting economic evidence is not an unreasonable view. Proof is however difficult as we have to separate anticipation from prior knowledge, the lucky speculator from the speculator who was in the know.Answers to End of Chapter Questions1. Motives for Investing in Foreign Money Markets. Explain why an MNC may invest fundsin a financial market outside its own country.ANSWER: The MNC may be able to earn a higher interest rate on funds invested in a financial market outside of its own country. In addition, the exchange rate of the currency involved may be expected to appreciate.2. Motives for Providing Credit in Foreign Markets. Explain why some financial institutionsprefer to provide credit in financial markets outside their own country.ANSWER: Financial institutions may believe that they can earn a higher return by providing credit in foreign financial markets if interest rate levels are higher and if the economic conditions are strong so that the risk of default on credit provided is low. The institutions may also want to diversity their credit so that they are not too exposed to the economic conditions in any single country.3. Exchange Rate Effects on Investing. Explain how the appreciation of the Australian dollaragainst the euro would affect the return to a French firm that invested in an Australian money market security.ANSWER: If the Australian dollar appreciates over the investment period, this implies that the French firm purchased the Australian dollars to make its investment at a lower exchange rate than the rate at which it will convert A$ to euros when the investment period is over.Thus, it benefits from the appreciation. Its return will be higher as a result of this appreciation.4. Exchange Rate Effects on Borrowing. Explain how the appreciation of the Japanese yenagainst the UK pound would affect the return to a UK firm that borrowed Japanese yen and used the proceeds for a UK project.ANSWER: If the Japanese yen appreciates over the borrowing period, this implies that the UK firm converted yen to pounds at a lower exchange rate than the rate at which it paid for yen at the time it would repay the loan. Thus, it is adversely affected by the appreciation. Its cost of borrowing will be higher as a result of this appreciation.5. Bank Services. List some of the important characteristics of bank foreign exchange servicesthat MNCs should consider.ANSWER: The important characteristics are (1) competitiveness of the quote, (2) the firm’s relationship with the bank, (3) speed of execution, (4) advice about current market conditions, and (5) forecasting advice.6. Bid/ask Spread. Delay Bank’s bid price for US dollars is £0.53 and its ask price is £0.55.What is the bid/ask percentage spread?ANSWER: (£0.55– £0.53)/£0.55 = .036 or 3.6%7. Bid/ask Spread. Compute the bid/ask percentage spread for Mexican peso in which the askrate is 20.6 New peso to the dollar and the bid rate is 21.5 New peso to the dollar.ANSWER: direct rates are 1/20.6 = $0.485:1 peso as the ask rate and 1/21.5 = $0.465:1 peso as the bid rate so the spread is[($0.485 – $0.465)/$0.485] = .041, or 4.1%. Note that the spread is fro the Mexiccan peso not the dollar.8. Forward Contract. The Wolfpack ltd is a UK exporter that invoices its exports to the UnitedStates in dollars. If it expects that the dollar will appreciate against the pound in the future, should it hedge its exports with a forward contract? Explain..ANSWER: The forward contract can hedge future receivables or payables in foreign currencies to insulate the firm against exchange rate risk. Yet, in this case, the Wolfpack Corporation should not hedge because it would benefit from appreciation of the dollar when it converts the dollars to pounds.9. Euro. Explain the foreign exchange situation for countries that use the euro when theyengage in international trade among themselves.ANSWER: There is no foreign exchange. Euros are used as the medium of exchange.10. Indirect Exchange Rate. If the direct exchange rate of the euro is worth £0.685, what is theindirect rate of the euro? That is, what is the value of a pound in euros?ANSWER: 1/0.685 = 1.46 euros.11. Cross Exchange Rate. Assume Poland’s currency (the zloty) is worth £0.17 and theJapanese yen is worth £0.005. What is the cross (implied) rate of the zloty with respect to yen?ANSWER: £0.17/£0.005 = 34 zloty:1 yen12. Syndicated Loans. Explain how syndicated loans are used in international markets.ANSWER: A large MNC may want to obtain a large loan that no single bank wants to accommodate by itself. Thus, a bank may create a syndicate whereby several other banks also participate in the loan.13. Loan Rates. Explain the process used by banks in the Eurocredit market to determine the rateto charge on loans.ANSWER: Banks set the loan rate based on the prevailing LIBOR, and allow the loan rate to float (change every 6 months) in accordance with changes in LIBOR.14. International Markets. What is the function of the international money market? Brieflydescribe the reasons for the development and growth of the European money market. Explain how the international money, credit, and bond markets differ from one another.ANSWER: The function of the international money market is to efficiently facilitate the flow of international funds from firms or governments with excess funds to those in need of funds.Growth of the European money market was largely due to (1) regulations in the U.S. that limited foreign lending by U.S. banks; and (2) regulated ceilings placed on interest rates of dollar deposits in the U.S. that encouraged deposits to be placed in the Eurocurrency market where ceilings were nonexistent.The international money market focuses on short-term deposits and loans, while the international credit market is used to tap medium-term loans, and the international bond market is used to obtain long-term funds (by issuing long-term bonds).15. Evolution of Floating Rates. Briefly describe the historical developments that led to floatingexchange rates as of 1973.ANSWER: Country governments had difficulty in maintaining fixed exchange rates. In 1971, the bands were widened. Yet, the difficulty of controlling exchange rates even within these wider bands continued. As of 1973, the bands were eliminated so that rates could respond to market forces without limits (although governments still did intervene periodically).16. International Diversification. Explain how the Asian crisis would have affected the returnsto a UK. firm investing in the Asian stock markets as a means of international diversification.[See the chapter appendix.]ANSWER: The returns to the UK firm would have been reduced substantially as a result of the Asian crisis because of both declines in the Asian stock markets and because of currency depreciation. For example, the Indonesian stock market declined by about 27% from June 1997 to June 1998. Furthermore, the Indonesian rupiah declined against the U.S. dollar by 84%.17.Eurocredit Loans.a.With regard to Eurocredit loans, who are the borrowers?b. Why would a bank desire to participate in syndicated Eurocredit loans?c. What is LIBOR and how is it used in the Eurocredit market?ANSWER:a. Large corporations and some government agencies commonly request Eurocredit loans.b. With a Eurocredit loan, no single bank would be totally exposed to the risk that theborrower may fail to repay the loan. The risk is spread among all lending banks within the syndicate.c. LIBOR (London interbank offer rate) is the rate of interest at which banks in Europe lendto each other. It is used as a base from which loan rates on other loans are determined in the Eurocredit market.18. Foreign Exchange. You just came back from Canada, where the Canadian dollar was worth£0.43. You still have C$200 from your trip and could exchange them for pounds at the airport, but the airport foreign exchange desk will only buy them for £0.40. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for £0.055 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C$200 for 1500 New Pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain.ANSWER: Exchange with the tourist. If you exchange the C$ for pesos at the foreign exchange desk, the C$200 is multiplied by £0.40 and then divided by £0.055 ie a ratio of £0.40/0.055 = 7.27 pesos to the C$. The total pesos would be 200 x 7.27 = 1454 pesos, a little less than is being offered by the tourist.19. Foreign Stock Markets. Explain why firms may issue stock in foreign markets. Why mightMNCs issue more stock in Europe since the conversion to a single currency in 1999?ANSWER: Firms may issue stock in foreign markets when they are concerned that their home market may be unable to absorb the entire issue. In addition, these firms may have foreign currency inflows in the foreign country that can be used to pay dividends on foreign-issued stock. They may also desire to enhance their global image. Since the euro can be used in several countries, firms may need a large amount of euros if they are expanding across Europe.20. Stock Market Integration. Bullet plc a UK firm, is planning to issue new shares on theLondon Stock Exchange this month. The only decision still to be made is the specific day on which the shares will be issued. Why do you think Bullet monitors results of the Tokyo stock market every morning?ANSWER: The UK stock market prices sometimes follow Japanese market prices. Thus, the firm would possibly be able to issue its stock at a higher price in the UK if it can use the Japanese market as an indicator of what will happen in the UK market. However, this indicator will not always be accurate.Advanced Questions21. Effects of September 11. Why do you think the terrorist attack on the U.S. was expected tocause a decline in U.S. interest rates? Given the expectations for a potential decline in U.S.interest rates and stock prices, how were capital flows between the U.S. and other countries likely affected?ANSWER: The attack was expected to cause a weaker economy, which would result in lower U.S. interest rates. Given the lower interest rates, and the weak stock prices, the amount of funds invested by foreign investors in U.S. securities would be reduced.22. International Financial Markets. Carrefour the French Supermarket chain has established retail outlets worldwide. These outlets are massive and contain products purchased locally as well as imports. As Carrefour generates earnings beyond what it needs abroad, it may remit those earnings back to France. Carrefour is likely to build additional outlets especially in China.a. Explain how the Carrefour outlets in China would use the spot market in foreign exchange.ANSWER:The Carrefour stores in China need other currencies to buy products from other countries, and must convert the Chinese currency (yuan) into the other currencies in the spot market to purchase these products. They also could use the spot market to convert excess earnings denominated in yuan into euros, which would be remitted to the French parent.b. Explain how Carrefour might utilize the international money markets when it isestablishing other Carrefour stores in Asia.ANSWER: Carrefour may need to maintain some deposits in the Eurocurrency market that can be used (when needed) to support the growth of Carrefour stores in various foreign markets. When some Carrefour stores in foreign markets need funds, they borrow from banks in the Eurocurrency market. Thus, the Eurocurrency market serves as a deposit or lending source for Carrefour and other MNCs on a short-term basis. (Eurocurrency refers to international currencies, most likely the dollar, not just the euro!)c. Explain how Carrefour could use the international bond market to finance theestablishment of new outlets in foreign markets.ANSWER: Carrefour could issue bonds in the Eurobond market to generate funds needed to establish new outlets. The bonds may be denominated in the currency that is needed; then, once the stores are established, some of the cash flows generated by those stores could be used to pay interest on the bonds.23.Interest Rates. Why do interest rates vary among countries? Why are interest rates normallysimilar for those European countries that use the euro as their currency? Offer a reason why the government interest rate of one country could be slightly higher than that of the government interest rate of another country, even though the euro is the currency used in both countries.ANSWER: Interest rates in each country are based on the supply of funds and demand for funds for a given currency. However, the supply and demand conditions for the euro are dictated by all participating countries in aggregate, and do not vary among participating countries. Yet, the government interest rate in one country that uses the euro could be slightly higher than others that use the euro if it is subject to default risk. The higher interest rate would reflect a risk premium.Blades plc Case Study。
