International Finance- EXAM 1

Suppose that Nevada Co. has sold consulting services to Primedia, a company based in Belarus, for 640 rubles. At the time of the transaction, the prevailing exchange rate was $0.42. If Nevada Co's bank does not desire to hold such a large amount of rubles, which of the following exchange rates might they be willing to accept when Nevada Co. seeks to exchange the rubles for dollars?

$0.39

Suppose that the spot rate for the euro is $1.4100 and with a forward rate of $1.4805. Which of the following most closely approximates the forward premium of the euro?

(1.4805-1.41)/1.41= .05 =5%

Compute the forward discount or premium for the Mexican peso whose 180-day forward rate is $0.107 and spot rate is $0.10. State whether your answer is a discount or premium. Assume that there are 360 days in a year. The forward rate exhibits a _______1______.

(Forward Rate- Spot Rate)/ Spot Rate) *(360/# of days) (.107-.10)/.10) * (360/180) 1) premium

Suppose that one year ago the spot rate for the British pound was $1.47 per pound, while the spot rate for the peso was $1.05 per peso. The cross rate of the British pound one year ago was £1 = __________1_________ Suppose that now the spot rate for the British pound is $1.60 per pound, while the spot rate for the peso was $1 per peso. Now, the cross rate of the British pound is £1 = ______2_______. This represents a ______3______ percent change in the cross rate of the British pound.

1) 1.40 2) $1.60 per pound / $1 per peso = 1.6 pesos per pound 3) 1.6-1.4/1.4= 14.29%

Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. If California Co. takes $200,000 of its own funds and converts them to pounds it would have ________1________ pounds. If California Co. borrows 500,000 euros and converts them to pounds, it will have _______2________ pounds. California Co. has a total of 600,000 pounds after converting their own funds, as well as their borrowed euros, to pounds. If California Co. invests these pounds, after 1-month it will have a total of ________3_________ pounds After 1 month, California Co. now has 612,000 pounds after investing their converted pounds. However, it is now time for California Co. to repay the 500,000 euro loan. If California Co. borrowed these euros at the prevailing rate of 0.50% percent, they must repay a total of _______4______ euros. At the cross rate of 1.25, this repayment is equivalent to _____5______ pounds. Thus, after repaying the loan, California Co. will have ____6______ pounds. After repaying their euro loan, California Co. has 210,000 pounds remaining. Assume that the exchange rate is still $1.00 per pound. These pounds are equivalent to $_______7______, which represents a profit of $_______8_______ over the initial $200,000 that California Co. used from their own funds. The previous scenario assumed that the spot rates of the pound and the euro remained constant. However, there is a risk that the exchange rates change. Suppose that the euro appreciates over the course of the month, such that the cross exchange rate is now 0.78125 euros per pound. Assume the spot rate for the pound remains constant at $1.00 per pound Under this new cross exchange rate of 0.78125, the 502,500 euros that California Co. needs to repay is equivalent to _______9_______ pounds. Thus, after repaying the loan, California Co. will have _______10_______ pounds from the 612,000 pounds they received from the initial investments. These pounds are equivalent to -$31,200, and represents a profit of $_______11_______ over the initial $200,000 that California Co. used from their own funds.

1) 200,000 2) 400,000 When California Co. borrows euros and converts them to pounds, they must do so at the cross exchange rate of $1.00/$0.80=1.25 Thus, if they borrow 500,000 euros and convert them to pounds, it will have 500,000/1.25=400,000 In total, it will have 400,000 pounds+200,000 pounds =600,000 pounds 3) 612,000 After 1 month, California Co. will receive a 2.00% percent return on the pounds they invested. Thus, in total, they will have: 600,000pounds×(1+2.00%)= 612,000 pounds 4) 502,500 If California Co. borrowed euros at the prevailing rate of 0.50% percent, they must repay 500,000euros×(1+0.50%)= 502,500 euros 5) 402,000 Using the cross exchange rate of 1.25 euros per pound, this repayment amount is equivalent to 502,500 euros/1.25=402,000 pounds 6) 210,000 Given the return on their pound investment, California Co. will have 612,000 pounds−402,000 pounds=210,000 pounds 7) $210,000 When California Co. converts their remaining 210,000 pounds to dollars at a rate of $1.00, they will have 210,000 pounds/$1.00 per pound=210,000 8) $10,000 When compared to their own funds that California Co. used, this represents a profit of $210,000−$200,000=10,000 9) 643,200 After the euro appreciates and the cross exchange rate falls to 0.78125 euros per pound, the 502,500 euros that California Co. needs to repay will now yield 502,5000/.78125=643,200 pounds 10) -31,200 These remaining pounds are equivalent to −31,200 pounds/$1.00 per pound= −$31,200.00 11) -231,200 Compared with the initial funds put forth by California Co., this represents a profit of −$31,200.00−$200,000= −$231,200.00 Since this number is negative, California Co. suffered a loss from the unforeseen appreciation of the euro.

Here are exchange rates for the Japanese yen and British pound at the beginning of each of the last five years. Your firm wants to determine which currency is more volatile as it assesses its exposure to exchange rate risk. Estimate the volatility of each currency's movements. Do not round intermediate calculations. Round your answers to two decimal places. Yen- Year 1: .009 Year 2: .012 Year 3: .009 Year 4: .008 Year 5: .011 Pound- Year 1: 1.49 Year 2: 1.54 Year 3: 1.55 Year 4: 1.55 Year 5: 1.51 The standard deviation of the yen's movements: _______1______ % The standard deviation of the pound's movements: ______2_______ % The _______3______ is more volatile.

1) 31.43% 2) 2.44% 3) Yen- higher the percent, the more volatile Take Yen number on excel, put them in a column then: =STDEV(Those numbers)

Assume that inflation is zero in the United States and in Europe and will remain at zero. U.S. interest rates are presently the same as in Europe. Assume that the economic growth for the United States is presently similar to Europe. Assume that international capital flows are much larger than international trade flows. Today, there is news that clearly signals economic conditions in Europe will be strengthening in the future, while economic conditions in the United States will remain the same. Explain why and how (which direction) the euro's value would change today based on this information. Expectations of strong economic conditions result in an _________1__________ demand for loanable funds within Europe, which should _________2________ interest rates in the future. Thus, there will be an ________3________ in U.S. demand for euros. The supply of euros to be exchanged for dollars should ______4______ as European investors ______5_______ to benefit from U.S. interest rates.

1) An increase 2) Increase 3) An increase 4) Decrease 5) Do not expect

When should a speculator purchase a call option on Australian dollars? Speculators should purchase a call option on Australian dollars if they expect the Australian dollar value to ________1_______ substantially over the period specified by the option contract.

