CHAPTER 31 INTERNATIONAL CORPORATE FINANCE
|
|
- Kevin Welch
- 6 years ago
- Views:
Transcription
1 Corporate Finance 11 th edition Solutions Manual Ross, Westerfield, Jaffe, and Jordan Completed download Solutions Manual, Answers, Instructors Resource Manual, Case Solutions, Excel Solutions are included: Test Bank for Corporate Finance 11th Edition Ross Westerfield Jaffe Jordan Download: CHAPTER 31 INTERNATIONAL CORPORATE FINANCE Answers to Concepts Review and Critical Thinking Questions 1. a. The dollar is selling at a premium because it is more expensive in the forward market than in the spot market (SF 1.11 versus SF 1.09). b. The franc is expected to depreciate relative to the dollar because it will take more francs to buy one dollar in the future than it does today. c. Inflation in Switzerland is higher than in the United States, as are nominal interest rates. 2. The exchange rate will increase, as it will take progressively more pesos to purchase a dollar. This is the relative PPP relationship. 3. a. The Australian dollar is expected to weaken relative to the dollar, because it will take more A$ in the future to buy one dollar than it does today. b. The inflation rate in Australia is higher. c. Nominal interest rates in Australia are higher; relative real rates in the two countries are the same. 4. No. For example, if a country s currency strengthens, imports become cheaper (good), but its exports become more expensive for others to buy (bad). The reverse is true for currency depreciation.
2 5. Additional advantages include being closer to the final consumer and, thereby, saving on transportation, significantly lower wages, and less exposure to exchange rate risk. Disadvantages include political risk and costs of supervising distant operations. 6. One key thing to remember is that dividend payments are made in the home currency. More generally, it may be that the owners of the multinational are primarily domestic and are ultimately concerned about their wealth denominated in their home currency because, unlike a multinational, they are not internationally diversified. 7. a. False. If prices are rising faster in Great Britain, it will take more pounds to buy the same amount of goods that one dollar can buy; the pound will depreciate relative to the dollar. b. False. The forward market would already reflect the projected deterioration of the euro relative to the dollar. Only if you feel that there might be additional, unanticipated weakening of the euro that isn t reflected in forward rates today, will the forward hedge protect you against additional declines.
3 CHAPTER 31-3 c. True. The market would only be correct on average, while you would be correct all the time. 8. a. American exporters: Their situation in general improves because a sale of the exported goods for a fixed number of euros will be worth more dollars. American importers: Their situation in general worsens because the purchase of the imported goods for a fixed number of euros will cost more in dollars. b. American exporters: They would generally be better off if the British government s intentions result in a strengthened pound. American importers: They would generally be worse off if the pound strengthens. c. American exporters: They would generally be much worse off, because an extreme case of fiscal expansion like this one will make American goods prohibitively expensive to buy, or else Brazilian sales, if fixed in reais, would become worth an unacceptably low number of dollars. American importers: They would generally be much better off, because Brazilian goods will become much cheaper to purchase in dollars. 9. IRP is the most likely to hold because it presents the easiest and least costly means to exploit any arbitrage opportunities. Relative PPP is least likely to hold since it depends on the absence of market imperfections and frictions in order to hold strictly. 10. It all depends on whether the forward market expects the same appreciation over the period and whether the expectation is accurate. Assuming that the expectation is correct and that other traders do not have the same information, there will be value to hedging the currency exposure. 11. One possible reason investment in the foreign subsidiary might be preferred is if this investment provides direct diversification that shareholders could not attain by investing on their own. Another reason could be if the political climate in the foreign country was more stable than in the home country. Increased political risk can also be a reason you might prefer the home subsidiary investment. Indonesia can serve as a great example of political risk. If it cannot be diversified away, investing in this type of foreign country will increase the systematic risk. As a result, it will raise the cost of the capital, and could actually decrease the NPV of the investment. 12. Yes, the firm should undertake the foreign investment. If, after taking into consideration all risks, a project in a foreign country has a positive NPV, the firm should undertake it. Note that in practice, the stated assumption (that the adjustment to the discount rate has taken into consideration all political and diversification issues) is a huge task. But once that has been addressed, the net present value principle holds for foreign operations, just as for domestic. 13. If the foreign currency depreciates, the U.S. parent will experience an exchange rate loss when the foreign cash flow is remitted to the U.S. This problem could be overcome by selling forward contracts. Another way of overcoming this problem would be to borrow in the country where the project is located. 14. False. If the financial markets are perfectly competitive, the difference between the Eurodollar rate and the U.S. rate will be due to differences in risk and government regulation. Therefore, speculating in those markets will not be beneficial.