国际财务管理(英文版) 第11版 马杜拉 答案 Chapter 16
Chapter 16Long-Term FinancingLecture OutlineLong-Term Financing DecisionSources of EquitySources of DebtCost of Debt FinancingMeasuring the Cost of FinancingActual Effects of Exchange Rate Movements on Financing Costs Assessing the Exchange Rate Risk of Debt Financing Use of Exchange Rate ProbabilitiesUse of SimulationReducing Exchange Rate RiskOffsetting Cash InflowsContractsForwardSwapsCurrencyLoansParallelDiversifying Among CurrenciesInterest Rate Risk from Debt FinancingThe Debt Maturity DecisionThe Fixed Versus Floating-rate DecisionHedging With Interest Rate SwapsPlain Vanilla SwapChapter ThemeThis chapter introduces the long-term sources of funds available to MNCs. Should the MNC choose bonds as a medium to attract long-term funds, a currency for denomination must be chosen. This is a critical decision for the MNC. While there is no clear-cut solution, this chapter illustrates how such a problem can be analyzed. A suggested method of presenting this analysis is to run through an example under assumed exchange rates. Then stress that future exchange rates are not known with certainty. Therefore, the firm should consider the possible costs of financing under a variety of exchange rate scenarios.Topics to Stimulate Class Discussion1. Why would U.S. firms consider issuing bonds denominated in a foreign currency?2. What are the desirable characteristics related to a currency’s interest rate (high or low) and value(strong or weak) that would make the currency attractive from a borrower’s perspective?Critical debateAre swaps deceiving the market?Proposition. Yes. Interest rates are charged to firms because the market estimates that the risk is appropriate for the borrower. For MNC’s to then swap the loans is to ignore this judgment and puts lenders at risk and hence the interests of the shareholders.Opposing View. No. The difference in rates is often small and hardly related to non payment. There are other reasons for swaps to do with currencies and changing the nature of the loan, so there is no second guessing the market.With whom do you agree? Provide a reasoned argument as to why you agree or with one of the above views.ANSWER:The swap rates will be in line with forward rates, so that MNCs will not benefit from borrowing low interest rate currencies and simultaneously hedging. As the forward rates are market rates there is little by the way of deceiving the market especially as swaps are usually between highly creditworthy companies.Answers to End of Chapter Questions1. Floating-Rate Bonds.a. What factors should be considered by a UK firm that plans to issue a floating rate bonddenominated in a foreign currency?b. Is the risk of issuing a floating rate bond higher or lower than the risk of issuing a fixed ratebond? Explain.c. How would an investing firm differ from a borrowing firm in the features (i.e., interest rate andcurrency’s future exchange rates) it would prefer a floating rate foreign currency-denominated bond to exhibit?ANSWER:a. A firm should consider the interest rate for each possible currency as well as forecasts of theexchange rate relative to the firm’s home currency. The firm should also determine whether it has future cash inflows in any foreign currencies that could denominate the bond. Finally, the firm should forecast the future path of the coupon rate.b. The risk from issuing a floating rate bond is that the interest rate may rise over time. The riskfrom issuing a fixed rate bond is that the firm is obligated to pay that coupon rate even if interest rates decline. Some firms may feel that a fixed rate bond is less risky since at least they know with certainty the coupon rate they must pay in the future. This question is somewhat open-ended.c. An investing firm prefers a bond denominated in a currency that is expected to appreciate andwith an interest rate that is high and expected to increase. A borrowing firm prefers a bond denominated in a currency that is expected to depreciate and with an interest rate that is low and expected to decrease.2.Risk From Issuing Foreign Currency-Denominated Bonds. What is the advantage of usingsimulation to assess the bond financing position?ANSWER: Unlike point forecasts, simulation provides a distribution of possible outcomes. Thus, the firm can determine the probability that a particular foreign issued bond will be a less expensive source of funds than a locally issued bond.3. Exchange Rate Effects.a. Explain the difference in the cost of financing with foreign currencies during a strong-poundperiod versus a weak-pound period for a UK firm.b. Explain how a UK-based MNC issuing bonds denominated in euros may be able to offset aportion of its exchange rate risk.ANSWER:a. The cost of financing with foreign currencies is low when the pound strengthens, and highwhen the pound weakens.b. It may offset some exchange rate risk if it has cash inflows in euros. These euros could beused to make coupon payments.4.Bond Offering Decision. Columbia plc is a UK company with no foreign currency cash flows. Itplans to issue either a bond denominated in euros with a fixed interest rate or a bond denominated in UK pounds with a floating interest rate. It estimates its periodic pound cash flows for each bond. Which bond do you think would have greater uncertainty surrounding these future pound cash flows? Explain.ANSWER: Exchange rates are generally more volatile than interest rates over time. Therefore the pound value of payments made on euro-denominated bonds would likely be more uncertain than the payments made on floating-rate bonds denominated in pounds. Also, the principal payment is subject to exchange rate risk but not to interest rate risk.5. Currency Diversification. Why would a UK firm consider issuing bonds denominated inmultiple currencies?ANSWER: The firm may issue bonds in multiple currencies to reduce exchange rate risk. This is especially possible when the currencies used to denominate bonds are not highly correlated.6.Financing That Reduces Exchange Rate Risk. Kerr, Plc a major UK exporter of products toJapan, denominates its exports in pounds and has no other international business. It can borrow pounds at 9 percent to finance its operations or borrow yen at 3 percent. If it borrows yen, it will be exposed to exchange rate risk. How can Kerr borrow yen and possibly reduce its economic exposure to exchange rate risk?ANSWER: Kerr could invoice its exports in yen and use the proceeds to pay back loans. Its economic exposure would be reduced because Japanese consumers would not be subjected to exchange rate swings.7. Exchange Rate Effects. Katina, Plc is a UK firm that plans to finance with bonds denominated ineuros to obtain a lower interest rate than is available on pound-denominated bonds. What is the most critical point in time when the exchange rate will have the greatest impact?ANSWER: The most critical time is maturity, since the principal will be paid back at that time.8.Financing Decision. Ivax plc (based in Germany) is a drug company that has attempted to capitalize on new opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are very low, often less than one-fourth of the cost in Germany or Switzerland. Furthermore, there is a strong demand for drugs in Eastern Europe. Ivax penetrated Eastern Europe by purchasing a 60 percent stake in Galena AS, a Czech firm that produces drugs.a. Should Ivax finance its investment in the Czech firm by borrowing euros that would then be converted into koruna (the Czech currency) or by borrowing koruna from a local Czech bank? What information do you need to know to answer this question?b. How can borrowing koruna locally from a Czech bank reduce the exposure of Ivax to exchange rate risk?c. How can borrowing koruna locally from a Czech bank reduce the exposure of Ivax to political risk caused by government regulations?ANSWER:a. Ivax would need to consider the interest rate in the Europe versus the interest rate when borrowingkoruna (the Czech currency). It would also need to consider the potential change in the koruna currency against the euro. If it finances the project in dollars, it is more exposed to exchange rate risk, because the funds would be remitted to Germany before paying the interest expenses on the loan. Conversely, if it finances the project in koruna, it could use some of its local funds to pay off its interest expenses before remitting any funds to the parent. Another reason for borrowing from a local Czech bank is that the bank may help Ivax avoid any excessive regulatory restrictions that could be imposed on foreign firms in the drug industry. These potential advantages of borrowing locally must be weighed against the potentially higher interest rate when borrowing locally.b. By borrowing koruna, the Czech subsidiary of Ivax should make its interest payments beforeremitting any funds to the parent. Therefore, there are less funds that have to be remitted (less exposure) than if the funds are remitted to Europe before interest payments are paid to a European bank.c. By borrowing from a local Czech bank, Ivax may be able to avoid excessive regulations thatcould be imposed on foreign firms by the local government. Also, there is less chance of any extreme action to be taken on a foreign firm when that firm’s failure would cause defaults on loans provided by local lenders.Advanced Questions9. Bond Financing Analysis. Sambuka plc can issue bonds in either UK pounds or in Swiss francs.Pound-denominated bonds would have a coupon rate of 15 percent; Swiss franc-denominated bonds would have a coupon rate of 12 percent. Assuming that Sambuka can issue bonds worth £10,000,000 in either currency, that the current exchange rate of the Swiss franc is £0.47, and that the forecasted exchange rate of the franc in each of the next three years is £0.50, what is the annual cost of financing for the franc-denominated bonds? Which type of bond should Sambuka issue?ANSWER:If Sambuka issues Swiss franc-denominated bonds, the bonds would have a face value of £10,000,000/£0.47 = Sf21,276,595.2Year3YearYear1SF Payment SF2,553,191 SF2,553,191 SF23,829,786£0.50£0.50rateExchange£0.50Payments in £ £1,276,596 £1,276,596 £11,914,893A UK bond at 15% on £10m would cost more (annual payments being £1.5m etc) but can wereally assume that the exchange ratte will stay as it is? A change of 1.5/1.276 – 1 = 17 ½% would make the SF more expensive, this is quite a big change but Sambuka would be wise to carry out a risk assessment.10. Bond Financing Analysis. Hatton ltd has just agreed to a long-term deal in which it willexport products to Japan. It needs funds to finance the production of the products that it will export. The products will be denominated in pounds. The prevailing UK long-term interest rate is 9 percent versus 3 percent in Japan. Assume that interest rate parity exists, and that Hatton believes that the international Fisher effect holds.a. Should Hatton finance its production with yen and leave itself open to exchange rate risk?Explain.b. Should Hatton finance its production with yen and simultaneously engage in forward contractsto hedge its exposure to exchange rate risk?c. How could Hatton plc achieve low-cost financing while eliminating its exposure to exchangerate risk?ANSWER:a. No. The exchange rate of the yen is expected to rise according to the IFE, whichwould offset the interest rate differential.b. No. The forward rate premium should reflect the interest rate differential, so the financing ratewould be 9% if Hawaii used this strategy.c. Hawaii could request that the Japanese importers pay for their imports in yen. It could financein yen at 3% and use a portion of the proceeds from its export revenue to cover its finance payments.11. Cost of Financing. Assume that Seminole, plc considers issuing a Singapore pound-denominatedbond at its present coupon rate of 7 percent, even though it has no incoming cash flows to cover the bond payments. It is attracted to the low financing rate, since UK pound-denominated bonds issued in the United Kingdom would have a coupon rate of 12 percent. Assume that either type of bond would have a four-year maturity and could be issued at par value. Seminole needs to borrow £10 million. Therefore, it will issue either UK pound-denominated bonds with a par value of £10 million or bonds denominated in Singapore dollars with a par value of S$20 million. The spot rate of the Singapore dollar is £0.33. Seminole has forecasted the Singapore dollar’s value at the end of each of the next four years, when coupon payments are to be paid:End of Year Pound Exchange Rateof Singapore1 £0.342 0.353 0.384 0.33Determine the expected annual cost of financing with Singapore pounds. Should Seminole, Plc issue bonds denominated in UK pounds or Singapore pounds? Explain.ANSWER:End of Year:1234 S$ payment S$1,400,000S$1,400,000S$1,400,000 S$21,400,000 Exchange rate £0.340.350.38 0.33£ payment £476,000£490,000£532,000 £7,062,000 S$20m is at the spot rate only worth 20 x 0.33 = £6,600,000 so some borrowing will also be needed. The question is whether the foreign borrowing in S$ is cheaper than the UK equivalent.?12% of £6,600,000 is £792,000 so it would seenm that borrowing in Singapore dollars would be much cheaper. But clearly the validity of the exchange rate predictions must be examined.12.Interaction Between Financing and Invoicing Policies. Assume that Hurricane, plc is a UKcompany that exports products to the United States, invoiced in pounds. It also exports products to Denmark, invoiced in pounds. It currently has no cash outflows in foreign currencies, and it plans to issue bonds in the near future. Hurricane could issue bonds at par value in (1) pounds with a coupon rate of 12 percent, (2) Danish kroner with a coupon rate of 9 percent, or (3) dollars with a coupon rate of 15 percent. It expects the kroner and dollar to strengthen over time. How could Hurricane revise its invoicing policy and make its bond denomination decision to achieve low financing costs without excessive exposure to exchange rate fluctuations?ANSWER: Hurricane could invoice goods exported to Denmark in kroner instead of pounds.Thus, it would now have inflows in kroner that could be used to make coupon payments on bonds denominated in kroner that it could issue. This strategy achieves a cost of financing of 9 percent,which is lower than the cost of other financing alternatives. To the extent that the inflows in kroner can cover bond payments, this strategy is not exposed to exchange rate risk.13.Swap Agreement. Grant, plc is a well-known UK firm that needs to borrow 10 million dollars tosupport a new business in the United States. However, it cannot obtain financing from US banks because it is not yet established within the United States. It decides to issue pound-denominated debt (at par value) in the United Kingdom, for which it will pay an annual coupon rate of 10 percent. It then will convert the pound proceeds from the debt issue into dollars at the prevailing spot rate (the prevailing spot rate is one pound = $1.70). Over each of the next three years, it plans to use the revenue in dollars from the new business in the United States to make its annual debt payment. Grant, plc engages in a currency swap in which it will convert dollars to pounds at an exchange rate of $1.70 per pound at the end of each of the next three years. How many pounds must be borrowed initially to support the new business in the United States? How many dollars should Grant plc specify in the swap agreement that it will swap over each of the next three years in exchange for pounds so that it can make its annual coupon payments to the UK creditors?ANSWER: Since Grant Inc. needs $10 million, Grant will need to issue debt amounting to £5.882 million (computed as $10 million / $1.70 per pound). Grant will pay 10% on the principal amount of £5.882 million annually as a coupon rate, which is equal to £0.5882 million. It should specify that 1 million dollars are to be swapped for pounds in each of the next three years.14.Interest Rate Swap. Janutis plc has just issued fixed rate debt at 10 percent. Yet, it prefers toconvert its financing to incur a floating rate on its debt. It engages in an interest rate swap in which it swaps variable rate payments of LIBOR plus 1 percent in exchange for payments of 10 percent.The interest rates are applied to an amount that represents the principal from its recent debt issue in order to determine the interest payments due at the end of each year for the next three years.Janutis plc expects that the LIBOR will be 9 percent at the end of the first year, 8.5 percent at the end of the second year, and 7 percent at the end of the third year. Determine the financing rate that Janutis plc expects to pay on its debt after considering the effect of the interest rate swap.ANSWER: The fixed rate of 10% to be received from the interest rate swap offsets the 10% payments made on the debt. Therefore, the annual cost of financing on the debt over the next three years is simply the variable rate that is paid out on the interest rate swap. This rate is derived below:End of Year LIBOR Variable Rate Paid Due to Swap1 9.0% 9.0% + 1.0% = 10.0%2 8.5% 8.5% + 1.0% = 9.5%3 7.0% 7.0% + 1.0% = 8.0%。
国际财务管理课后习题答案chapter
国际财务管理课后习题答案chapterCHAPTER 10 MANAGEMENT OF TRANSLATION EXPOSURESUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method. Answer: Under the monetary/nonmonetary method, all monetary balance sheet accounts of a foreign subsidiary are translated at the current exchange rate. Other balance sheet accounts are translated at the historical rate exchange rate in effect when the account was first recorded. Under the temporal method, monetary accounts are translated at the current exchange rate. Other balance sheet accounts are also translated at the current rate, if they are carried on the books at current value. If they are carried at historical value, they are translated at the rate in effect on the date the item was put on the books. Since fixed assets and inventory are usually carried at historical costs, the temporal method and the monetary/nonmonetary method will typically provide the same translation.2. How are translation gains and losses handled differently according to the current rate method in comparison to the other three methods, that is, the current/noncurrent method, the monetary/nonmonetary method, and the temporal method? Answer: Under the current rate method, translation gains and losses are handled only as an adjustment to net worth through an equity account named the “cumulative translation adjustment” account. Nothing passes through the income statement. Th e other three translation methods pass foreign exchange gains or losses through the income statement before they enter on to the balance sheet through the accumulated retained earnings account.3. Identify some instances under FASB 52 when a foreign enti ty’s functional currency would be the same as the parent firm’s currency.Answer: Three examples under FASB 52, where the foreign entity’s functional currency will be the same as the parent firm’s currency, are: i) the foreign entity’s cash flows directly affect the parent’s cash flows and are readily available for remittance to the parent firm; ii) the sales prices for the foreign entity’s products are responsive on a short-term basis to exchange rate changes, where sales prices are determined through worldwide competition; and, iii) the sales market is primarily located in the parent’s country or sales contracts are denominated in the parent’s currency.4. Describe the remeasurement and translation process under FASB 52 of a wholly owned affiliate that keeps its books in the local currency of the country in which it operates, which is different than its functional currency.Answer: For a foreign entity that keeps its books in its local currency, which is different from its functional currency, the translation process according to FASB 52 is to: first, remeasure the financial reports from the local currency into the functional currency using the temporal method of translation, and second, translate from the functional currency into the reporting currency using the current rate method of translation.5. It is, generally, not possible to completely eliminate both translation exposure and transaction exposure. In some cases, the elimination of one exposure will also eliminate the other. But in other cases, the elimination of one exposure actually creates the other. Discuss which exposure might be viewed as the most important to effectively manage, if a conflict between controlling both arises. Also, discuss and critique the common methods for controlling translation exposure.Answer: Since it is, generally, not possible to completely eliminate both transaction and translation exposure, we recommend that transaction exposure be given first priority since it involves real cash flows. The translation process, on-the-other hand, has no direct effect on reporting currency cash flows, and will only have a realizable effect on net investment upon the sale or liquidation of the assets.There are two common methods for controlling translation exposure: a balance sheet hedge and a derivatives hedge. The balance sheet hedge involves equating the amount of exposed assets in an exposure currency with the exposed liabilities in that currency, so the net exposure is zero. Thus when an exposure currency exchange rate changes versus the reporting currency, the change in assets will offset the change in liabilities. To create a balance sheet hedge, once transaction exposure has been controlled, often means creating new transaction exposure. This is not wise since real cash flow losses can result. A derivatives hedge is not really a hedge, but rather a speculative position, since the size