1) Appreciate

The New Zealand dollar's spot rate was equal to $0.60 last month. New Zealand conducts much international trade with the United States but the financial (investment) transactions between the two countries are negligible. Assume the following conditions have occurred in the last year. First, interest rates decreased in New Zealand but increased in the United States. Second, inflation decreased in New Zealand but increased in the United States. Third, the New Zealand central bank intervened in the foreign exchange market by exchanging a very small amount of U.S. dollars to purchase a very small amount of New Zealand dollars. How should the New Zealand dollar change over the year based on the information provided here? The NZ $ should ______1_______ over the year, because the ________2_________should have a large impact and it will place _____3_______ pressure on the NZ $.

1) Appreciate 2) Inflation Effect 3) Upward

The New Zealand dollar's spot rate was equal to $0.60 last month. New Zealand conducts much international trade with the United States but the financial (investment) transactions between the two countries are negligible. Assume the following conditions have occurred in the last year. First, interest rates decreased in New Zealand but increased in the United States. Second, inflation decreased in New Zealand but increased in the United States. Third, the New Zealand central bank intervened in the foreign exchange market by exchanging a very small amount of U.S. dollars to purchase a very small amount of New Zealand dollars. How should the New Zealand dollar change over the year based on the information provided here? The NZ $ should _______1________ over the year, because the inflation ________2_______ should have a large impact and it will place ________3_______ pressure on the NZ $.

1) Appreciate 2) Inflation Effect 3) Upward

1) Governments of many countries enact policies that can have a major impact on international trade flows. Explain how governments might give their local firms a competitive advantage in the international trade arena. A) Some governments can restrict the number of firms that can trade in the global market. B) Some governments can offer subsidies to their domestic firms. C)Some governments can forbid settlements in foreign currency to make cash inflows fo firm more stable. D) Some governments can expand environment restrictions to allow local firms to produce at a low cost. 2) Why might different tax laws on corporate income across countries allow firms from some countries to have a competitive advantage in the international trade arena? A) When a government imposes lower corporate tax rates, firms can decrease their after-tax cash flows and therefore decrease their stock valuations for their shareholders. B) When a government imposes lower corporate tax rates, this increases the confidence in the company from foreign consumers giving her advantages in the international trade arena. C) When a government imposes lower corporate tax rates, firms may be able to charge lower prices for their products and still make a profit.

1) B 2) B

Assume a simple world in which the U.S. exports soft drinks and beer to France and imports wine from France. If the U.S. imposes large tariffs on the French wine, explain the likely impact on the values of the U.S. beverage firms, U.S. wine producers, the French beverage firms, and the French wine producers. The U.S. wine producers _________1___________ from the U.S. tariffs. The French wine producers ________2_________ from the U.S. tariffs. The French government would likely retaliate by imposing tariffs on the U.S. beverage firms, which would _______3_________ affect their value. The French beverage firms would _______4_________ from the French tariffs.

1) Benefit 2) Loss 3) Adversely 4) Benefit

Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply: US Dollar: Lending Rate- 7.10% Borrowing Rate- 7.50% NZ Dollar: Lending Rate- 6.80% Borrowing Rate- 7.25% Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

1) Borrow $5 Million 2) Convert to NZ: $5,000,000/$0.48= NZ$10,416,667 3) Invest NZ$ at annualized rate of 6.8% over 5 days: NZ$10,416,667 * [1+ (.068*(5/360)] = NZ$10,426,505 4) Convert NZ$ back to US Dollars: NZ$10,426,505 * $0.50= $5,213,252 5) Repay the Dollar Borrowed: $5,000,000 * [1+(.075(5/360)] = $5,005,208 6) After repaying the loan, the remaining dollar profit is: $5,213,252 - $5,005,208 = $208,044 Profit

Differentiate between a currency call option and a currency put option. A currency ________1__________ option provides the right to purchase a specified currency at a specified price within a specified period of time. A currency ______2_______option provides the right to sell a specified currency for a specified price within a specified period of time.

1) Call 2) Put

As of today, the interest rate in Countries X, Y, and Z, are similar. In the next month, Country X is expected to have a weak economy, while Countries Y and Z are expected to experience a 6% increase in economic growth. However, conditions this month will also cause an increase in default risk of borrowers in Country Z in the next month because of political concerns, while the default risk of Countries X and Y remain unchanged. During the next month, which country should have the lowest interest rate? ___________1___________ should have the lowest interest rate because it is expected to have a _________2_________ economy and a ___________3_________ level of default risk.

1) Country X 2) Weak 3) Low

All else equal, an expected decrease in the value of a country's currency will _______1_______ portfolio investment in that country. A decrease in the tax rate on dividends in a country is likely to _________2________ direct foreign investment (DFI) in that country.

1) Decrease 2) Increase

Assume U.S. interest rates rise relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound? 1) Demand for pounds should 2) Supply of pounds for sale should 3) The pound's value should

1) Decrease 2) Increase 3) Decrease

Assume that the U.S. inflation rate becomes low relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? 1) Demand for Canadian dollars should 2) Supply of Canadian dollars for sale should 3) The Canadian dollar's value should

1) Decrease 2) Increase 3) Decrease

How would a relatively low home inflation rate affect the home country's current account, other things being equal? A low inflation rate tends to _______1________ imports and ______2________ exports, thereby ________3_______ the current account deficit, other things equal.

1) Decrease 2) Increase 3) Decreasing

Assume that there are substantial capital flows among Canada, the United States, and Japan. If interest rates in Canada increase to a level above the U.S. interest rate, and inflationary expectations remain unchanged, how could this affect the value of the Canadian dollar against the U.S. dollar? If interest rates in Canada increase, there may be a ________1_______ in capital flows from Canada to the U.S. In addition, U.S. investors ________2________ their investments in Canadian's securities. This places ________3_________ pressure on the Canadian dollar's value. How might this increase in Canada's interest rates possibly affect the value of the Canadian dollar against the Japanese yen? Japanese investors that previously invested in the U.S. may shift to Canada. Thus, the increased flow of funds from Japan would place ________4________ pressure on the Canadian dollar against the Japanese yen.

1) Decrease 2) Increase 3) Upward 4) Upward

Assume that the United States invests heavily in government and corporate securities of Country K. In addition, residents of Country K invest heavily in the United States. Approximately $10 billion worth of investment transactions occur between these two countries each year. The total dollar value of trade transactions per year is about $8 million. This information is expected to also hold in the future. Because your firm exports goods to Country K, your job as international cash manager requires you to forecast the value of Country K's currency (the "krank") with respect to the dollar. Explain how each of the following conditions will affect the value of the krank, holding other things equal. Then, aggregate all of these impacts to develop an overall forecast of the krank's movement against the dollar. 1) U.S. inflation has suddenly decreased substantially, while Country K's inflation remains high. __________1___________ U.S. demand for the krank. __________2__________ supply of kranks for sale. ________3_________ pressure in the krank's value. 2) U.S. interest rates have decreased substantially, while Country K's interest rates remain high. Investors of both countries are attracted to high interest rates. __________4___________ U.S. demand for the krank. ________5_________ supply of kranks for sale. _______6__________ pressure on the krank's value. 3) The U.S. income level decreased substantially, while Country K's income level has remained unchanged. _______7________ U.S. demand for the krank. ______8_________ pressure on the krank's value. 4) The U.S. is expected to remove a tariff on goods imported from Country K. The tariff elimination will cause an _______9________ in the United States' desire for Country K's goods, and will therefore _______10________ the demand for kranks for sale. ________11__________ pressure on the krank's value. 5) Combine all expected impacts to develop an overall forecast. Since the interest rates affect capital flows and capital flows dominate trade flows between the U.S. and Country K, the interest rate scenario should overwhelm all other scenarios. When considering the importance of implications of all scenarios, the krank is expected to ________12__________.