4 Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. Using the quotes from the table, we get: a. $100(.8031/$1) = b. $ c. 5M($1.2452/ ) = $6,226,000 d. New Zealand dollar e. Mexican peso f. (P /$1)($1.2452/ 1) = P / This is a cross rate. g. The most valuable is the Kuwait dinar. The least valuable is the Vietnam dong. 2. a. You would prefer 100, since: ( 100)($1.5649/ 1) = $ b. You would still prefer 100. Using the $/ exchange rate and the SF/$ exchange rate to find the amount of Swiss francs 100 will buy, we get: ( 100)($1.5649/ 1)(SF.9655) = SF c. Using the quotes in the book to find the SF/ cross rate, we find: (SF/$.9655)($1.5649/ 1) = SF / 1 The /SF exchange rate is the inverse of the SF/ exchange rate, so: 1/SF =.6619/SF1
5 CHAPTER a. F 180 = (per $). The yen is selling at a premium because it is more expensive in the forward market than in the spot market ($ versus $ ). b. F 90 = $.6394/. The pound is selling at a discount because it is less expensive in the forward market than in the spot market ($ versus $1.5640). c. The value of the dollar will fall relative to the yen, since it takes more dollars to buy one yen in the future than it does today. The value of the dollar will rise relative to the pound, because it will take less dollars to buy one pound in the future than it does today. 4. a. The U.S. dollar, since one Canadian dollar will buy: (Can$1)/(Can$1.13/$1) = $.8850 b. The cost in U.S. dollars is: (Can$2.50)/(Can$1.13/$1) = $2.21 Among the reasons that absolute PPP doesn t hold are tariffs and other barriers to trade, transactions costs, taxes, and different tastes. c. The U.S. dollar is selling at a premium, because it is more expensive in the forward market than in the spot market (Can$1.13 versus Can$1.16). d. The Canadian dollar is expected to depreciate in value relative to the dollar, because it takes more Canadian dollars to buy one U.S. dollar in the future than it does today. e. Interest rates in the United States are probably lower than they are in Canada. 5. a. The cross rate in / terms is: ( 126/$1)($1.53/ 1) = / 1 b. The yen is quoted high relative to the pound. Take out a loan for $1 and buy Use the.6536 to purchase yen at the cross-rate, which will give you: 195.8(.6536) = Use the yen to buy back dollars and repay the loan. The cost to repay the loan will be: ($1/ 126) = $ Your arbitrage profit is $.0157 per dollar used.
6 6. We can rearrange the interest rate parity condition to answer this question. The equation we will use is: R FC = (F T S 0) / S 0 + R US Using this relationship, we find: Great Britain: R FC = ( ) / =.0206, or 2.06% Japan: R FC = ( ) / =.0169, or 1.69% Switzerland: R FC = (SF.9632 SF.9655) / SF =.0166, or 1.66% 7. If we invest in the U.S. for the next three months, we will have: $30,000,000(1.0017) 3 = $30,153, If we invest in Great Britain, we must exchange the dollars today for pounds, and exchange the pounds for dollars in three months. After making these transactions, the dollar amount we would have in three months would be: ($30,000,000)(.64/$1)(1.0061) 3 /(.65/$1) = $30,082, The company should invest in the U.S. 8. Using the relative purchasing power parity equation: F t = S 0 [1 + (h FC h US)] t We find: Z3.41 = Z3.29[1 + (h FC h US)] 3 h FC h US = (Z3.41 / Z3.29) 1/3 1 h FC h US =.0120, or 1.20% Inflation in Poland is expected to exceed that in the U.S. by 1.20% annually over this period. 9. The profit will be the quantity sold, times the sales price minus the cost of production. The production cost is in Singapore dollars, so we must convert this to U.S. dollars. Doing so, we find that if the exchange rates stay the same, the profit will be: Profit = 30,000[$115 {(S$141.30) / (S$1.3043/$1)}] Profit = $199, If the exchange rate rises, we must adjust the cost by the increased exchange rate, so: Profit = 30,000[$115 {(S$141.30) / 1.1(S$1.3043/$1)}] Profit = $495,437.12
7 CHAPTER 31-7 If the exchange rate falls, we must adjust the cost by the decreased exchange rate, so: Profit = 30,000[$115 {(S$141.30) /.9(S$1.3043/$1)}] Profit = $161, To calculate the breakeven change in the exchange rate, we need to find the exchange rate that makes the cost in Singapore dollars equal to the selling price in U.S. dollars, so: $115 = S$141.30/S T S T = S$1.2287/$1 S T =.0580, or 5.80% 10. a. If IRP holds, then: F 180 = (Kr 6.97)[1 + (.05.03)] 1/2 F 180 = Kr Since given F 180 is Kr 7.06, an arbitrage opportunity exists; the forward premium is too high. Borrow Kr 1 today at 5 percent interest. Agree to a 180-day forward contract at Kr Convert the loan proceeds into dollars: Kr 1 ($1/Kr 6.97) = $ Invest these dollars at 3 percent, ending up with $ Convert the dollars back into krone as $.14558(Kr 7.06/$1) = Kr Repay the Kr 1 loan, ending with a profit of: Kr Kr = Kr b. To find the forward rate that eliminates arbitrage, we use the interest rate parity condition, so: F 180 = (Kr 6.97)[1 + (.05.03)] 1/2 F 180 = Kr The international Fisher effect states that the real interest rate across countries is equal. We can rearrange the international Fisher effect as follows to answer this question: R US h US = R FC h FC h FC = R FC + h US R US a. h AUS = h AUS =.0415, or 4.15% b. h CAN = h CAN =.0615, or 6.15% c. h TAI = h TAI =.0915, or 9.15%
8 12. a. The yen is expected to get stronger, since it will take fewer yen to buy one dollar in the future than it does today. b. h US h JAP ( ) / h US h JAP =.0068, or.68% (1.0068) 4 1 =.0268, or 2.68% The approximate inflation differential between the U.S. and Japan is 2.68 percent annually. 13. We need to find the change in the exchange rate over time, so we need to use the relative purchasing power parity relationship: F t = S 0 [1 + (h FC h US)] t Using this relationship, we find the exchange rate in one year should be: F 1 = 251[1 + ( )] 1 F 1 = HUF The exchange rate in two years should be: F 2 = 251[1 + ( )] 2 F 2 = HUF And the exchange rate in five years should be: F 5 = 251[1 + ( )] 5 F 5 = HUF Intermediate 14. First, we need to forecast the future spot rate for each of the next three years. From interest rate and purchasing power parity, the expected exchange rate is: E(S T) = [(1 + R US) / (1 + R FC)] t S 0 So: E(S 1) = ( / ) 1 ($1.04/ ) = $1.0420/ E(S 2) = ( / ) 2 ($1.04/ ) = $1.0440/ E(S 3) = ( / ) 3 ($1.04/ ) = $1.0461/