of the “hedge” is based on the future expected spot rate of exchange for the exposure currency with the reporting currency. If the actual spot rate differs from the expected rate, the “hedge” may result in the loss of real cash flows.PROBLEMS1. Assume that FASB 8 is still in effect instead of FASB 52. Construct a translation exposure report for Centralia Corporation and its affiliates that is the counterpart to Exhibit 10.7 in the text. Centralia and its affiliates carry inventory and fixed assets on the books at historical values.Solution: The following table provides a translation exposure report for Centralia Corporation and its affiliates under FASB 8, which is essentially the temporal method of translation. The difference between the new report and Exhibit 10.7 is that nonmonetary accounts such as inventory and fixed assets are translated at the historical exchange rate if they are carried at historical costs. Thus, these accounts will not change values when exchange rates change and they do not create translation exposure.Examination of the table indicates that under FASB 8 there is negative net exposure for the Mexican peso and the euro, whereas under FASB 52 the net exposure for these currencies is positive. There is no change in net exposure for the Canadian dollar and the Swiss franc. Consequently, if the euro depreciates against the dollar from €1.1000/$1.00 to€1.1786/$1.00, as the text example assumed, exposed assets will now fall in value by a smaller amount than exposed liabilities, instead of vice versa. The associated reporting currency imbalance will be $239,415, calculated as follows: Reporting Currency Imbalance=-€3,949,0000€1.1786/$1.00--€3,949,0000€1.1000/$1.00=$239,415.Translation Exposure Report under FASB 8 for Centralia Corporation and its Mexican and Spanish Affiliates, December 31, 2005 (in 000 Currency Units)Canadian Dollar MexicanPeso EuroSwissFrancAssetsCash CD200 Ps 6,000 € 825SF 0 Accounts receivable 0 9,000 1,045 0Inventory 0 0 0 0Net fixed assets 0 0 0Exposed assets CD200 Ps15,000 € 1,870SF 0LiabilitiesAccounts payable CD 0 Ps 7,000 € 1,364SF 0 Notes payable 0 17,000 935 1,400Long-term debt 0 27,000 3,520ExposedliabilitiesCD 0 Ps51,000 € 5,819SF1,400Net exposure CD200 (Ps36,000) (€3,949)(SF1,400)2. Assume that FASB 8 is still in effect instead of FASB 52. Construct a consolidated balance sheet for Centralia Corporation and its affiliates after a depreciation of the euro from €1.1000/$1.00 to €1.1786/$1.00 that is the counterpart to Exhibit 10.8 inthe text. Centralia and its affiliates carry inventory and fixed assets on the books at historical values.Solution: This problem is the sequel to Problem 1. The solution to Problem 1 showed that if the euro depreciated there would be a reporting currency imbalance of $239,415. Under FASB 8 this is carried through the income statement as a foreignexchange gain to the retained earnings on the balance sheet. The following table shows that consolidated retained earnings increased to $4,190,000 from $3,950,000 in Exhibit 10.8. This is an increase of $240,000, which is the same as the reporting currency imbalance after accounting for rounding error.Consolidated Balance Sheet under FASB 8 for Centralia Corporation and its Mexican anda This includes CD200,000 the parent firm has in a Canadian bank, carried as $150,000. CD200,000/(CD1.3333/$1.00) = $150,000.b$1,750,000 - $300,000 (= Ps3,000,000/(Ps10.00/$1.00)) intracompany loan = $1,450,000.c,d Investment in affiliates cancels with the net worth of the affiliates in the consolidation.e The Spanish affiliate owes a Swiss bank SF375,000 (÷ SF1.2727/€1.00 = €294,649). This is carried on the books,after the exchange rate change, as part of €1,229,649 = €294,649 + €935,000. €1,229,649/(€1.1786/$1.00) = $1,043,313.3. In Example 10.2, a f orward contract was used to establish a derivatives “hedge” to protect Centralia from a translation loss if the euro depreciated from €1.1000/$1.00 to €1.1786/$1.00. Assume that an over-the-counter put option on the euro with a strike price of €1.1393/$1.00 (or $0.8777/€1.00) can be purchased for $0.0088 per euro. Show how the potential translation loss can be “hedged” with an option contract.Solution: As in example 10.2, if the potential translation loss is $110,704, the equivalent amount in functiona l currency that needs to be hedged is €3,782,468. If in fact the euro does depreciate to €1.1786/$1.00 ($0.8485/€1.00), €3,782,468 can be purchased in the spot market for $3,209,289. At a striking price of €1.1393/$1.00, the €3,782,468 can be sold throu gh the put for $3,319,993, yielding a gross profit of $110,704. The put option cost $33,286 (= €3,782,468 x $0.0088). Thus, at an exchange rate of €1.1786/$1.00, the put option will effectively hedge $110,704 - $33,286 = $77,418 of the potential translation loss. At terminal exchange rates of €1.1393/$1.00 to €1.1786/$1.00, the put option hedge will be less effective. An option contract does not have to be exercised if doing so is disadvantageous to the option owner. Therefore, the put will not be exercised at exchange rates of less than €1.1393/$1.00 (more than $0.8777/€1.00), in which case the “hedge” will lose the $33,286 cost of the option.MINI CASE: SUNDANCE SPORTING GOODS, INC.Sundance Sporting Goods, Inc., is a U.S. manufacturer of high-quality sporting goods--principally golf, tennis and other racquet equipment, and also lawn sports, such as croquet and badminton-- with administrative offices and manufacturing facilities in Chicago, Illinois. Sundance has two wholly owned manufacturing affiliates, one in Mexico and the other in Canada. The Mexican affiliate is located in Mexico City and services all of Latin America. The Canadian affiliate is in Toronto and serves only Canada. Each affiliate keeps its books in its local currency, which is also the functional currency for the affiliate. The current exchange rates are: $1.00 = CD1.25 = Ps3.30 = A1.00 = ￥105 = W800. The nonconsolidated balance sheets for Sundance and its two affiliates appear in the accompanying table.Nonconsolidated Balance Sheet for Sundance Sporting Goods, Inc. and Its Mexican anda The parent firm is owed Ps1,320,000 by the Mexican affiliate. This sum is included in the parent’s accounts receivable as $400,000, translated at Ps3.30/$1.00. The remainder of the parent’s (Mexican affiliate’s) accounts receivable (payable) is denominated in dollars (pesos).b The Mexican affiliate is wholly owned by the parent firm. It is carried on the parent firm’s books at $2,400,000. This represents the sum of the comm on stock (Ps4,500,000) and retained earnings (Ps3,420,000) on the Mexican affiliate’s books, translated at Ps3.30/$1.00.c The Canadian affiliate is wholly owned by the parent firm. It is carried on the parent firm’s books at $3,600,000. This represents the sum of the common stock (CD2,900,000) and the retained earnings (CD1,600,000) on the Canadian affiliate’s books, translated at CD1.25/$1.00.d The parent firm has outstanding notes payable of ￥126,000,000 due a Japanese bank. This sum is carried on th e parent firm’s books as $1,200,000, translated at￥105/$1.00. Other notes payable are denominated in U.S. dollars.e The Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import house. This sum is carried on the Mexican affi liate’s books as Ps396,000, translated at A1.00/Ps3.30. Other accounts receivable are denominated in Mexican pesos.f The Canadian affiliate has sold on account W192,000,000 of merchandise to a Korean importer. This sum is carried on the Canadian affilia te’s books as CD300,000, translated at W800/CD1.25. Other accounts receivable are denominated in Canadian dollars.You joined the International Treasury division of Sundance six months ago after spending the last two years receiving your MBA degree. The corporate treasurer has asked you to prepare a report analyzing all aspects of the translation exposure faced by Sundance as a MNC. She has also asked you to address in your analysis the relationship between the firm’s translation exposure and its transa ction exposure. After performing a forecast of future spot rates of exchange, you decide that you must do the following before any sensible report can be written.a. Using the current exchange rates and the nonconsolidated balance sheets for Sundance and its affiliates, prepare a consolidated balance sheet for the MNC according to FASB 52.b. i. Prepare a translation exposure report for Sundance Sporting Goods, Inc., and its two affiliates.ii. Using the translation exposure report you have prepared, determine if any reporting currency imbalance will result from a change in exchange rates to which thefirm has currency exposure. Your forecast is that exchange rates will change from $1.00 = CD1.25 = Ps3.30 = A1.00 = ￥105 = W800 to $1.00 = CD1.30 = P s3.30 = A1.03 = ￥105 = W800.c. Prepare a second consolidated balance sheet for the MNC using the exchange rates you expect in the future. Determine how any reporting currency imbalance will affect the new consolidated balance sheet for the MNC.d. i. Prepare a transaction exposure report for Sundance and its affiliates. Determine if any transaction exposures are also translation exposures.ii. Investigate what Sundance and its affiliates can do to control its transaction and translation exposures. Determine if any of the translation exposure should be hedged.Suggested Solution to Sundance Sporting Goods, Inc.Note to Instructor: It is not necessary to assign the entire case problem. Parts a. and b.i. can be used as self-contained problems, respectively, on basic balance sheet consolidation and the preparation of a translation exposure report.a. Below is the consolidated balance sheet for the MNC prepared according to the current rate method prescribed by FASB52. Note that the balance sheet balances. That is, Total Assets and Total Liabilities and Net Worth equal one another. Thus, the assumption is that the current exchange rates are the same as when the affiliates were established. This assumption is relaxed in part c.Consolidated Balance Sheet for Sundance Sporting Goods, Inc. its Mexican and Canadian Affiliates,December 31, 2005: Pre-Exchange Rate Change (in 000 Dollars) Sundance, Inc.Mexican Affiliate Canadian AffiliateConsolidated Balance a$2,500,000 - $400,000 (= Ps1,320,000/(Ps3.30/$1.00)) intracompany loan = $2,100,000.b,c The investment in the affiliates cancels with the net worth of the affiliates in the consolidation.d The parent owes a Japanese bank ￥126,000,000. This is carried on the books as $1,200,000 (=￥126,000,000/(￥105/$1.00)).e The Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import house. This is carried on the Mexican affiliate’s books as Ps396,000 (= A120,000 xPs3.30/A1.00).f The Canadian affiliate has sold on account W192,000,000 of merchandise to a Korean importer. This is carried on the Canadian affiliate’s books as CD300,000 (= W192,000,000/(W800/CD1.25)).b. i. Below is presented the translation exposure report for the Sundance MNC. Note, from the report that there is net positive exposure in the Mexican peso, Canadian dollar, Argentine austral and Korean won. If any of these exposure currencies appreciates (depreciates) against the U.S. dollar, exposed assets denominated in these currencies will increase (fall) in translated value by a greater amount than the exposed liabilities denominated in these currencies. There is negative net exposure in the Japanese yen. If the yen appreciates (depreciates) against the U.S. dollar, exposed assets denominated in the yen will increase (fall) in translated value by smaller amount than the exposed liabilities denominated in the yen. Translation Exposure Report for Sundance Sporting Goods, Inc. and its Mexican and Canadian Affiliates, December 31, 2005 (in 000 Currency Units)b. ii. The problem assumes that Canadian dollar depreciates from CD1.25/$1.00 to CD1.30/$1.00 and that the Argentine austral depreciates from A1.00/$1.00 to A1.03/$1.00. To determine the reporting currency imbalance in translated value caused by these exchange rate changes, we can use the following formula:Net Exposure Currency i S(i/reporting)-Net Exposure Currency i S(i/reporting)new old = Reporting Currency Imbalance.From the translation exposure report we can determine that the depreciation in the Canadian dollar will cause aCD4,200,000 CD1.30/$1.00-CD4,200,000CD1.25/$1.00= -$129,231reporting currency imbalance.Similarly, the depreciation in the Argentine austral will cause aA120,000 A1.03/$1.00-A120,000A1.00/$1.00= -$3,495reporting currency imbalance.In total, the depreciation of the Canadian dollar and the Argentine austral will cause a reporting currency imbalance in translated value equal to -$129,231 -$3,495= -$132,726.c. The new consolidated balance sheet for Sundance MNC after the depreciation of the Canadian dollar and the Argentine austral is presented below. Note that in order for the new consolidated balance sheet to balance after the exchange rate change, it is necessary to have a cumulative translation adjustment account balance of -$133 thousand, which is the amountof the reporting currency imbalance determined in part b. ii (rounded to the nearest thousand).。