1) Decreased 2) Increased 3) Downward 4) Increased 5) Decreased 6) Upward 7) Decrease 8) Downward 9) an increased 10) increased 11) Upward 12) Appreciate

Assume that the United States invests heavily in government and corporate securities of Country K. In addition, residents of Country K invest heavily in the United States. Approximately $10 billion worth of investment transactions occur between these two countries each year. The total dollar value of trade transactions per year is about $8 million. This information is expected to also hold in the future. Because your firm exports goods to Country K, your job as international cash manager requires you to forecast the value of Country K's currency (the "krank") with respect to the dollar. Explain how each of the following conditions will affect the value of the krank, holding other things equal. Then, aggregate all of these impacts to develop an overall forecast of the krank's movement against the dollar. U.S. inflation has suddenly decreased substantially, while Country K's inflation remains high. ___________1__________ U.S. demand for the krank. _________2___________ supply of kranks for sale. __________3__________ pressure in the krank's value. U.S. interest rates have decreased substantially, while Country K's interest rates remain high. Investors of both countries are attracted to high interest rates. __________4__________ U.S. demand for the krank. ____________5___________ supply of kranks for sale. _______6__________ pressure on the krank's value. The U.S. income level decreased substantially, while Country K's income level has remained unchanged. _________7_________ U.S. demand for the krank. __________8____________ pressure on the krank's value. The U.S. is expected to remove a tariff on goods imported from Country K. The tariff elimination will cause an ________9________ in the United States' desire for Country K's goods, and will therefore _______10_______ the demand for kranks for sale. __________11__________ pressure on the krank's value. Combine all expected impacts to develop an overall forecast. Since the interest rates affect capital flows and capital flows dominate trade flows between the U.S. and Country K, the interest rate scenario should overwhelm all other scenarios. When considering the importance of implications of all scenarios, the krank is expected to _________12___________.

1) Decreased 2) Increased 3) Downward 4) Increased 5) Decreased 6) Upward 7) Decreased 8) Downward 9) an increase 10) Increase 11) Upward 12) Appreciate

Assume that during this semester, the euro depreciated against the dollar. Did the direct exchange rate of the euro increase or decrease? Did the indirect exchange rate of the euro increase or decrease? As the euro depreciates against the U.S. dollar over time, this means that the direct rate of the euro _________1________ and the indirect rate of the euro ________2________.

1) Decreases 2) Increases

The country of Luta has large capital flows with the United States. It has no trade with the United States and will not have trade with the United States in the future. Its interest rate is 6 percent, the same as the U.S. interest rate. Its rate of inflation is 5 percent, the same as the U.S. inflation rate. You expect that the inflation rate in Luta will fall to 3 percent this coming year, while the U.S. inflation rate will remain at 5 percent. You expect that Luta's interest rate will fall to 4 percent during the next year. You expect that the U.S. interest rate will remain at 6 percent this year. Do you think Luta's currency will appreciate, depreciate, or remain unchanged against the dollar? Briefly explain. Luta's currency should ______1______ against the dollar because the exchange rate should be influenced by capital flows. Luta is expected to have a lower interest rate in the next year, which will _______2________ U.S. investors, especially since the effect of lower inflation in Luta is negligible because of no trade between the countries.

1) Depreciate 2) Distract

The country of Vezot has massive capital flows with the United States because it has no restrictions on the movement of investment funds into or out of the country. Vezot's inflation rate just decreased substantially, while the U.S. inflation rate remains unchanged. Vezot's interest rate just decreased substantially, while the U.S. interest rate remains unchanged. Vezot's income level recently decreased substantially, which will decrease consumption of products within its country. The U.S. income level remains unchanged. There is negligible international trade between Vezot and the United States. Vezot can easily obtain all of its imported products from border countries instead of the United States. Starting today, the United States has eliminated very large taxes on U.S. importers that import products from Vezot. Vezot does not impose restrictions on imports from the United States. Vezot's currency is freely floating. Based on the information above, do you think Vezot's currency will appreciate, depreciate, or remain unchanged against the dollar? Briefly explain. Vezot's currency should _______1__________ against the dollar, because its value should be influenced mostly by _______2_______.

1) Depreciate 2) Capital Flows

The country of Vezot has massive capital flows with the United States because it has no restrictions on the movement of investment funds into or out of the country. Vezot's inflation rate just decreased substantially, while the U.S. inflation rate remains unchanged. Vezot's interest rate just decreased substantially, while the U.S. interest rate remains unchanged. Vezot's income level recently decreased substantially, which will decrease consumption of products within its country. The U.S. income level remains unchanged. There is negligible international trade between Vezot and the United States. Vezot can easily obtain all of its imported products from border countries instead of the United States. Starting today, the United States has eliminated very large taxes on U.S. importers that import products from Vezot. Vezot does not impose restrictions on imports from the United States. Vezot's currency is freely floating. Based on the information above, do you think Vezot's currency will appreciate, depreciate, or remain unchanged against the dollar? Briefly explain. Vezot's currency should ________1________ against the dollar, because its value should be influenced mostly by ______2_______.

1) Depreciate 2) Capital Flows

Olmsted Co. has small computer chips assembled in Poland and transports the final assembled products to the parent, where they are sold by the parent in the United States. The assembled products are invoiced in dollars. Olmsted Co.uses Polish currency (the zloty) to produce these chips and assemble them in Poland. The Polish subsidiary pays the employees in the local currency (zloty), and Olmsted Co. finances its subsidiary operations with loans from a Polish bank (in zloty). The parent of Olmsted will send sufficient monthly payments (in dollars) to the subsidiary in order to repay the loan and other expenses incurred by the subsidiary. If the Polish zloty depreciates against the dollar over time, will that have a favorable, unfavorable, or neutral effect on the value of Olmsted Co.? Briefly explain. It will have ________1________ effect because Olmsted incurs expenses in the zloty and it will be able to cover these expenses with _________2__________ dollars if the zloty depreciates. It will be able to repay the zloty loan with _______3______ dollars if the zloty depreciates.

1) Favorable 2) Fewer 3) Fewer

Consider the case of a balance-of-trade deficit in the United States, along with a floating exchange rate. A balance-of-trade deficit implies that the value of imports is ______1______ than the value of exports. As the supply of dollars increases (in exchange for foreign currency to purchase imports), the value of the dollar _______2_______. This would lead to ______3______ demand for American products in foreign countries.