9 CHAPTER 31-9 Now we can use these future spot rates to find the dollar cash flows. The dollar cash flow each year will be: Year 0 cash flow = $19,000,000($1.04/ ) = $19,760, Year 1 cash flow = $3,600,000($1.0420/ ) = $3,751, Year 2 cash flow = $4,100,000($1.0440/ ) = $4,280, Year 3 cash flow = ( 5,100, ,700,000)($1.0461/ ) = $18,620, And the NPV of the project will be: NPV = $19,760,000 + $3,751, / $4,280, / $18,620, / NPV = $941, a. Implicitly, it is assumed that interest rates won t change over the life of the project, but the exchange rate is projected to decline because the Euroswiss rate is lower than the Eurodollar rate. b. We can use relative purchasing power parity to calculate the dollar cash flows at each time. The equation is: E[S T] = (SF 1.17)[1 + (.05.06)] t E[S T] = 1.17(.99) t So, the cash flows each year in U.S. dollar terms will be: t SF E[St] US$ 0 25,000, $21,367, ,900, ,957, ,900, ,017, ,900, ,077, ,900, ,139, ,900, ,201, And the NPV is: NPV = $21,367, $5,957,005.96/ $6,017,177.73/ $6,077,957.31/ $6,139,350.82/ $6,201,364.46/ NPV = $494, c. Rearranging the relative purchasing power parity equation to find the required return in Swiss francs, we get: R SF = 1.12[1 + (.05.06)] 1 R SF = 10.88% So, the NPV in Swiss francs is: NPV = SF 25,000,000 + SF 6,900,000(PVIFA 10.88%,5) NPV = SF 578,857.89
10 Converting the NPV to dollars at the spot rate, we get the NPV in U.S. dollars as: NPV = (SF 578,857.89)($1/SF 1.17) NPV = $494, a. To construct the balance sheet in dollars, we need to convert the account balances to dollars. At the current exchange rate, we get: Assets = solaris 43,000 ($ / solaris 1.20) = $35, Debt = solaris 14,000 ($ / solaris 1.20) = $11, Equity = solaris 29,000 ($ / solaris 1.20) = $24, b. In one year, if the exchange rate is solaris 1.40/$, the accounts will be: Assets = solaris 43,000 ($ / solaris 1.40) = $30, Debt = solaris 14,000 ($ / solaris 1.40) = $10, Equity = solaris 29,000 ($ / solaris 1.40) = $20, c. If the exchange rate is solaris 1.12/$, the accounts will be: Assets = solaris 43,000 ($ / solaris 1.12) = $38, Debt = solaris 14,000 ($ / solaris 1.12) = $12, Equity = solaris 29,000 ($ / solaris 1.12) = $25, Challenge 17. First, we need to construct the end of year balance sheet in solaris. Since the company has retained earnings, the equity account will increase, which necessarily implies the assets will also increase by the same amount. So, the balance sheet at the end of the year in solaris will be: Balance Sheet (solaris) Liabilities $14,000 Equity 30,750 Assets $44,750 Total liabilities & equity $44,750 Now we need to convert the balance sheet accounts to dollars, which gives us: Assets = solaris 44,750 ($ / solaris 1.24) = $36, Debt = solaris 14,000 ($ / solaris 1.24) = $11, Equity = solaris 30,750 ($ / solaris 1.24) = $24, a. The domestic Fisher effect is: 1 + R US = (1 + r US)(1 + h US) 1 + r US = (1 + R US)/(1 + h US) This relationship must hold for any country, that is: 1 + r FC = (1 + R FC)/(1 + h FC)
11 CHAPTER The international Fisher effect states that real rates are equal across countries, so: 1 + r US = (1 + R US)/(1 + h US) = (1 + R FC)/(1 + h FC) = 1 + r FC b. The exact form of unbiased interest rate parity is: E[S t] = F t = S 0 [(1 + R FC)/(1 + R US)] t c. The exact form for relative PPP is: E[S t] = S 0 [(1 + h FC)/(1 + h US)] t d. For the home currency approach, we calculate the expected currency spot rate at Time t as: E[S t] = (.5)[1.07/1.05] t = (.5)(1.019) t We then convert the euro cash flows using this equation at every time, and find the present value. Doing so, we find: NPV = [ 2M/(.5)] + {.9M/[1.019(.5)]}/1.1 + {.9M/[ (.5)]}/ {.9M/[ (.5)]}/1.1 3 NPV = $316, For the foreign currency approach, we first find the return in euros as: R FC = 1.10(1.07/1.05) 1 =.121 Next, we find the NPV in euros as: NPV = 2M + (.9M)/ (.9M)/ (.9M)/ = 158, And finally, we convert the euros to dollars at the current exchange rate, which is: NPV ($) = 158, /.5 = $316, Download links: corporate finance 11th edition solutions ross westerfield and jordan corporate finance 11th edition test bank ross westerfield and jordan fundamentals of corporate finance 11th edition solutions pdf principles of corporate finance 11th edition solutions manual fundamentals of corporate finance 11th edition answers principles of corporate finance 11th edition solutions manual pdf fundamentals of corporate finance 11th edition ross principles of corporate finance 11th edition solutions manual free download brealey myers allen principles of corporate finance 11th edition solutions pdf
Introduction to Exchange Rates and the Foreign Exchange Market
Introduction to Exchange Rates and the Foreign Exchange Market 2 1. Refer to the exchange rates given in the following table. Today One Year Ago June 25, 2010 June 25, 2009 Country Per $ Per Per Per $
More informationInternational Finance multiple-choice questions
International Finance multiple-choice questions 1. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the
More informationExchange rate: the price of one currency in terms of another. We will be using the notation E t = euro
Econ 330: Money and Banking Fall 2014, Handout 8 Chapter 17 : Foreign Exchange Market 1. Foreign Exchange Market Exchange rate: the price of one currency in terms of another. We will be using the notation
More information2. Discuss the implications of the interest rate parity for the exchange rate determination.
