FIN 565 Week 8 Final Exam - Correct Answers

1. Question: (TCOA) A high home inflation rate relative to other countries would the home country's current 2. Question: (TCOA) The U.S. dollar is not ever used as a medium of exchange in any Latin American countries. 3. Question: (TCOB)Assume that Swiss investors are benefiting from CIA due to a high U.S.interestrate.Which force results from the act of this CIA? 4. Question: (TCOC) A strong dollar is normally expected to cause High unemployment and high inflation in the United States. 5. Question: (TCOD)Afirmsellsacurrencyfuturescontractandthendecidesbeforethesettlementdatethatitno longer wants to maintain such a position. It can close out its position by buying an identical futures contract. 6. Question: (TCOH) The cost of capital for MNCs based in the United States has been generally than MNCs based in Germany and than MNCs based in Japan. 7. Question: (TCO E) Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to against their home currency and if their cost of capital is relatively . 8. Question: (TCOF)Whichisnotawayinwhichagencyproblemscanbereducedthroughcorporatecontrol? 9. Question: (TCOI)IfIRPexistsandtransactioncostsarezero,foreignfinancingwithasimultaneousforward purchase of the currency borrowed will result in an effective financing rate that is 10. Question: (TCOG)Whichisanexampleofeconomicexposurebutnotanexampleoftransactionexposure? 11. Question: (TCOD)AfirmwantstouseanoptiontohedgeNZ$12.5millioninreceivablesfromNewZealand firms.Thepremiumis$0.02.Theexercisepriceis$0.50.Iftheoptionisexercised,whatisthetotal amount of dollars received (after accounting for the premium paid)? 12. Question: (TCO B) Assume the following information. You have $900,000 to invest. 13. Question: (TCOD) You purchase a call option on pounds for a premium of $ 0.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, what is your net profit per unit? Show your work. 14. Question: (TCOD)What are major characteristics of currency futures contracts? List at least five of them. 15. Question: (TCO A) Answer the following questions regarding international financial markets. Recently, Walmart established two retail outlets in the city of Shanzen,China,whichhasapopulation of3.7million.Theseoutletsaremassiveandcontainproductspurchasedlocallyaswellasimports.As WalmartgeneratesearningsbeyondwhatitneedsinShanzen,itmayremitthoseearningsbacktothe UnitedStates.WalmartislikelytobuildadditionaloutletsinShanzenorinotherChinesecitiesinthe future. a. How would the Walmart outlets in China use the spot market in foreign exchange? b. How might Walmart utilize the international money market when it is establishing other Walmart 16. Question: (TCO C) Answer the following questions regarding factors affecting exchange rates. Mexico tends to have much higher inflation than the United States and also much higher interest rates than the United States. Inflation and interest rates are much more volatile in Mexico than in industrializedcountries.ThevalueoftheMexicanpesoistypicallymorevolatilethanthecurrenciesof industrialized countries, from a U.S. perspective; it has typically depreciated from one year to the next, but the degree of depreciation has varied substantially. What are some factors influencing this? 17. Question: (TCOF) List at least three methods that MNCs engage in international business. Explain each briefly. 18. Question: (TCOD)What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros? 19. Question: (TCOB) The opening of Russia's market has resulted in a highly volatile Russian currency (the ruble). Russia's inflation has commonly exceeded 20% per month. Russian interest rates commonly exceed 150%, but this is sometimes less than the annual inflation rate in Russia. What is happening to the purchasing power of Russian consumers based on this exchange system of rubles? What will be the foreign demand for rubles to purchase Russian goods? Will rubles appreciate or depreciate against the U.S. dollar? 20. Question: (TCO F) Snyder Golf Co., a U.S. firm that sells high-quality golf clubs in the United States, wants to expand internationally by selling the same golf clubs in Brazil. Describe the trade offs that are involved For each method (e.g.,exporting,directforeigninvestment,etc.)thatSnydercouldusetoachieveits goal. 21. Question: (TCOG) How does translation exposure affect a business with a high percentage of business conducted by subsidiaries? What factors come into play? 22. Question: (TCO E) Answer the following questions regarding DFI strategy. (a) Bronco Corp. has decided to establish a subsidiary in Taiwan that will produce stereo sand sell them there.Itexpectsthatitscostofproducingthesestereoswillbeonethirdthecostofproducing them in the United States. Assuming that its production cost estimates are accurate, is Bronco's strategy sensible? Explain. (10points) (b) Ocean MNC establishes a subsidiary, DFI remains an ongoing decision. What does this statement mean?