1) Greater 2) Decreases 3) Increased

An MNC has an incentive to invest short-term funds in a foreign currency if investments denominated in the foreign currency have a ______1_______ interest rate than investments denominated in the home currency of the MNC.

1) Higher

Briefly explain the relationship that exists for the factors that affect currency put option premiums. The _________1___________ the existing spot rate relative to the strike price, the greater is the put option value, other things equal. The __________2__________the period prior to the expiration date, the greater is the put option value, other things equal. The __________3__________ the variability of the currency, the greater is the put option value, other things equal.

1) Higher 2) Longer 3) Greater

Briefly explain the relationship that exists for the factors that affect currency call option premiums. The _________1__________ the existing spot rate relative to the strike price, the greater is the call option value, other things equal. The ______2________ the period prior to the expiration date, the greater is the call option value, other things equal. The _______3________ the variability of the currency, the greater is the call option value, other things equal. Do you think an at-the-money call option in euros has a higher or lower premium than an at-the-money call option in Mexican pesos (assuming the expiration date and the total dollar value represented by each option are the same for both options)? The at-the-money call option in euros should have a __________4_________ premium because the euro should have ______5________ volatility than the peso.

1) Higher 2) Longer 3) Greater 4) Lower 5) Less

Explain how the depreciation of the Australian dollar against the U.S. dollar would affect the return to a U.S. firm that invested in an Australian money market security. If the Australian dollar depreciates over the investment period, this implies that the U.S. firm purchased the Australian dollars to make its investment at a _________1___________ exchange rate than the rate at which it will convert Australian dollars to U.S. dollars when the investment period is over. Thus, it _______2_________ from the depreciation. Its return will be __________3________ as a result of this depreciation.

1) Higher 2) Loses 3) Lower

Explain how the depreciation of the Japanese yen against the U.S. dollar would affect the return to a U.S. firm that borrowed Japanese yen and used the proceeds for a U.S. project. If the Japanese yen depreciates over the borrowing period, this implies that the U.S. firm converted yen to U.S. dollars at a _______1________ exchange rate than the rate at which it paid for yen at the time it would repay the loan. Thus, it is ___________2__________ affected by the depreciation. Its cost of borrowing will be _______3________ as a result of this depreciation.

1) Higher 2) Positively 3) Lower

Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased. Hudson's best guess of its future peso cash flows to be received has not changed. Explain how its valuation has changed as a result of the increase in political risk. The valuation of the MNC is the present value of expected cash flows. The increase in risk results in a ______1______ expected return, which _______2_________ the present value of the expected future cash flows, and therefore its valuation has ______3_____.

1) Higher 2) Reduces 3) Declines

Put Option Premium 1) A lower spot price relative to the strike price= 2) A shorter time before expiration= 3) A lower level of volatility for the currency= When using a put option to hedge receivables in an international currency, a U.S. based MNC can lock in the ______4________ amount of dollars it will receive.

1) Higher Put Option Premium 2) Higher Put Option Premium 3) Lower Put Option Premium 4) Minimum

Consider the valuation of an MNC with cash flows denoted in multiple currencies, over multiple time periods. In particular, for each currency jj that comprises the cash flows, with associated exchange rates Sj, tSj, t, and for all time periods, the equation for the value of the MNC can be written as follows: Consider a U.S.-based MNC parent owns subsidiaries in the France, Mexico, and Australia. Suppose that recent investment decisions by the MNC parent in its local businesses has caused the cost of capital in France to decrease. This decrease in the forecasted cost of capital will ______1_______the value (VV) of the MNC, all else equal.

1) Increase

Explain how the existence of the euro may affect U.S. international trade. The euro allowed for a single currency among many European countries. The existence of the euro can _________1_________ trade within Europe and this would possibly cause European countries to trade ________2_______ with the U.S.

1) Increase 2) Less

Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things (including interest rates) being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? 1) Demand for Canadian dollars should 2) Supply of Canadian dollars for sale should 3) The Canadian dollar's value should

1) Increase 2) Not be affected 3) Increase

Explain how the international money, credit, and bond markets differ from one another. 1) A market is used to tap medium-term loans. 2) A market focuses on short-term deposits and loans. 3) A market is used to obtain long-term funds.

1) International Credit Market 2) International Money Market 3) International Bond Market

When South Korea's export growth stalled, some South Korean firms suggested that South Korea's primary export problem was the weakness in the Japanese yen. Assume Japan is one of South Korea's primary competitors in exporting. How would you interpret this statement? When the Japanese yen is weak, some importers switch to ______1_______products causes the ______2______ of South Korean exports.

1) Japanese 2) Decline

How can a forward contract backfire? If the spot rate of the foreign currency at the time of the transaction is ______1______ than the forward rate that was negotiated when purchasing the currency, or is worth _____2______ than the forward rate that was negotiated when selling the currency, the forward contract has backfired.

1) Less 2) More

U.S.-based MNCs commonly invest in foreign securities. A) Assume that the dollar is presently weak and is expected to strengthen over time. How will these expectations affect the tendency of U.S. investors to invest in foreign securities? The U.S. investors would invest _________1_________ abroad if the dollar is expected to strengthen. If the dollar is relatively weak now, U.S. investors need __________2_______ dollars to make purchase foreign currency (when investing). If the dollar strengthens over their investment horizon, the exchange rate effect would increase _________3_________ the yield that they earn on their investment. B) Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest abroad. Low U.S. interest rates can _______4________ the tendency of U.S.-based MNCs to invest abroad, as investors seek higher returns on their investment.

1) Less 2) More 3) Reduce 4) Increase

Diamond Bank expects that the Singapore dollar will depreciate against the U.S. dollar from its spot rate of $0.41 to $0.40 in 65 days. The following interbank lending and borrowing rates exist: U.S. Dollar: -Lending Rate: 6.8% -Borrowing Rate: 7.1% Singapore Dollar: -Lending Rate: 22% -Borrowing Rate: 27.5% Diamond Bank considers borrowing 8 million Singapore dollars in the interbank market and investing the funds in U.S. dollars for 65 days. Estimate the profits (or losses) that could be earned from this strategy. Should Diamond Bank pursue this strategy? Assume 360 days in year for your calculations. Do not round intermediate calculations. Round your answer to the nearest Singapore dollar. Enter your answer as a positive value. This strategy results in a _______1_______ of S$ ______2_______. Therefore, Diamond Bank ______3_______ pursue this strategy.

1) Loss 2) S$ 96,544.44 3) Should Not Steps: 1) Borrow S$8,000,000 and convert to U.S. $:S$8,000,000 × $0.41 = $3,280,000 2) Invest funds for 65 days. The rate earned in the U.S. for 65 days is:6.8% × (65/360) = 1.23% Total amount accumulated in 65 days:$3,280,000 × (1 + 0.0123) = $3,320,271 3) Convert U.S. $ back to S$ in 65 days:$3,320,271/$0.40 = S$8,300,678 4) The rate to be paid on loan is:27.5% × (65/360) = 4.97% Amount owed on S$ loan is:S$8,000,000 × (1 + 0.0497) = S$8,397,222 5) This strategy results in a loss:S$8,300,678 - S$8,397,222 = -S$96,544

Suppose that the government in China subsidizes the production of children's toys, with the requirement that the toys must be exported and sold in the United States. The subsidies lead to ________1_______ production costs for the firms receiving subsidies. When exported to the United States, the Chinese firms ________2_______ sell the toys for a lower price than their US competitors, leading to a ____3_______ effect on US toy producers.