CHAPTER 5 INTERNATIONAL PARITY RELATIONSHIPS AND FORECASTING FOREIGN EXCHANGE RELATIONSHIPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Give a full definition
More informationWeek-7. Dr. Ahmed. Domestic Firms International Firms Multinational Firms Global Firms
FINC 5880 Dr. Ahmed Week-7 Name Domestic Firms International Firms Multinational Firms Global Firms Factors that make multinational financial management different Exchange rates and trading International
More informationMCQ on International Finance
MCQ on International Finance 1. If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with a) international monetary credits. b) dollars. c) yuan,
More informationChapter 11. Managing Transaction Exposure. Lecture Outline. Hedging Payables. Hedging Receivables
Chapter 11 Managing Transaction Exposure Lecture Outline Policies for Hedging Transaction Exposure Hedging Most of the Exposure Selective Hedging Hedging Payables Forward or Futures Hedge Money Market
More informationInternational Parity Conditions. 1. The Law of One Price. 2. Absolute Purchasing Power Parity
International Parity Conditions Some fundamental questions of international financial managers are: - What are the determinants of exchange rates? - Are changes in exchange rates predictable? The economic
More informationInternational Parity Conditions
International Parity Conditions Eiteman et al., Chapter 6 Winter 2004 Outline of the Chapter How are exchange rates determined? Can we predict them? Prices and Exchange Rates Prices Indices Inflation Rates
More informationAgenda. Learning Objectives. Chapter 19. International Business Finance. Learning Objectives Principles Used in This Chapter
Chapter 19 International Business Finance Agenda Learning Objectives Principles Used in This Chapter 1. Foreign Exchange Markets and Currency Exchange Rates 2. Interest Rate and Purchasing-Power Parity
More informationChapter 10. Measuring Exposure to Exchange Rate Fluctuations. Lecture Outline. Relevance of Exchange Rate Risk
Chapter 10 Measuring Exposure to Exchange Rate Fluctuations Lecture Outline Relevance of Exchange Rate Risk Transaction Exposure Estimating Net Cash Flows in Each Currency Exposure of an MNC s Portfolio
More information05/07/55. International Parity Conditions. 1. The Law of One Price
International Parity Conditions Some fundamental questions of international financial managers are: - What are the determinants of exchange rates? - Are changes in exchange rates predictable? The economic
More informationInternational Parity Conditions
International Parity Conditions Some fundamental questions of international financial managers are: - What are the determinants of exchange rates? - Are changes in exchange rates predictable? The economic
More information20: Short-Term Financing
0: Short-Term Financing All firms make short-term financing decisions periodically. Beyond the trade financing discussed in the previous chapter, MCs obtain short-term financing to support other operations
More informationChapter 9. Forecasting Exchange Rates. Lecture Outline. Why Firms Forecast Exchange Rates
Chapter 9 Forecasting Exchange Rates Lecture Outline Why Firms Forecast Exchange Rates Forecasting Techniques Technical Forecasting Fundamental Forecasting Market-Based Forecasting Mixed Forecasting Guidelines
More informationChapter 3 Foreign Exchange Determination and Forecasting
Chapter 3 oreign Exchange Determination and orecasting 1. Applying expansionary macroeconomic policy, which results in higher goods prices and lower real interest rates, will not reduce the balance of
More informationCHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. How would you define transaction exposure? How is it different from economic exposure?
More informationChapter 2 Foreign Exchange Parity Relations
Chapter 2 Foreign Exchange Parity Relations Note: In the sixth edition of Global Investments, the exchange rate quotation symbols differ from previous editions. We adopted the convention that the first
More informationforeign, and hence it is where the prices of many currencies are set. The price of foreign money is
Chapter 2: The BOP and the Foreign Exchange Market The foreign exchange market is the market where domestic money can be exchanged for foreign, and hence it is where the prices of many currencies are set.