国际财务管理（英文版）课后习题答案（整合版）
CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRM SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONSQUESTIONS1. Why is it important to study international financial managementAnswer: We are now living in a world where all the major economic functions i.e. consumptionproduction and investment are highly globalized. It is thus essential for financial managers to fullyunderstand vital international dimensions of financial management. This global shift is in markedcontrast to a situation that existed when the authors of this book were learning finance some twenty yearsago.At that time most professors customarily and safely to some extent ignored international aspectsof finance. This mode of operation has become untenable since then.2. How is international financial management different from domestic financial managementAnswer: There are three major dimensions that set apart international finance from domestic finance.They are: 1. foreign exchange and political risks 2. market imperfections and 3. expanded opportunity set.3. Discuss the three major trends that have prevailed in international business during the last two decades.Answer: The 1980s brought a rapid integration of international capital and financial markets. Impetus forglobalized financial markets initially came from the governments of major countries that had begun toderegulate their foreign exchange and capital markets. The economic integration and globalization thatbegan in the eighties is picking up speed in the 1990s via privatization. Privatization is the process bywhich a country divests itself of the ownership and operation of a business venture by turning it over tothe free market system. Lastly trade liberalization and economic integration continued to proceed at boththe regional and global levels.4. How is a country‟s economic well-being enhanced through free international trade in goods andservicesAnswer: According to David Ricardo with free international trade it is mutually beneficial for twocountries to each specialize in the production of the goods that it can produce relatively most efficientlyand then trade those goods. By doing so the two countries can increase their combined productionwhich allows both countries to consume more of both goods. This argument remains valid even if acountry can produce both goods more efficiently than the other country. International trade is not a …zero-sum‟ game in which one country benefits at the expense of another country. Rather international tradecould be an …increasing-sum‟ game at which all players become winners.5. What considerations might limit the extent to which the theory of comparative advantage is realisticAnswer: The theory of comparative advantage was originally advanced by the nineteenth centuryeconomist David Ricardo as an explanation for why nations trade with one another. The theory claimsthat economic well-being is enhanced if each country‟s citizens produce what they have a comparativeadvantage in producing relative to the citizens of other countries and then trade products. Underlying thetheory are the assumptions of free trade between nations and that the factors of production landbuildings labor technology and capital are relatively immobile. To the extent that these assumptions donot hold the theory of comparative advantage will not realistically describe international trade.6. What are multinational corporations MNCs and what economic roles do they playAnswer: A multinational corporation MNC can be defined as a business firm incorporated in onecountry that has production and sales operations in several other countries. Indeed some MNCs haveoperations in dozens of different countries. MNCs obtain financing from major money centers around theworld in many different currencies to finance their operations. Global operations force the treasurer‟soffice to establish international banking relationships to place short-term fundsin several currencydenominations and to effectively manage foreign exchange risk.7. Mr. Ross Perot a former Presidential candidate of the Reform Party which is a third political party inthe United States had strongly objected to the creation of the North American Trade AgreementNAFTA which nonetheless was inaugurated in 1994 for the fear of losing American jobs to Mexicowhere it is much cheaper to hire workers. What are the merits and demerits of Mr. Perot‟s position onNAFTA Considering the recent economic developments in North America how would you assess Mr.Perot‟s position on NAFTAAnswer: Since the inception of NAFTA many American companies indeed have invested heavily inMexico sometimes relocating production from the United States to Mexico. Although this might havetemporarily caused unemployment of some American workers they were eventually rehired by otherindustries often for higher wages. Currently the unemployment rate in the U.S. is quite low by historicalstandard. At the same time Mexico has been experiencing a major economic boom. It seems clear thatboth Mexico and the U.S. have benefited from NAFTA. Mr. Perot‟s concern appears to hav e been illfounded.8. In 1995 a working group of French chief executive officers was set up by the Confederation of FrenchIndustry CNPF and the French Association of Private Companies AFEP to study the French corporategovernance structure. The group reported the following among other things “The board of directorsshould not simply aim at maximizing share values as in the U.K. and the U.S. Rather its goal should be toserve the company whose interests should be clearly distinguished from those of its shareholdersemployees creditors suppliers and clients but still equated with their general common interest which isto safeguard the prosperity and continuity of the company”. Evaluate the above recommendation of theworking group.Answer: The recommendations of the French working group clearly show that shareholder wealthmaximization is not a universally accepted goal of corporate management especially outside the UnitedStates and possibly a few other Anglo-Saxon countries including the United Kingdom and Canada. Tosome extent this may reflect the fact that share ownership is not wide spread in most other countries. InFrance about 15 of households own shares.9. Emphasizing the importance of voluntary compliance as opposed to enforcement in the aftermath ofcorporate scandals e.g. Enron and WorldCom U.S. President George W. Bush stated that while tougherlaws might help “ultimately the ethics of American business depends on the conscience of America‟sbusiness leaders.” Describe your view on this statement.Answer: There can be different answers to this question. If business leaders always behave with a highethical standard many of the corporate scandals we have seen lately might not have happened. Since wecannot fully depend on the ethical behavior on the part of business leaders the society should protectitself by adopting therules/regulations and governance structure that would induce business leaders tobehave in the interest of the society at large.10. Suppose you are interested in investing in shares of Nokia Corporation of Finland which is a worldleader in wireless communication. But before you make investment decision you would like to learnabout the company. Visit the website of CNN Financial network and collectinformation about Nokia including the recent stock price history and analysts‟ views of the company.Discuss what you learn about the company. Also discuss how the instantaneous access to information viainternet would affect the nature and workings of financial markets.Answer: As students might have learned from visiting the website information is readily available evenfor foreign companies like Nokia. Ready access to international information helpsintegrate financialmarkets dismantling barriers to international investment and financing. Integration however may help afinancial shock in one market to be transmitted to other markets.MINI CASE: NIKE‟S DECISION Nike a U.S.-based company with a globally recognized brand name manufactures athletic shoes insuch Asian developing countries as China Indonesia and Vietnam using subcontractors and sells theproducts in the U.S. and foreign markets. The company has no production facilities in the United States.In each of those Asian countries where Nike has production facilities the rates of unemployment andunderemployment are quite high. The wage rate is very low in those countries by the U.S. standardhourly wage rate in the manufacturing sector is less than one dollar in each of those countries which iscompared with about 18 in the U.S. In addition workers in those countries often are operating in poorand unhealthy environments and their rights are not well protected. Understandably Asian host countriesare eager to attract foreign investments like Nike‟s to develop their economies and raise the livingstandards of th eir citizens. Recently however Nike came under a world-wide criticism for its practice ofhiring workers for such a low pay “next to nothing” in the words of critics and condoning poor workingconditions in host countries. Evaluate and discuss various …ethical‟ as well as economic ramifications of Nike‟s decision toinvest in those Asian countries.Suggested Solution to Nike‟s Decision Obviously Nike‟s investments in such Asian countries as China Indonesia and Vietnam weremotivated to take advantage of low labor costs in those countries. While Nike was criticized for the poorworking conditions for its workers the company has recognized the problem and has substantiallyimproved the working environments recently. Although Nike‟s workers get paid very low wages by theWestern standard they probably are making substantially more than their local compatriots who are eitherunder- or unemployed. While Nike‟s detractors may have valid points one should not ignore the fact thatthe company is making contributions to the economic welfare of those Asian countries by creating