1) Lower 2) Can 3) Negative

How do you think the weaker U.S. economic conditions could affect capital flows? If capital flows are affected, how would this influence the value of the dollar (holding other factors constant)? Weaker U.S. economic conditions commonly result in _______1________ interest rates. The _________2_________ U.S. interest rates should _______3________ the capital flows to the U.S., which place _______4_________ pressure on the value of the dollar.

1) Lower 2) Lower 3) Reduce 4) Downward

How do you think the weaker U.S. economic conditions could affect capital flows? If capital flows are affected, how would this influence the value of the dollar (holding other factors constant)? Weaker U.S. economic conditions commonly result in _________1__________ interest rates. The ______2_______ U.S. interest rates should ________3________ the capital flows to the U.S., which place _________4___________ pressure on the value of the dollar.

1) Lower 2) Lower 3) Reduce 4) Downward

Call Option Premium 1) A lower spot price relative to the strike price= 2) A shorter time before expiration= 3) A lower level of volatility for the currency=

1) Lower Call Option Premium 2) Lower Call Option Premium 3) Lower Call Option Premium When using a call option to hedge project bidding in an international currency, a U.S. based MNC can lock in the _______4_______ amount of dollars needed to obtain the needed foreign currency. 4) Maximum

A) Explain why a stronger dollar could enlarge the U.S. balance of trade deficit. Explain why a weaker dollar could affect the U.S. balance of trade deficit. Assume other factors do not change. A stronger dollar makes U.S. exports ________1__________ expensive to importers and may __________2______ imports. A weaker dollar makes U.S. exports _________3__________ to importers and may ____________________ imports. This should cause a _________4__________ in the home country's demand for imports and an __________5__________ in the foreign demand for the home country's exports, and therefore ________6________ the current account. B) It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate any current account deficit. Explain why this adjustment would occur. A current account deficit reflects a net sale of the home currency in exchange for other currencies. The exchange of its currency (to buy foreign goods) in greater volume than the foreign demand for its currency could place ___________7__________ pressure on the value of that currency.

1) More Expensive 2) Reduce 3) Cheaper 4) Increase 5) An increase 6) Increase 7) Downward

If there is _________1_________ for a bond, a bondholder may not be able to sell a bond at the desired time or may have to decrease the price of their bonds in order to sell them. The risk of this occurrence is known as _______2_____ risk.

1) No active Market 2) Interest Rate

Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect the (a) U.S. demand for Japanese yen, (b) supply of yen for sale, and (c) equilibrium value of the yen? 1) Demand for yen should 2) Supply of yen for sale should 3) The value of yen should

1) Not be affected 2) Increase 3) Decrease

Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $0.17 to $0.13 in 15 days. The following interbank lending and borrowing rates exist: U.S. Dollar: -Lending Rate: 7.7% -Borrowing Rate: 8.2% Mexican Peso: -Lending Rate: 8.6% -Borrowing Rate 8.9% Assume that Blue Demon Bank has a borrowing capacity of either $15 million or 60 million pesos in the interbank market, depending on which currency it wants to borrow. Assume 360 days in year for your calculations. Do not round intermediate calculations. Round your answers to the nearest dollar. How could Blue Demon Bank attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy. Blue Demon Bank can capitalize on its expectations by borrowing ______1________, converting it to ______2________, lending the ______3_______, and repaying the _____4______ loan. The expected profit is $ ________5________. Assume all the preceding information with this exception: Blue Demon Bank expects the peso to appreciate from its present spot rate of $0.17 to $0.2 in 45 days. How could it attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy. Blue Demon Bank can capitalize on its expectations by borrowing ______6_______, converting it to _______7_______, lending the _______8________, and repaying the _______9______ loan. The expected profit is $______10_______ .

1) Pesos 2) Dollars 3) Dollars 4) Peso 5) $2,403,800 6) Dollars 7) Peso 8) Peso 9) Dollar 10) $2,683,014.71 Steps: A) 1)Borrow MXP60 million. 2) Convert MXP60 million to dollars: MXP60,000,000 × $0.17 = $10,200,000 3) Lend the dollars through the interbank market at 7.7% annualized over a 15 day period. The amount accumulated in 15 days is: $10,200,000 × [1 + (7.7% × 15/360)] = $10,200,000 × [1.003208] = $10,232,725 4) Repay the peso loan. The repayment amount on the peso loan is: MXP60,000,000 × [1 + (8.9% × 15/360)] = 60,000,000 × [1.003708] = MXP60,222,500 Based on the expected spot rate of $0.13, the amount of dollars needed to repay the peso loan is: MXP60,222,500 × $0.13 = $7,828,925 After repaying the loan, Blue Demon Bank will have a speculative profit (if its forecasted exchange rate is accurate) of: $10,232,725 - $7,828,925 = $2,403,800 B) Blue Demon Bank can capitalize on its expectations by borrowing dollars, converting it to pesos, lending the pesos, and repaying the dollar loan. Blue Demon Bank can capitalize on its expectations as follows: 1) Borrow $15 million. 2) Convert the $15 million to pesos (MXP): $15,000,000/$0.17 = MXP88,235,294 3) Lend the pesos through the interbank market at 8.6% annualized over a 45 day period. The amount accumulated in 45 days is: MXP88,235,294 × [1 + (8.6% × 45/360)] = 88,235,294 × [1.010750] = MXP89,183,824 4) Repay the dollar loan. The repayment amount on the dollar loan is: $15,000,000 × [1 + (8.2% × 45/360)] = $15,000,000 × [1.010250] = $15,153,750 5) Convert the pesos to dollars to repay the loan. The amount of dollars to be received in 45 days (based on the expected spot rate of $0.20) is: MXP89,183,824 × $0.20 = $17,836,765 6) The profits are determined by estimating the dollars available after repaying the loan: $17,836,765 - $15,153,750 = $2,683,015

How can currency futures be used by corporations? U.S. corporations that desire to lock in a price at which they can purchase a foreign currency would _______1________ currency futures. How can currency futures be used by speculators? Speculators who expect a currency to appreciate could ________2__________ currency futures contracts for that currency.

1) Purchase 2) Purchase

Assume that a March futures contract on Mexican pesos was available in January for $0.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $0.092 per peso. How could speculators capitalize on this situation, assuming zero transaction costs? Speculators could ________1_________ peso futures for $0.09 per unit, and simultaneously __________2________ pesos forward at $0.092 per unit. How would such speculative activity affect the difference between the forward contract price and the futures price? Speculators would place _______3_____ pressure on futures prices and ______4_______ pressure on forward prices. Thus, the difference between the forward contract price and futures price would _______5_________.