More informationChapter 11 Currency Risk Management
Chapter 11 Currency Risk Management Note: In these problems, the notation / is used to mean per. For example, 158/$ means 158 per $. 1. To lock in the rate at which yen can be converted into U.S. dollars,
More informationIn frictionless markets, freely tradable goods should have the same price anywhere: S = P P $
Prices and Exchange Rates In frictionless markets, freely tradable goods should have the same price anywhere: P $ S = P P $ price in US$ S Exchange rate in yen per dollar P Price in Japanese yen Purchasing
More informationUniversity of Siegen
University of Siegen Faculty of Economic Disciplines, Department of economics Univ. Prof. Dr. Jan Franke-Viebach Seminar Risk and Finance Summer Semester 2008 Topic 4: Hedging with currency futures Name
More informationTypes of Exposure. Forward Market Hedge. Transaction Exposure. Forward Market Hedge. Forward Market Hedge: an Example INTERNATIONAL FINANCE.
Types of Exposure INTERNATIONAL FINANCE Chapter 8 Transaction exposure sensitivity of realized domestic currency values of the firm s contractual cash flows denominated in foreign currencies to unexpected
More informationMBF1223 Financial Management Prepared by Dr Khairul Anuar
MBF1223 Financial Management Prepared by Dr Khairul Anuar L11 - International Financial Management www.mba638.wordpress.com Learning Objectives Understand cultural, business, and political differences
More information22 INTERNATIONAL CORPORATE FINANCE. Topics in Corporate Finance PART 8. DIGITAL STUDY TOOLS 2003 back to the
22 INTERNATIONAL CORPORATE FINANCE Topics in Corporate Finance PART 8 Relatively few large companies operate in a single country, and companies based in the United States are no exception. In 2005, multinational
More informationParity Conditions in International Finance and Currency Forecasting. Chapter 4
Parity Conditions in International Finance and Currency Forecasting Chapter 4 ١ ARBITRAGE AND THE LAW OF ONE PRICE Five Parity Conditions Result From Arbitrage Activities 1. Purchasing Power Parity (PPP)
More informationFINC/ECON International Finance Homework Solution
FINC/ECON 3240 - International Finance Homework Solution Chapter 1 2. Comparative Advantage. a. Explain how the theory of comparative advantage relates to the need for international business. ANSWER: The
More informationMacroeonomics. 18 this chapter, Open-Economy Macroeconomics: look for the answers to these questions: Introduction. N.
C H A P T E R In 18 this chapter, look for the answers to these questions: Open-Economy Macroeconomics: How are international flows of goods and assets Basic Concepts related? P R I N C I P L E S O F Macroeonomics
More informationChapter 1. Multinational Financial Management: An Overview
Chapter 1 Multinational Financial Management: An Overview 1. The commonly accepted goal of the MNC is to: A) maximize short-term earnings. B) maximize shareholder wealth. C) minimize risk. D) A and C.
More informationGovernments and Exchange Rates
Governments and Exchange Rates Exchange Rate Behavior Existing spot exchange rate covered interest arbitrage locational arbitrage triangular arbitrage Existing spot exchange rates at other locations Existing
More informationLong-Term Debt Financing
18 Long-Term Debt Financing CHAPTER OBJECTIVES The specific objectives of this chapter are to: explain how an MNC uses debt financing in a manner that minimizes its exposure to exchange rate risk, explain
More informationOpen-Economy Macroeconomics: Basic Concepts
Lesson 10 Open-Economy Macroeconomics: Basic Concepts Henan University of Technology Sino-British College Transfer Abroad Undergraduate Programme 0 In this lesson, look for the answers to these questions:
More informationChapter 31 Open Economy Macroeconomics Basic Concepts
Chapter 31 Open Economy Macroeconomics Basic Concepts 0 In this chapter, look for the answers to these questions: How are international flows of goods and assets related? What s the difference between
More informationInvesting in a Portfolio of Currencies
APPENDIX 21 Investing in a Portfolio of Currencies Large fi nancial corporations may consider investing in a portfolio of currencies, as illustrated in the following example. Assume that MacFarland Co.,
More informationChapter 8 Outline. Transaction exposure Should the Firm Hedge? Contractual hedge Risk Management in practice
Chapter 8 Outline Transaction exposure Should the Firm Hedge? Contractual hedge Risk Management in practice 1 / 51 Transaction exposure Transaction exposure measures gains or losses that arise from the
More information3) In 2010, what was the top remittance-receiving country in the world? A) Brazil B) Mexico C) India D) China
HSE-IB Test Syllabus: International Business: Environments and Operations, 15e, Global Edition (Daniels et al.). For use of the student for an educational purpose only, do not reproduce or redistribute.
More informationOpen-Economy Macroeconomics: Basic Concepts
Wojciech Gerson (1831-1901) Seventh Edition Principles of Macroeconomics N. Gregory Mankiw CHAPTER 18 Open-Economy Macroeconomics: Basic Concepts Closed vs. Open Economies A closed economy does not interact
More informationForeign Exchange Markets: Key Institutional Features (cont)
Foreign Exchange Markets FOREIGN EXCHANGE MARKETS Professor Anant Sundaram AGENDA Basic characteristics of FX markets: Institutional features Spot markets Forward markets Appreciation, depreciation, premium,
More informationInternational Parity Conditions
International Parity Conditions Fall 2013 Stephen Sapp Introduction The costs should be the same for buying and selling goods, services and financial assets in different countries when converted to a common
More informationEconomics. Open-Economy Macroeconomics: Basic Concepts CHAPTER. N. Gregory Mankiw. Principles of. Seventh Edition. Wojciech Gerson ( )
Seventh Edition Principles of Economics N. Gregory Mankiw Wojciech Gerson (1831-1901) CHAPTER 31 Open-Economy Macroeconomics: Basic Concepts In this chapter, look for the answers to these questions How
More informationECO 328 SUMMER Sample Questions Topics I.1-3. I.1 National Income Accounting and the Balance of Payments
ECO 328 SUMMER 2004--Sample Questions Topics I.1-3 I.1 National Income Accounting and the Balance of Payments 1. National income equals GNP A. less depreciation, less net unilateral transfers, less indirect
More informationRutgers University Spring Econ 336 International Balance of Payments Professor Roberto Chang. Problem Set 1. Name:
Rutgers University Spring 2013 Econ 336 International Balance of Payments Professor Roberto Chang Problem Set 1 Name: 1. When the exchange value of the euro rises in terms of the U.S. dollar, U.S. residents
More informationLess Reliable International Parity Conditions
The International Parity Conditions The Law of One Price Interest Rate Parity Less Reliable International Parity Conditions The Real Exchange Rate 1 The International Parity Conditions Though this be madness,
More informationChapter 19: What Determines Exchange Rates?
