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Exam 17: Multinational Financial Management

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Question 21

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Suppose 1 U.S.dollar equals 1.60 Canadian dollars in the spot market.6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%) .6-month U.S.securities have an annualized return of 6.5% and a periodic return of 3.25%.If interest rate parity holds,what is the U.S.dollar-Canadian dollar exchange rate in the 180-day forward market?

A) 1 U.S. dollar = 0.6235 Canadian dollars
B) 1 U.S. dollar = 0.6265 Canadian dollars
C) 1 U.S. dollar = 1.0000 Canadian dollars
D) 1 U.S. dollar = 1.5961 Canadian dollars
E) 1 U.S. dollar = 1.6039 Canadian dollars

F) A) and B)
G) A) and E)

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Question 22

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

A) True
B) False

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Question 23

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Which of the following is NOT a reason why companies move into international operations?

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

Suppose one U.S.dollar can purchase 144 yen today in the foreign exchange market.If the yen depreciates by 8.0% tomorrow,how many yen could one U.S.dollar buy tomorrow?

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

Multinational financial management requires that financial analysts consider the effects of changing currency values.

Suppose it takes 1.82 U.S.dollars today to purchase one British pound in the foreign exchange market,and currency forecasters predict that the U.S.dollar will depreciate by 12.0% against the pound over the next 30 days.How many dollars will a pound buy in 30 days?

The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return.In the U.S.,90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return.In the 90-day forward market,1 British pound equals $1.65.If interest rate parity holds,what is the spot exchange rate?

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

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed.

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

In 1985,a given Japanese imported automobile sold for 1,476,000 yen,or $8,200.If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar,what would the car be selling for today in U.S.dollars?

Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S.money market instruments.

A product sells for $750 in the United States.The exchange rate is $1 to 1.65 Swiss francs.If purchasing power parity (PPP) holds,what is the price of the product in Switzerland?

When considering the risk of a foreign investment,a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.

A foreign currency will,on average,depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

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