1) Purchase 2) Sell 3) Downward 4) Upward 5) be reduced

If Asian countries experience a decline in economic growth (and experience a decline in inflation and interest rates as a result), how will their currency values (relative to the U.S. dollar) be affected? A relative decline in Asian economic growth will ______1_______ Asian demand for U.S. products, which places ________2_________ pressure on Asian currencies. Given the change in interest rates, Asian corporations with excess cash may now invest in the U.S. or other countries, thereby __________3________ the demand for U.S. dollars. Thus, a decline in Asian interest rates will place _______4________ pressure on the value of the Asian currencies.

1) Reduce 2) Upward 3) Increasing 4) Downward

If Asian countries experience a decline in economic growth (and experience a decline in inflation and interest rates as a result), how will their currency values (relative to the U.S. dollar) be affected? A relative decline in Asian economic growth will ________1________ Asian demand for U.S. products, which places ________2________ pressure on Asian currencies. Given the change in interest rates, Asian corporations with excess cash may now invest in the U.S. or other countries, thereby _________3________ the demand for U.S. dollars. Thus, a decline in Asian interest rates will place _______4__________ pressure on the value of the Asian currencies.

1) Reduce 2) Upward 3) Increasing 4) Downward

Why do you think international trade volume has increased over time? In general, how are inefficient firms affected by the continuous increase in international trade? International trade volume has increased because of the _______1______ in trade restrictions over time. Inefficient firms are ______2________ affected by ______3_______ competition from foreign firms as a result of increased international trade.

1) Reduction 2) Adversely 3) Increased

Chapman Co. is a privately owned MNC in the U.S. that plans to engage in an initial public offering (IPO) of stock, so that it can finance its international expansion. At the present time, world stock market conditions are very weak but are expected to improve. The U.S. market tends to be weak in periods when the other stock markets around the world are weak. A financial manager of Chapman Co. recommends that it wait until the world stock markets recover before it issues stock. Another manager believes that Chapman Co. could issue its stock now even if the price would be low, since its stock price should rise later once world stock markets recover. Who is correct? Explain. The ____________1___________ manager is correct. If Chapman Co. issues stock now when the price is low, it would receive a ________2__________ dollar amount of proceeds to use for its expansion. If its stock price rises later and the shares have already been sold, its ________3__________ would benefit.

1) Second 2) Lower 3) Its shareholders

How can currency futures be used by corporations? U.S. corporations that desire to lock in a price at which they can sell a foreign currency would ________1________currency futures. How can currency futures be used by speculators? Speculators who expect a currency to appreciate could _______2_________ currency futures contracts for that currency.

1) Sell 2) Purchase

The Wolfpack Corp. is a U.S. exporter that invoices its exports to the United Kingdom in British pounds. If it expects that the pound will appreciate against the dollar in the future, should it hedge its exports with a forward contract? Explain. The Wolfpack Corporation _______1_______ hedge because it would ______2______ from appreciation of the pound when it converts the pounds to dollars.

1) Should Not 2) Benefit

Would the U.S. balance-of-trade deficit be larger or smaller if the dollar depreciates against all currencies, versus depreciating against some currencies but appreciated against others? Explain. If the dollar weakens against all currencies, the U.S. balance-of-trade deficit will likely be _____1______. Some U.S. importers would have ______2________ their purchasing of goods in the U.S. if all currencies simultaneously strengthened against the dollar. If some currencies weaken against the dollar, the U.S. importers _______3_______ shifted their importing from one foreign country to another.

1) Smaller 2) Increased 3) Would have

A relatively small U.S. balance-of-trade deficit is commonly attributed to a strong demand for U.S. exports. What do you think is the underlying reason for the strong demand for U.S. exports? The strong demand for U.S. exports is commonly attributed to ______1______ foreign economies or to a ______2______ dollar.

1) Strong 2) Weak

Explain which theory relates to the need for international business. The _______1_______ implies that countries should specialize in production, thereby relying on other countries for some products. Consequently, there is a need for international business. Explain which theory relates to the growth of an MNC. The _______2______ suggests that at some point in time, the firm will attempt to capitalize on its perceived advantages in markets other than where it was initially established.

1) Theory of Competitive Advantage 2) Product Cycle Theory

Assume that there are substantial capital flows among Canada, the United States, and Japan. If interest rates in Canada increase to a level above the U.S. interest rate, and inflationary expectations remain unchanged, how could this affect the value of the Canadian dollar against the U.S. dollar? If interest rates in Canada increase, there may be a ________1__________ in capital flows from Canada to the U.S. In addition, U.S. investors _______2________ their investments in Canadian's securities. This places ________3__________ pressure on the Canadian dollar's value. How might this increase in Canada's interest rates possibly affect the value of the Canadian dollar against the Japanese yen? Japanese investors that previously invested in the U.S. may shift to Canada. Thus, the increased flow of funds from Japan would place _________4_________ pressure on the Canadian dollar against the Japanese yen.

1) a decrease 2) increase 3) Upward 4) Upward

Assume that inflation is zero in the United States and in Europe and will remain at zero. U.S. interest rates are presently the same as in Europe. Assume that the economic growth for the United States is presently similar to Europe. Assume that international capital flows are much larger than international trade flows. Today, there is news that clearly signals economic conditions in Europe will be strengthening in the future, while economic conditions in the United States will remain the same. Explain why and how (which direction) the euro's value would change today based on this information. Expectations of strong economic conditions result in an ______1________ demand for loanable funds within Europe, which should _________2__________ interest rates in the future. Thus, there will be an ___________3__________ in U.S. demand for euros. The supply of euros to be exchanged for dollars should _______4_______ as European investors ______5________ to benefit from U.S. interest rates.

1) an increased 2) Increase 3) An Increase 4) Decrease 5) Do Not Expect

The country of Luta has large capital flows with the United States. It has no trade with the United States and will not have trade with the United States in the future. Its interest rate is 6 percent, the same as the U.S. interest rate. Its rate of inflation is 5 percent, the same as the U.S. inflation rate. You expect that the inflation rate in Luta will fall to 3 percent this coming year, while the U.S. inflation rate will remain at 5 percent. You expect that Luta's interest rate will fall to 4 percent during the next year. You expect that the U.S. interest rate will remain at 6 percent this year. Do you think Luta's currency will appreciate, depreciate, or remain unchanged against the dollar? Briefly explain. Luta's currency should _________1__________ against the dollar because the exchange rate should be influenced by capital flows. Luta is expected to have a lower interest rate in the next year, which will ___________2__________ U.S. investors, especially since the effect of lower inflation in Luta is negligible because of no trade between the countries.

1) depreciate 2) distract

What are the main components of the current account?

1)The balance of trade. 2)The net amount of payments of interest to foreign investors and from foreign investment. 3) Payments from international tourism. 4) Private gifts and grants.