Chapter 19: What Determines Exchange Rates? Introduction Exchange rates over time Long-term trends Medium-term trends Short-term variability Frameworks Asset market approach Purchasing power parity (PPP)
More informationManagement of Transaction Exposure
INTERNATIONAL FINANCIAL MANAGEMENT Seventh Edition EUN / RESNICK Management of Transaction Exposure 8 Chapter Eight INTERNATIONAL Chapter Objective: FINANCIAL MANAGEMENT This chapter discusses various
More informationRutgers University Spring Econ 336 International Balance of Payments Professor Roberto Chang. Problem Set 2. Deadline: March 1st.
Rutgers University Spring 2012 Econ 336 International Balance of Payments Professor Roberto Chang Problem Set 2. Deadline: March 1st Name: 1. The law of one price works under some assumptions. Which of
More informationFinancial Management
Financial Management International Finance 1 RISK AND HEDGING In this lecture we will cover: Justification for hedging Different Types of Hedging Instruments. How to Determine Risk Exposure. Good references
More informationManagement of Transaction Exposure
INTERNATIONAL FINANCIAL MANAGEMENT Seventh Edition EUN / RESNICK 8-0 Copyright 2015 by The McGraw-Hill Companies, Inc. All rights reserved. Management of Transaction Exposure 8 Chapter Eight INTERNATIONAL
More informationManagement of Transaction Exposure
INTERNATIONAL FINANCIAL MANAGEMENT Seventh Edition EUN / RESNICK 8-0 Copyright 2015 by The McGraw-Hill Companies, Inc. All rights reserved. Management of Transaction Exposure 8 Chapter Eight INTERNATIONAL
More informationOpen-Economy Macroeconomics: Basic Concepts
N. Gregory Mankiw Principles of Macroeconomics Sixth Edition 18 Open-Economy Macroeconomics: Basic Concepts Premium PowerPoint Slides by Ron Cronovich 2012 UPDATE In this chapter, look for the answers
More informationDiscussion in the Boardroom
APPENDIX E Discussion in the Boardroom This exercise is intended to apply many of the key concepts presented in the text to broad issues that are discussed by managers who make financial decisions. It
More informationFOREIGN EXCHANGE MARKET. Luigi Vena 05/08/2015 Liuc Carlo Cattaneo
FOREIGN EXCHANGE MARKET Luigi Vena 05/08/2015 Liuc Carlo Cattaneo TABLE OF CONTENTS The FX market Exchange rates Exchange rates regimes Financial balances International Financial Markets 05/08/2015 Coopeland
More informationin equilibrium, are supposed to hold across international markets. Covered Interest Rate Parity Purchasing Power Parity y( (also called the Law of
Week 4 The Parities The Parities There are three fundamental parity conditions that, in equilibrium, are supposed to hold across international markets. Covered Interest Rate Parity Purchasing Power Parity
More informationHow Hedging Can Substantially Reduce Foreign Stock Currency Risk
Possible losses from changes in currency exchange rates are a risk of investing unhedged in foreign stocks. While a stock may perform well on the London Stock Exchange, if the British pound declines against
More informationChapter 14. Multinational Capital Budgeting. Lecture Outline
Chapter 14 Multinational Capital Budgeting Lecture Outline Subsidiary versus Parent Perspective Tax Differentials Restrictions on Remitted Earnings Exchange Rate Movements Input for Multinational Capital
More information2. Interest rates in the United States rise faster than interest rates in Canada.
Exchange Rates Interaction Between Currencies When Americans buy more foreign goods, U.S. dollars are sold in the international currency market to purchase foreign currencies that are used to pay producers
More informationChapter 6. International Parity Conditions. International Parity Conditions: Learning Objectives. Prices and Exchange Rates
Chapter 6 International arity Conditions International arity Conditions: Learning Objectives Examine how price levels and price level changes (inflation) in countries determine the exchange rate at which
More informationChapter 10. The Foreign Exchange Market
Chapter 10 The Foreign Exchange Market Why Is The Foreign Exchange Market Important? The foreign exchange market 1. is used to convert the currency of one country into the currency of another 2. provides
More informationAN INTRODUCTION TO TRADING CURRENCIES
The ins and outs of trading currencies AN INTRODUCTION TO TRADING CURRENCIES A FOREX.com educational guide K$ $ kr HK$ $ FOREX.com is a trading name of GAIN Capital - FOREX.com Canada Limited is a member
More informationExam 2 Sample Questions FINAN430 International Finance McBrayer Spring 2018
Sample Multiple Choice Questions 1. Suppose you observe a spot exchange rate of $1.0500/. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate?