jobopportunities. CHAPTER 1A THEORY OF COMPARATIVE ADVANTAGE SUGGESTED SOLUTIONS TO APPENDIX PROBLEMSPROBLEMS1. Country C can produce seven pounds of food or four yards of textiles per unit of input. Compute theopportunity cost of producing food instead of textiles. Similarly compute the opportunity cost ofproducing textiles instead of food.Solution: The opportunity cost of producing food instead of textiles is one yard of textiles per 7/4 1.75pounds of food. A pound of food has an opportunity cost of4/7 .57 yards of textiles.2. Consider the no-trade input/output situation presented in the following table for Countries X and Y.Assuming that free trade is allowed develop a scenario that will benefit the citizens of both countries.INPUT/OUTPUT WITHOUT TRADE_________________________________________________________________ ______ Country X YTotal___________________________________________________________________ _____I. Units of Input000000_____________________________________________________Food 70 60Textiles 4030______________________________________________________________________ __II. Output per Unit of Inputlbs or yards____________________________________________________Food 17 5Textiles 52_______________________________________________________________________ _III. Total Outputlbs or yards000000____________________________________________________Food 1190 300 1490Textiles 200 60260_____________________________________________________________________ ___IV. Consumptionlbs or yards000000___________________________________________________Food 1190 300 1490Textiles 200 60260_____________________________________________________________________ ___Solution: Examination of the no-trade input/output table indicates that Country X has an absoluteadvantage in the production of food and textiles. Country X can “trade off” one unit of productionneeded to produce 17 pounds of food for five yards of textiles. Thus a yard of textiles has an opportunitycost of 17/5 3.40 pounds of food or a pound of food has an opportunity cost of 5/17 .29 yards oftextiles. Analogously Country Y has an opportunity cost of 5/2 2.50 pounds of food per yard oftextiles or 2/5 .40 yards of textiles per pound of food. In terms of opportunity cost it is clear thatCountry X is relatively more efficient in producing food and Country Y is relatively more efficient inproducing textiles. Thus Country X Y has a comparative advantage in producing food textile iscomparison to Country Y X. When there are no restrictions or impediments to free trade the economic-well being of thecitizens of both countries is enhanced through trade. Suppose that Country X shifts 20000000 unitsfrom the production of textiles to the production of food where it has a comparative advantage and thatCountry Y shifts 60000000 units from the production of food to the production of textiles where it has acomparative advantage. Total output will now be 90000000 x 17 1530000000 pounds of food and20000000 x 5 100000000 90000000 x 2 180000000 280000000 yards of textiles.Further suppose that Country X and Country Y agree on a price of 3.00 pounds of food for one yard oftextiles and that Country X sells Country Y 330000000 pounds of food for 110000000 yards of textiles.Under free trade the following table shows that the citizens of Country X Y have increased theirconsumption of food by 10000000 30000000 pounds and textiles by 10000000 10000000 yards.INPUT/OUTPUT WITH FREE TRADE_________________________________________________________________ _________ Country X YTotal___________________________________________________________________ _______I. Units of Input 000000_______________________________________________________Food 90 0Textiles 2090______________________________________________________________________ ____II. Output per Unit of Input lbs or yards______________________________________________________Food 17 5Textiles 52_______________________________________________________________________ ___III. Total Output lbs or yards 000000_____________________________________________________Food 1530 0 1530Textiles 100 180280_____________________________________________________________________ _____IV. Consumption lbs or yards 000000_____________________________________________________Food 1200 330 1530Textiles 210 70280_____________________________________________________________________ _____ CHAPTER 3 BALANCE OF PAYMENTS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMSQUESTIONS1. Define the balance of payments.Answer: The balance of payments BOP can be defined as the statistical record of a country‟sinternational transactions over a certain period of time presented in the form of double-entry bookkeeping.2. Why would it be useful.。
国际财务管理答案Chap013
CHAPTER 13 INTERNATIONAL EQUITY MARKETSSUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Get a current copy of The Wall Street Journal and find the Dow Jones Country Indexes listing in Section C of the newspaper. Examine the year-to-date percentage changes in U.S. dollars for the various national indexes. How do the changes from your table compare with the year-to-date percentage changes from the sample provided in the textbook as Exhibit 13.8? Are the same national indexes positive and negative in both listings? Discuss your findings.Answer: This question is designed to provide an intuitive understanding of the benefits from international diversification of equity portfolios. It is very unlikely that the student will find many, if any, national market indexes that have year-to-date returns that are even close to the same level as in Exhibit 13.8. Over different time periods, different market forces will affect each national market in unique ways and the exchange rates will be different. Some markets that previously yielded a positive return will now show a negative return, and vice versa. Similarly, some markets that had yielded a large positive (negative) return may now show only a small positive (negative) return.2. As an investor, what factors would you consider before investing in the emerging stock market of a developing country?Answer: An investor in emerging market stocks needs to be concerned with the depth of the market and the market’s liqui dity. Depth of the market refers to the opportunities to invest in the country. One measure of the depth of the market is the concentration ratio of a country’s stock market. The concentration ratio frequently is calculated to show the market value of the ten largest stock traded as a fraction of the total market capitalization of all equities traded. The higher the concentration ratio, the less deep is the market. That is, most value is concentrated in only a few companies. While this does not necessarily imply that the largest stocks in the emerging market are not good investments, it does, however, suggest that there are few opportunities for investment in that country and that proper diversification within the country may be difficult. In terms of liquidity, an investor would be wise to examine the market turnover ratio of the country’s stock market. High market turnover suggests that the market is liquid, or that there are opportunities for purchasing or selling the stock quickly at close to the current market price. This is important because liquidity means you can get in or out of a stock position quickly without spending more than you intended on purchase or receiving less than you expected on sale.3. Compare and contrast the various types of secondary market trading structures.Answer: There are two basic types of secondary market trading structures: dealer and agency. In a dealer market, the dealer serves as market maker for the security, holding an inventory of the security. The dealer buys at his bid price and sells at his asked price from this inventory. All public trades go through the dealer. In an agency market,public trades go through the agent who matches it with another public trade. Both dealer and agency markets can be continuous trade markets, but non-continuous markets tend to be only agency markets. Over-the-counter trading, specialist markets, and automated markets are types of continuous market trading systems. Call markets and crowd trading are each types of non-continuous trading market systems. Continuous trading systems are desirable for actively traded issues, whereas call markets and crowd trading offer advantages for smaller markets with many thinly traded issues because they mitigate the possibility of sparse order flow over short time periods.4. Discuss any benefits you can think of for a company to (a) cross-list its equity shares on more than one national exchange, and (b) to source new equity capital from foreign investors as well as domestic investors.Answer: A MNC that has a product market presence or manufacturing facilities in several countries may cross-list its shares on the exchanges of these same countries because there is typically investor demand for the shares of companies that are known within a country. Additionally, a company may cross-list its shares on foreign exchanges to broaden its investor base and therefore to increase the demand for its stock. An increase in demand will generally increase the stock price and improve its market liquidity. A broader investor base may also mitigate the possibility of a hostile takeover. Additional, cross-listing a company’s shares establishes name recognition and thus facilitates sourcing new equity capital in these foreign capital markets.5. Why might it be easier for an investor desiring to diversify his portfolio internationally to buy depository receipts rather than the actual shares of the company?Answer: A depository receipt can be purchased on the investor’s domestic exchange. It represents a package of the underlying foreign security that is priced in the investor’s local currency and in a trading range that is typical for the investor’s marketplace. The investor can purchase a depository receipt directly from his domestic broker, rather than having to deal with an overseas broker and the necessity of obtaining foreign funds to make the foreign stock purchase. Additionally, dividends are received in the local currency rather than in foreign funds that would need to be converted into the local currency.6. Why do you think the empirical studies about factors affecting equity returns basically showed that domestic factors were more important than international factors, and, secondly, that industrial membership of a firm was of little importance in forecasting the international correlation structure of a set of international stocks?Answer: While national security markets have become more integrated in recent years, there is still a tremendous amount of segmentation that brings about the benefit to be derived from international diversification of financial assets. Monetary and fiscal policies differ among countries because of different economic circumstances. The economic policies of a country directly affect the securities traded in the country, and they will behave differently than securities traded in another country with other economic policies being implemented. Hence, it is not surprising that domestic factors are foundto be more important than international factors in affecting security returns. Similarly, industrial activity within a country is also affected by the economic policies of the country; thus firms in the same industry group, but from different countries, will not necessarily behave the same in all countries, nor should we expect the securities issued by these firms to behave