Explain the foreign exchange situation for countries that use the euro when they engage in international trade among themselves. A) These countries are required to exchange euros in national currency after a trade under any conditions. B) There is no foreign exchange. Euros are used as the medium of exchange. C) If the euro weakens countries will prefer to use a stronger currency in international trade among themselves.

B

If the yuan was revalued to the extent that it substantially reduced the U.S. demand for Chinese products, would this shift the U.S. demand toward the U.S. or toward other countries where wage rates are relatively low? In other words, would the correction of the U.S. balance of trade deficit have a major impact on U.S. productivity and jobs? A) Because there are not decent substitute products in other low wage countries, a correction in the U.S. balance of trade deficit with China would shift jobs to the U.S. rather than to other countries. B) Because there are other low wage countries which provide decent substitutes of Chinese products, a correction in the U.S. balance of trade deficit with China would shift jobs to those countries rather than to the U.S. C) Because decent substitute products of Chinese products in other countries have higher price, a correction in the U.S. balance of trade deficit with China would shift jobs to the U.S. rather than to other countries.

B

Which of the following does not directly affect the bid/ask spread?

Bank Profits

The United States typically has a balance-of-trade deficit in its trade with ____.

China and Japan

The one-year forward rate of the British pound is quoted at $1.50, and the spot rate of the British pound is quoted at $1.515. The forward ____ is ____ percent.

Discount 1

If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the U.S. dollar.

Downward

Brian Tull sold a put option on Canadian dollars for $0.02 per unit. The strike price was $0.70, and the spot rate at the time the option was exercised was $0.63. Assume Brian immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 51,600 units in a Canadian dollar option. What was Brian's net profit on the put option? Use a minus sign to enter loss values, if any. If the answer is zero, enter "0". Round your answer to the nearest dollar. Wrong!!!!!!!!!

Expected Profit/Loss= Spot Rate- Strike Price $0.63- $0.70 = -$0.07 Net Profit Per C$= Spot Rate- Strike Price - Premium $0.63- $0.70 - (-$0.07) = $0 Net Profit= # of units * Net Profit Per C$ 51,600 * $0 = $0

Today, the stock price of Genevo Co. (based in Switzerland) is priced at SF65 per share. The spot rate of the Swiss franc (SF) is $0.70. During the next year, you expect that the stock price of Genevo Co. will decline by 2%. You also expect that the Swiss franc will appreciate against the U.S. dollar by 8% during the next year. You own American depository receipts (ADRs) that represent Genevo stock. Each share that you own represents one share of the stock traded on the Swiss stock exchange. What is the estimated value of the ADR per share in 1 year? Do not round intermediate calculations. Round your answer to the nearest cent.

Expected value of Swiss stock in 1 year = SF65 × (1 - 0.02) = SF63.70 Expected value of Swiss franc in 1 year = $0.70 × (1 +0.08) = $0.756 Expected value of ADR in 1 year = SF63.7 × ($0.756 per franc) = $48.16

Assume that the U.S. and Mexico engage in high volumes of international trade. On the other hand, assume that the two countries engage in almost no capital flow transactions True or False: The value of the peso should be influenced more by interest rates than by trade-related factors.

False

True or False: The exchange rate is likely to fluctuate more in markets that are liquid than in markets that are illiquid.

False

When you own ____, there is an obligation on your part; however, when you own ____, there is no obligation on your part.

Futures Contracts Call Options

The longer the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things being equal.

Greater Greater

A large increase in the income level in the U.S. along with no growth in Mexico's income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in U.S. demand for Mexico's goods, and the Mexican peso should ____.

Increase, Appreciate

A decrease in U.S. interest rates relative to French interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros to be exchanged for dollars.

Increase, Reduce

Any event that reduces the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.

Increase, The US Dollar

The lower the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____ will be the premium of a put option on this currency, other things being equal.

Lower Lower

LSU Corp. purchased Canadian dollar call options for speculative purposes. If these options are exercised, LSU will immediately sell the Canadian dollars in the spot market. Each option was purchased for a premium of $0.03 per unit, with an exercise price of $0.73. LSU plans to wait until the expiration date before deciding whether to exercise the options. Of course, LSU will exercise the options at that time only if it is feasible to do so. In the following table, fill in the net profit (or loss) per unit to LSU Corp. based on the listed possible spot rates of the Canadian dollar on the expiration date. Possible Spot Rate of Canadian Dollar on Expiration Date: $0.74 $0.76 $0.78 $0.80 $0.83 $0.85

Net Profit = Spot Rate - Exchange Rate - Premium But if the spot rate is less than the exchange rate, the net profit or basically the less will be negative premium Net Profit Per Unit $0.74 - $0.73 - $0.03 = -$0.02 $0.76 - $0.73 - $0.03 = $0 $0.78 - $0.73 - $0.03 = $0.02 $0.80 - $0.73 - $0.03 = $0.04 $0.83 - $0.73 - $0.03 = $0.07 $0.85 - $0.73 - $0.03 = $0.09

Mike Suerth sold a call option on Canadian dollars for $0.02 per unit. The strike price was $0.77, and the spot rate at the time the option was exercised was $0.85. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that there are 48,100 units in a Canadian dollar option. What was Mike's net profit on the call option? Use a minus sign to enter loss values, if any. Round your answer to the nearest dollar.

Profit per Unit= Spot Rate- Strike Rate $0.85-$0.77= $0.08 Net Profit Per Unit= Premium - Profit per unit $0.02-$0.08= -$0.06 Net Profit for one option= Total units * Net profit per unit 48,100* -$0.06= -$2886

Alice Duever purchased a put option on British pounds for $0.03 per unit. The strike price was $1.86 and the spot rate at the time the pound option was exercised was $1.61. Assume there are 30,450 units in a British pound option. What was Alice's net profit on the option? Use a minus sign to enter loss values, if any. Round your answer to the nearest cent.

Profit per Unit= Strike Price- Spot Rate $1.86- $1.61= $0.25 Net Profit Per Unit= Profit per unit- Premium paid per unit $0.25- $0.03 = $0.22 Net Profit for one option= Total units * Net profit per unit 30,450* $0.22= $6,699

Randy Rudecki purchased a call option on British pounds for $0.04 per unit. The strike price was $1.39 and the spot rate at the time the option was exercised was $1.41. Assume there are 31,600 units in a British pound option. What was Randy's net profit on this option? Use a minus sign to enter loss values, if any. Round your answer to the nearest cent.

Profit per unit= Spot Rate- Strike Price $1.41- $1.39 = $0.02 Premium Paid: $0.04 Net Profit: Profit Per Unit - Premium Paid $0.02- $0.04= -$0.02 Net Profit Per Option= # of units * Net profit 31,600 * -$0.02 = -$632

If your firm expects the euro to substantially appreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market.

Purchasing Purchasing

Which of the following is the least likely strategy for a U.S. firm that will be purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?

Sell a futures contract on francs.