More informationThe Foreign Exchange Market
The Foreign Exchange Market Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The market in which foreign currencies are traded is known as the: A. stock
More informationAssignment 6. Deadline: July 29, 2005
ECON 1010C Principles of Macroeconomics Instructor: Sharif F. Khan Department of Economics Atkinson College York University Summer 2005 Assignment 6 Deadline: July 29, 2005 Part A Multiple-Choice Questions
More informationCHAPTER 11 RETURN AND RISK: THE CAPITAL ASSET PRICING MODEL (CAPM)
CHAPTER 11 RETURN AND RISK: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concept Questions 1. Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of
More informationChapter 6. The Open Economy
Chapter 6 0 IN THIS CHAPTER, YOU WILL LEARN: accounting identities for the open economy the small open economy model what makes it small how the trade balance and exchange rate are determined how policies
More information5: Currency Derivatives
5: Currency Derivatives Given the potential shifts in the supply of or demand for currency (as explained in the previous chapter), fi rms and individuals who have assets denominated in foreign currencies
More information8: Relationships among Inflation, Interest Rates, and Exchange Rates
8: Relationships among Inflation, Interest Rates, and Exchange Rates Infl ation rates and interest rates can have a significant impact on exchange rates (as explained in Chapter 4) and therefore can infl
More informationIntroduction to Foreign Exchange. Andrew Wilkinson
Introduction to Foreign Exchange Andrew Wilkinson Risk Disclosure Options and Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading
More informationAfter You Read. Find the missing expressions from the reading. Paragraph numbers are given. Write your answer on line.
3 After You Read. Find the missing expressions from the reading. Paragraph numbers are given. Write your answer on line. 1. Par. 1: Countries do not exchange goods and services directly, but use money
More informationNational Income & Business Cycles
National Income & Business Cycles accounting identities for the open economy the small open economy model what makes it small how the trade balance and exchange rate are determined how policies affect
More informationThose who are interested in international business may wish to take FIN 430 which is our course on international financial management.
1 For the most part, the basic principles you ll learn in this class apply to both domestic and international businesses. However, two important differences you ll find when doing business internationally
More informationTREASURY AND FEDERAL RESERVE FOREIGN EXCHANGE OPERATIONS
EMBARGOED: FOR RELEASE AT 4:00 P.M., EDT, THURSDAY, MAY 5, 2005 TREASURY AND FEDERAL RESERVE FOREIGN EXCHANGE OPERATIONS January March 2005 During the first quarter of 2005, the dollar s trade-weighted
More informationINTRODUCTION TO EXCHANGE RATES AND THE FOREIGN EXCHANGE MARKET
INTRODUCTION TO EXCHANGE RATES AND THE FOREIGN EXCHANGE MARKET 13 1 Exchange Rate Essentials 2 Exchange Rates in Practice 3 The Market for Foreign Exchange 4 Arbitrage and Spot Exchange Rates 5 Arbitrage
More informationOn January 1, 1999, a new currency was born: the
, Fourth Edition PART NINE TOPICS IN BUSINESS FINANCE 18 International Aspects of AFTER READING THIS CHAPTER, YOU SHOULD HAVE A GOOD UNDERSTANDING OF: How exchange rates are quoted, what they mean, and
More information3PART. Financial Markets
Financial Markets 3PART In Part 2, we studied interest rates and the bond market. In Chapters 8 to 11, we extend our analysis to encompass financial markets more broadly. In Chapter 8, we investigate the
More information1. The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.
Chapter 02 Determinants of Interest Rates True / False Questions 1. The real risk-free rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.
More informationLessons V and VI: Overview
Lessons V and VI: Overview 1. FX parity conditions 2. Do the PPP and the IRPs (CIRP and UIRP) hold in practice? 1 FX parity conditions 2 FX parity conditions 1. The Law of One Price and the Purchasing
More informationRelationships among Exchange Rates, Inflation, and Interest Rates
Relationships among Exchange Rates, Inflation, and Interest Rates Chapter Objectives To explain the purchasing power parity (PPP) and international Fisher effect (IFE) theories, and their implications
More informationThe Open Economy. Inflation Worth Publishers, all rights reserved CHAPTER 5
6 The Open Economy Inflation CHAPTER 5 Modified by Ming Yi 2016 Worth Publishers, all rights reserved 5 IN THIS CHAPTER, YOU WILL LEARN: Accounting identities for the open economy The small open economy
More informationgement JEFF MADURA "Fldfida'J&lantic University .,. ;. O r> Ll.l K 1 i UNIVERSnAT LIECHTENSTEIN Blbllothett SOUTH-WESTERN CENGAGE Learning- " ^ si-
f f >' ' '^11 ABRIDGED 10TH EDITION gement JEFF MADURA "Fldfida'J&lantic University Ll.l K 1 i.,. ;. O r> UNIVERSnAT LIECHTENSTEIN Blbllothett /, " ^ si- -A- SOUTH-WESTERN CENGAGE Learning- Australia Brazil
More informationChapter 25 The Exchange Rate and the Balance of Payments The Foreign Exchange Market
Chapter 25 The Exchange Rate and the Balance of Payments 25.1 The Foreign Exchange Market 1) Foreign currency is A) the market for foreign exchange. B) the price at which one currency exchanges for another
More informationCurrency Option Combinations
APPENDIX5B Currency Option Combinations 160 In addition to the basic call and put options just discussed, a variety of currency option combinations are available to the currency speculator and hedger.