alike.PROBLEMS1. On the Milan bourse, Fiat stock closed at EUR5.84 per share on Thursday, March 3, 2005. Fiat trades as and ADR on the NYSE. One underlying Fiat share equals one ADR. On March 3, the $/EUR spot exchange rate was $1.3112/EUR1.00.a. At this exchange rate, what is the no-arbitrage U.S. dollar price of one ADR?b. By comparison, Fiat ADRs closed at $7.61. Do you think an arbitrage opportunity exists?Solution:a. The no-arbitrage ADR U.S. dollar price is: EUR5.84 x $1.3112 = $7.66.b. It is unlikely that an arbitrage opportunity exists after transaction costs. Additionally the slight difference in prices is likely accounted for by a difference in information contained in prices since the ADR market in New York closed several hours after the Milan bourse.2. If Fiat ADRs were trading at $7 when the underlying shares were trading in Milan at EUR5.84, what could you do to earn a trading profit? Use the information in problem 1, above, to help you and assume that transaction costs are negligible.Solution: As the solution to problem 1 shows, the no-arbitrage ADR U.S. dollar price is $7.66. If Fiat ADRs were trading at $7, a wise investor would buy the relatively undervalued ADRs. Since the ADRs are a derivative security, one would expect the ADRs to increase in price from $7 to $7.66. Assuming this happens, the position could be liquidated for a profit of $7.66 - $7.00 = $0.66 per ADR.MINI CASE: SAN PICO’S NEW STOCK EXCHANGESan Pico is a rapidly growing Latin American developing country. The country is blessed with miles of scenic beaches that have attracted tourists by the thousands in recent years to new resort hotels financed by joint ventures of San Pico businessmen and moneymen from the Middle East, Japan, and the United States. Additionally, San Pico has good natural harbors that are conducive for receiving imported merchandise from abroad and exporting merchandise produced in San Pico and other surrounding countries that lack access to the sea. Because of these advantages, many new businesses are being started in San Pico.Presently, stock is traded in a cramped building in La Cobijio, the nation’s capital. Admittedly, the San Pico Stock Exchange system is rather archaic. Twice a day an official of the exchange will call out the name of each of the 43 companies whose stock trades on the exchange. Brokers wanting to buy or sell shares for their clients then attempt to make a trade with one another. This crowd trading system has worked well for over one hundred years, but the government desires to replace it with a new modern system that will allow greater and more frequent opportunities for trading in each company, and will allow for trading the shares of the many new start-up companies that are expected to trade in the secondary market. Additionally, the government administration is rapidly privatizing many state-owned businesses in an attempt to foster their efficiency, obtain foreign exchange from the sale, and convert the country to a more capitalist economy. The government believes that it could conduct this privatization faster and perhaps at more attractive prices if it had a modern stock exchange facility where the shares of thenewly privatized companies will eventually trade.You are an expert in the operation of secondary stock markets and have been retained as a consultant to the San Pico Stock Exchange to offer your expertise in modernizing the stock market. What would you advise?S uggested Solution to San Pico’s New Stock ExchangeMost new and renovated stock exchanges are being established these days as either a partially or fully automated trading system. A fully automated system is especially beneficial for a small to medium size country in which there is only moderate trading in most issues. Such a system that deserves special note is the continuous National Integrated Market system of New Zealand. This system is fully computerized and does not require a physical structure. Essentially, all buyers and sellers of a stock enter through their broker into the computer system the number of shares they desire to buy or sell and their required transaction price. The system is updated constantly as new purchase or sale orders are entered into the system. The computer constantly searches for a match between buyer and seller, and when one is found a transaction takes place. This type of system would likely serve San Pico’s needs very well. There is existing technology to implement, the bugs have been worked out in other countries, and it would satisfy all the demands of the San Pico government and easily accommodate growth in market activity.。
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Chapter 3International Financial Markets Lecture OutlineMotives for Using International Financial Markets Motives for Investing in Foreign MarketsMotives for Providing Credit in Foreign MarketsMotives for Borrowing in Foreign MarketsForeign Exchange MarketHistory of Foreign ExchangeForeign Exchange TransactionsExchange QuotationsForeignInterpretingCurrency Futures and Options MarketsInternational Money MarketOrigins and DevelopmentStandardizing Global Bank RegulationsInternational Credit MarketSyndicated LoansInternational Bond MarketEurobond MarketDevelopment of Other Bond MarketsComparing Interest Rates Among CurrenciesInternational Stock MarketsIssuance of Foreign Stock in the U.S.Issuance of Stock in Foreign MarketsComparison of International Financial MarketsHow Financial Markets Affect an MNC’s ValueChapter ThemeThis chapter identifies and discusses the various international financial markets used by MNCs. These markets facilitate day-to-day operations of MNCs, including foreign exchange transactions, investing in foreign markets, and borrowing in foreign markets.Topics to Stimulate Class Discussion1. Why do international financial markets exist?2. How do banks serve international financial markets?3. Which international financial markets are most important to a firm that consistently needsshort-term funds? What about a firm that needs long-term funds?Critical debateShould firms that go public engage in international offerings?Proposition Yes. When a firm issues shares to the public for the first time in an initial public offering (IPO), it is naturally concerned about whether it can place all of its shares at a reasonable price. It will be able to issue its shares at a higher price by attracting more investors. It will increase its demand by spreading the shares across countries. The higher the price at which it can issue shares, the lower is its cost of using equity capital. It can also establish a global name by spreading shares across countries.Opposing view No. If a firm spreads its shares across different countries at the time of the IPO, there will be less publicly traded shares in the home country. Thus, it will not have as much liquidity in the secondary market. Investors desire shares that they can easily sell in the secondary market, which means that they require that the shares have liquidity. To the extent that a firm reduces its liquidity in the home country by spreading its share across countries, it may not attract sufficient home demand for the shares. Thus, its efforts to create global name recognition may reduce its name recognition in the home country.With whom do you agree? State your reasons. Use InfoTrac or some other search engine to learn more about this issue. Which argument do you support? Offer your own opinion on this issue.ANSWER: The key is that students recognize the tradeoff involved. A firm that engages in a relatively small IPO will have limited liquidity even when all of the stock is issued in the home country. Thus, it should not consider issuing stock internationally. However, firms with larger stock offerings may be in a position to issue a portion of their shares outside the home country. They should not spread the stocks across several countries, but perhaps should target one or two countries where they conduct substantial business. They want to ensure sufficient liquidity in each of the foreign countries where they sell shares.Stock Markets are inefficientPropositionI cannot believe that if the value of the euro in terms of, say, the British pound increases three days in a row, on the fourth day there is still a 50:50 chance that it will go up or down in value. I think that most investors will see a trend and will buy, therefore the price is morelikely to go up. Also, if the forward market predicts a rise in value, on average, surely it is going to rise in value. In other words, currency prices are predictable. And finally, if it were so unpredictable and therefore unprofitable to the speculator, how is it that there is such a vast sum of money being traded every day for speculative purposes – there is no smoke without fire.The simple answer is that if that is what you believe, buy currencies that have viewOpposingincreased three days in a row and on average you should make a profit, buy currencies where the forward market shows an increase in value. The fact is that there are a lot of investors with just your sort of views. The market traders know all about such beliefs and will price the currency so that such easy profit (their loss) cannot be made. Look at past currency rates for yourself, check all fourth day changes after three days of rises, any difference is going to be not enough to cover transaction costs or trading expenses and the slight inaccuracy in your figures which are likely to be closing day mid point of the bid/ask spread. No, all currency movements are related to information and no-one knows if tomorrows news will be better or worse than expected.With whom do you agree? Could there be undiscovered patterns? Could some movements not be related to information? Could some private news be leaking out?ANSWER: Clearly there are no obvious patterns. Discussion on the impossibility of obvious patterns is worth emphasizing. However, does market inefficiency necessarily involve patterns, could market manipulation be occasional. There is worrying evidence from share price movements that there is unusual movement before announcements on many occasions, so the ideathat traders do not occasionally collude and move the price without supporting economic evidence is not an unreasonable view. Proof is however difficult as we have to separate anticipation from prior knowledge, the lucky speculator from the speculator who was in the know.Answers to End of Chapter Questions1. Motives for Investing in Foreign Money Markets. Explain why an MNC may invest fundsin a financial market outside its own country.ANSWER: The MNC may be able to earn a higher interest rate on funds invested in a financial market outside of its own country. In addition, the exchange rate of the currency involved may be expected to appreciate.2. Motives for Providing Credit in Foreign Markets. Explain why some financial institutionsprefer to provide credit in financial markets outside their own country.ANSWER: Financial institutions may believe that they can earn a higher return by providing credit in foreign financial markets if interest rate levels are higher and if the economic conditions are strong so that the risk of default on credit provided is low. The institutions may also want to diversity their credit so that they are not too exposed to the economic conditions in any single country.3. Exchange Rate Effects on Investing. Explain how the appreciation of the Australian dollaragainst the euro would affect the return to a French firm that invested in an Australian money market security.ANSWER: If the Australian dollar appreciates over the investment period, this implies that the French firm purchased the Australian dollars to make its investment at a lower exchange rate than the rate at which it will convert A$ to euros when the investment period is over.Thus, it benefits from the appreciation. Its return will be higher as a result of this appreciation.4. Exchange Rate Effects on Borrowing. Explain how the appreciation of the Japanese yenagainst the UK pound would affect the return to a UK firm that borrowed Japanese yen and used the proceeds for a UK project.ANSWER: If the Japanese yen appreciates over the borrowing period, this implies that the UK firm converted yen to pounds at a lower exchange rate than the rate at which it paid for yen at the time it would repay the loan. Thus, it is adversely affected by the appreciation. Its cost of borrowing will be higher as a result of this appreciation.5. Bank Services. List some of the important characteristics of bank foreign exchange servicesthat MNCs should consider.ANSWER: The important characteristics are (1) competitiveness of the quote, (2) the firm’s relationship with the bank, (3) speed of execution, (4) advice about current market conditions, and (5) forecasting advice.6. Bid/ask Spread. Delay Bank’s bid price for US dollars is £0.53 and its ask price is £0.55.What is the bid/ask percentage spread?ANSWER: (£0.55– £0.53)/£0.55 = .036 or 3.6%7. Bid/ask Spread. Compute the bid/ask percentage spread for Mexican peso in which the askrate is 20.6 New peso to the dollar and the bid rate is 21.5 New peso to the dollar.ANSWER: direct rates are 1/20.6 = $0.485:1 peso as the ask rate and 1/21.5 = $0.465:1 peso as the bid rate so the spread is[($0.485 – $0.465)/$0.485] = .041, or 4.1%. Note that the spread is fro the Mexiccan peso not the dollar.8. Forward Contract. The Wolfpack ltd is a UK exporter that invoices its exports to the UnitedStates in dollars. If it expects that the dollar will appreciate against the pound in the future, should it hedge its exports with a forward contract? Explain..ANSWER: The forward contract can hedge future receivables or payables in foreign currencies to insulate the firm against exchange rate risk. Yet, in this case, the Wolfpack Corporation should not hedge because it would benefit from appreciation of the dollar when it converts the dollars to pounds.9. Euro. Explain the foreign exchange situation for countries that use the euro when theyengage in international trade among themselves.ANSWER: There is no foreign exchange. Euros are used as the medium of exchange.10. Indirect Exchange Rate. If the direct exchange rate of the euro is worth £0.685, what is theindirect rate of the euro? That is, what is the value of a pound in euros?ANSWER: 1/0.685 = 1.46 euros.11. Cross Exchange Rate. Assume Poland’s currency (the zloty) is worth £0.17 and theJapanese yen is worth £0.005. What is the cross (implied) rate of the zloty with respect to yen?ANSWER: £0.17/£0.005 = 34 zloty:1 yen12. Syndicated Loans. Explain how syndicated loans are used in international markets.ANSWER: A large MNC may want to obtain a large loan that no single bank wants to accommodate by itself. Thus, a bank may create a syndicate whereby several other banks also participate in the loan.13. Loan Rates. Explain the process used by banks in the Eurocredit market to determine the rateto charge on loans.ANSWER: Banks set the loan rate based on the prevailing LIBOR, and allow the loan rate to float (change every 6 months) in accordance with changes in LIBOR.14. International Markets. What is the function of the international money market? Brieflydescribe the reasons for the development and growth of the European money market. Explain how the international money, credit, and bond markets differ from one another.ANSWER: The function of the international money market is to efficiently facilitate the flow of international funds from firms or governments with excess funds to those in need of funds.Growth of the European money market was largely due to (1) regulations in the U.S. that limited foreign lending by U.S. banks; and (2) regulated ceilings placed on interest rates of dollar deposits in the U.S. that encouraged deposits to be placed in the Eurocurrency market where ceilings were nonexistent.The international money market focuses on short-term deposits and loans, while the international credit market is used to tap medium-term loans, and the international bond market is used to obtain long-term funds (by issuing long-term bonds).15. Evolution of Floating Rates. Briefly describe the historical developments that led to floatingexchange rates as of 1973.ANSWER: Country governments had difficulty in maintaining fixed exchange rates. In 1971, the bands were widened. Yet, the difficulty of controlling exchange rates even within these wider bands continued. As of 1973, the bands were eliminated so that rates could respond to market forces without limits (although governments still did intervene periodically).16. International Diversification. Explain how the Asian crisis would have affected the returnsto a UK. firm investing in the Asian stock markets as a means of international diversification.[See the chapter appendix.]ANSWER: The returns to the UK firm would have been reduced substantially as a result of the Asian crisis because of both declines in the Asian stock markets and because of currency depreciation. For example, the Indonesian stock market declined by about 27% from June 1997 to June 1998. Furthermore, the Indonesian rupiah declined against the U.S. dollar by 84%.17.Eurocredit Loans.a.With regard to Eurocredit loans, who are the borrowers?b. Why would a bank desire to participate in syndicated Eurocredit loans?c. What is LIBOR and how is it used in the Eurocredit market?ANSWER:a. Large corporations and some government agencies commonly request Eurocredit loans.b. With a Eurocredit loan, no single bank would be totally exposed to the risk that theborrower may fail to repay the loan. The risk is spread among all lending banks within the syndicate.c. LIBOR (London interbank offer rate) is the rate of interest at which banks in Europe lendto each other. It is used as a base from which loan rates on other loans are determined in the Eurocredit market.18. Foreign Exchange. You just came back from Canada, where the Canadian dollar was worth£0.43. You still have C$200 from your trip and could exchange them for pounds at the airport, but the airport foreign exchange desk will only buy them for £0.40. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for £0.055 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C$200 for 1500 New Pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain.ANSWER: Exchange with the tourist. If you exchange the C$ for pesos at the foreign exchange desk, the C$200 is multiplied by £0.40 and then divided by £0.055 ie a ratio of £0.40/0.055 = 7.27 pesos to the C$. The total pesos would be 200 x 7.27 = 1454 pesos, a little less than is being offered by the tourist.19. Foreign Stock Markets. Explain why firms may issue stock in foreign markets. Why mightMNCs issue more stock in Europe since the conversion to a single currency in 1999?ANSWER: Firms may issue stock in foreign markets when they are concerned that their home market may be unable to absorb the entire issue. In addition, these firms may have foreign currency inflows in the foreign country that can be used to pay dividends on foreign-issued stock. They may also desire to enhance their global image. Since the euro can be used in several countries, firms may need a large amount of euros if they are expanding across Europe.20. Stock Market Integration. Bullet plc a UK firm, is planning to issue new shares on theLondon Stock Exchange this month. The only decision still to be made is the specific day on which the shares will be issued. Why do you think Bullet monitors results of the Tokyo stock market every morning?ANSWER: The UK stock market prices sometimes follow Japanese market prices. Thus, the firm would possibly be able to issue its stock at a higher price in the UK if it can use the Japanese market as an indicator of what will happen in the UK market. However, this indicator will not always be accurate.Advanced Questions21. Effects of September 11. Why do you think the terrorist attack on the U.S. was expected tocause a decline in U.S. interest rates? Given the expectations for a potential decline in U.S.interest rates and stock prices, how were capital flows between the U.S. and other countries likely affected?ANSWER: The attack was expected to cause a weaker economy, which would result in lower U.S. interest rates. Given the lower interest rates, and the weak stock prices, the amount of funds invested by foreign investors in U.S. securities would be reduced.22. International Financial Markets. Carrefour the French Supermarket chain has established retail outlets worldwide. These outlets are massive and contain products purchased locally as well as imports. As Carrefour generates earnings beyond what it needs abroad, it may remit those earnings back to France. Carrefour is likely to build additional outlets especially in China.a. Explain how the Carrefour outlets in China would use the spot market in foreign exchange.ANSWER:The Carrefour stores in China need other currencies to buy products from other countries, and must convert the Chinese currency (yuan) into the other currencies in the spot market to purchase these products. They also could use the spot market to convert excess earnings denominated in yuan into euros, which would be remitted to the French parent.b. Explain how Carrefour might utilize the international money markets when it isestablishing other Carrefour stores in Asia.ANSWER: Carrefour may need to maintain some deposits in the Eurocurrency market that can be used (when needed) to support the growth of Carrefour stores in various foreign markets. When some Carrefour stores in foreign markets need funds, they borrow from banks in the Eurocurrency market. Thus, the Eurocurrency market serves as a deposit or lending source for Carrefour and other MNCs on a short-term basis. (Eurocurrency refers to international currencies, most likely the dollar, not just the euro!)c. Explain how Carrefour could use the international bond market to finance theestablishment of new outlets in foreign markets.ANSWER: Carrefour could issue bonds in the Eurobond market to generate funds needed to establish new outlets. The bonds may be denominated in the currency that is needed; then, once the stores are established, some of the cash flows generated by those stores could be used to pay interest on the bonds.23.Interest Rates. Why do interest rates vary among countries? Why are interest rates normallysimilar for those European countries that use the euro as their currency? Offer a reason why the government interest rate of one country could be slightly higher than that of the government interest rate of another country, even though the euro is the currency used in both countries.ANSWER: Interest rates in each country are based on the supply of funds and demand for funds for a given currency. However, the supply and demand conditions for the euro are dictated by all participating countries in aggregate, and do not vary among participating countries. Yet, the government interest rate in one country that uses the euro could be slightly higher than others that use the euro if it is subject to default risk. The higher interest rate would reflect a risk premium.Blades plc Case Study。