More informationForecasting Exchange Rates Managing Exposure to Exchange Rate Fluctuations
Part 3: 1: Exchange Overview of Rate the Risk Financial Management Environment Part 3 (Chapters 9 through 12) explains the various functions involved in managing exposure to exchange rate risk. Chapter
More informationOpen Economy. Sherif Khalifa. Sherif Khalifa () Open Economy 1 / 66
Sherif Khalifa Sherif Khalifa () Open Economy 1 / 66 International Flows Definition A closed economy is an economy that does not interact with other economies. Definition An open economy is an economy
More informationSolutions to Practice Problems
Solutions to Practice Problems CHAPTER 1 1.1 Original exchange rate Reciprocal rate Answer (a) 1 = US$0.8420 US$1 =? 1.1876 (b) 1 = US$1.4565 US$1 =? 0.6866 (c) NZ$1 = US$0.4250 US$1 = NZ$? 2.3529 1.2
More informationChapter 14 Exchange Rates and the Foreign Exchange Market: An Asset Approach
Chapter 14 Exchange Rates and the Foreign Exchange Market: An Asset Approach Copyright 2015 Pearson Education, Inc. All rights reserved. 1-1 Preview The basics of exchange rates Exchange rates and the
More informationChapter 6. Government Influence on Exchange Rates. Lecture Outline
Chapter 6 Government Influence on Exchange Rates Lecture Outline Exchange Rate Systems Fixed Exchange Rate System Freely Floating Exchange Rate System Managed Float Exchange Rate System Pegged Exchange
More informationChapter 16. Price Levels and the Exchange Rate in the Long Run
Chapter 16 Price Levels and the Exchange Rate in the Long Run Preview Law of one price Purchasing power parity Long-run model of exchange rates: monetary approach (based on absolute version of PPP) Relationship
More informationCHAPTER 15 EQUITY PORTFOLIOS
CHAPTER 15 EQUITY PORTFOLIOS Answers to end-of-chapter exercises CROSS SHAREHOLDING 1. Suppose Firm A has 1,000 shares outstanding and Firm B has 500 shares outstanding. Firm A and B each issue 100 new
More informationCHAPTER 9 SOME LESSONS FROM CAPITAL MARKET HISTORY
CHAPTER 9 SOME LESSONS FROM CAPITAL MARKET HISTORY Answers to Concepts Review and Critical Thinking Questions 1. They all wish they had! Since they didn t, it must have been the case that the stellar performance
More informationIn this Session, you will explore international financial markets. You will also: Learn about the international bond, international equity, and
1 In this Session, you will explore international financial markets. You will also: Learn about the international bond, international equity, and Eurocurrency markets. Understand the primary functions
More informationThe U.S. dollar continues to be a primary beneficiary during times of market stress. In our view:
WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU Over the past few years, investors have become increasingly sophisticated. Not only do they understand the benefits of expanding their holdings beyond
More informationPractice questions: Set #5
International Financial Management Professor Michel A. Robe What should you do with this set? Practice questions: Set #5 To help students prepare for the exam and the case, seven problem sets with solutions
More informationInternational Parity Conditions. Introduction. Parity Conditions. Fall Stephen Sapp
International Parity Conditions Fall 2010 Introduction Te costs sould be te same for buying and selling goods, services and financial assets in different countries, in a common currency. For example, te
More informationChapter 2 The Domestic and International Financial Marketplace
Download Solution Manual for Contemporary Financial Management 13th Edition by Moyer Link full: https://testbankservice.com/download/solutionmanual-for-contemporary-financial-management-13th-editionby-moyer/
More informationINTERNATIONAL FINANCE & FINANCIAL MARKETS MAF306 EXAM SUMMARY NOTES
INTERNATIONAL FINANCE & FINANCIAL MARKETS MAF306 EXAM SUMMARY NOTES TOPIC 1 - INTRODUCTION 4 GLOBAL OPERATION 4 TYPES OF MULTI-NATIONAL CORPORATIONS (MNC) 4 WHY FOREIGN DIRECT INVESTMENT (FDI) 4 GLOBALIZATION
More informationReplies to one minute memos, 9/21/03
Replies to one minute memos, 9/21/03 Dear Students, Thank you for asking these great questions. The answer to my question (what is the difference b/n the covered & uncovered interest rate arbitrage? If
More informationExchange rate and interest rates. Rodolfo Helg, February 2018 (adapted from Feenstra Taylor)
Exchange rate and interest rates Rodolfo Helg, February 2018 (adapted from Feenstra Taylor) Defining the Exchange Rate Exchange rate (E domestic/foreign ) The price of a unit of foreign currency in terms
More informationChapter 15. The Foreign Exchange Market. Chapter Preview
Chapter 15 The Foreign Exchange Market Chapter Preview In the mid-1980s, American businesses became less competitive relative to their foreign counterparts. By the 2000s, though, competitiveness increased.
More informationINTERNATIONAL FINANCE MBA 926
INTERNATIONAL FINANCE MBA 926 1. Give a full definition of the market for foreign exchange. Answer: Broadly defined, the foreign exchange (FX) market encompasses the conversion of purchasing power from
More informationCHAPTER 17 OPTIONS AND CORPORATE FINANCE
CHAPTER 17 OPTIONS AND CORPORATE FINANCE Answers to Concept Questions 1. A call option confers the right, without the obligation, to buy an asset at a given price on or before a given date. A put option
More information