Establishment of new foreign subsidiaries

Setting up new business operations in a foreign country

____ is not a bank characteristic important to customers in need of foreign exchange.

Size of loan department

Which of the following are reasons why an MNC might issue bonds in a particular foreign market? Check all that apply.

The MNC intends to finance a project in a specific country and in a specific currency. There is a lower interest rate in that foreign country. There is stronger demand for bonds issued by the MNC in a foreign market as opposed to the domestic market.

Also referred to as the International Bank for Reconstruction and Development (IBRD), the primary objective of this agency's financing (and cofinancing) is to decrease poverty and facilitate economic development. A key feature of this agency is the use of structural adjustment loans (SALs), which are used to promote long-term economic growth. The previous description most closely matches which of the following agencies?

The World Bank

Country Y is Country X's sole trading partner. Which of the following would increase the current account of Country X?

The currency of Country X depreciates against the currency of Country Y.

The bid price for the euro is $1.1148 and its ask price is $1.1153. The bid price for the Norwegian Krone is 0.1086 and its ask price is 0.1242. Determine the bid/ask spread for the euro and Norwegian Krone. Round your answers to three decimal places. The bid/ask spread for the euro = % The bid/ask spread for the Norwegian Krone = %

The percentage spread is estimated as:(Ask quote - Bid quote)/Ask quote. The bid/ask spread for the euro = ($1.1153 - $1.1148)/$1.1153 = 0.00045 or 0.045% The bid/ask spread for the Norwegian Krone = ($0.1242 - $0.1086)/$0.1242 = 0.12560 or 12.560%

Imperfect Markets Theory-

The theory that costs for factors of production vary across countries, due to the immobility of these resources.

The demand for U.S. exports tends to decrease when

U.S. Inflation Rise

A large reduction in the current account deficit will place __________ pressure on the home currency value, other things being equal.

Upward

Assume that the inflation rate becomes much higher in the United States relative to Canada. This will place ____ pressure on the value of the Canadian dollar when holding other factors constant. Also, assume that Canadian interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the Canadian dollar, when holding other factors constant.

Upward, Upward

A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by

buying an identical futures contract

Compared to international trade, direct foreign investment generally results in ____ exposure to international political risk and ____ exposure to international economic conditions.

higher, higher

The Sarbanes-Oxley Act caused corporate governance of MNCs to _________; it makes executives ____ accountable for verifying financial statements.

improve, more

If the United States and Japan engage in substantial financial flows but little trade, ____ directly influence their exchange rate the most. If the United States and Switzerland engage in much trade but little financial flows, ____ directly influence their exchange rate the most.

interest rate differentials; inflation and income differentials

The real interest rate is calculated as

nominal interest rate - inflation rate.

Assume that the British government imposes quotas on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.

remain unchanged; decrease; increase

Acquisitions of existing operations

Purchasing a business that is already operating in a foreign market

The premium on a pound put option is $.04 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)

$1.56 $1.56

Product Cycle Theory-

The theory that a firm first produces goods domestically, then exports to foreign markets, then establishes its own foreign operations.

True or False: If a currency's LIBOR rate rises, the money market interest rates denominated in that currency also rise.

True

Forward contracts contain

a commitment to the owner, and can be tailored to the owner's desire.

Assume that Swiss corporations begin to purchase fewer supplies from the United States. This action reflects

a decrease in the supply of Swiss francs for sale (exchanged for dollars).

As a result of the Bretton Woods Agreement, the exchange rate between any two currencies was typically

fixed within narrow boundaries

When a currency call option is classified as "in the money," this indicates that

the spot rate of the currency is greater than the exercise price of the option.

Which of the following is not one of the more common methods used by MNCs to improve their internal control process?

requiring executives to forecast future exchange rates

The agency costs of an MNC are likely to be higher if it

scatters its subsidiaries across many foreign countries.

A legal limit on the amount of a good that can be imported into a country

terms quota

Assume that an American firm wants to engage in international business in which it establishes a large subsidiary in the foreign country. This strategy definitely represents ______________.

direct foreign investment

a tax on goods imported into a country

tariff

If there is _________1________ for a bond, a bondholder may not be able to sell a bond at the desired time or may have to decrease the price of their bonds in order to sell them. The risk of this occurrence is known as _______2________ risk.

1) No Active Market 2) Exchange Risk

A low inflation rate tends to ________1________ imports and _______2________ exports, thereby ______3________ the current account deficit, other things equal.

1) Decrease 2) Increase 3) Decreasing

There are many factors that influence international trade, including cost of labor.

Differences in labor costs across countries drive opportunities for international trade.

Assume Poland's currency (the zloty) is worth $0.16 and the Japanese yen is worth $0.004. What is the cross rate of the zloty with respect to yen? That is, how many yen equal a zloty? Round your answer to two decimal places.

.16/.004=40

If a country's government removes a tariff on imported goods, that country's current account balance will likely ____ (assuming no other changes in tariffs by other governments).

Decrease

Joint Ventures

An arrangement whereby two or more firms own and operate a business

LIBOR is

the interest rate commonly charged for loans between banks.

Compute the bid/ask percentage spread for Mexican peso retail transactions in which the ask rate is $0.14 and the bid rate is $0.12. Round your answer to two decimal places.

(.14-.12)/.14= .1429 = 14.29%

According to the text, the valuation of an MNC with foreign subsidiaries is directly affected by:

-exchange rate fluctuations -foreign political conditions -foreign economic conditions

Which of the following is mentioned in the text as a theory of international business?

-theory of comparative advantage -imperfect markets theory -product cycle theory

Suppose that Nevada Co., a US-based MNC, makes regular, monthly purchases of materials from a German supplier named Spicurity. These regular payments are typically in the amount of 230,000 euros. Last month the exchange rate was $1.64 per euro. Nevada Co. only has cash reserves in dollars, while Spicurity only has cash reserves in euros. Suppose both companies use the same bank. In order to conduct this transaction last month, Nevada Co. required $______1______ to pay for the materials. Thus, the bank handling the transaction reduced Nevada's account by this amount, denominated in ____2____. The bank then converted this amount to ______3_____ ______4______ and credited it to Spicurity's account.

1) $140,243.90 2) dollars. 3) 230,000.00 4) euros

Continue to assume a direct quotation of $1.25 per euro. Suppose you have also been given a direct quotation of $0.1 per peso. The cross exchange rate, indicating the euro value in terms of pesos, is _____1________ euros per peso.

1) 1.25/.1= 12.5 euros

Asheville Co. has a subsidiary in Mexico that develops software for its parent. It rents a large facility in Mexico and hires many people in Mexico to work in the facility. Asheville Co. has no other international business. All operations are presently funded by Asheville's parent. All the software is sold to U.S. firms by Asheville's parent and invoiced in U.S. dollars. If the Mexican peso depreciates against the dollar, does this have a favorable effect, unfavorable effect, or no effect on Asheville's value? Depreciation of the peso has _________1________ effect because it result in _______2_________ dollar expenses to Asheville Co. Asheville Co. plans to borrow funds to support its expansion in the United States. The Mexican interest rates are presently lower than U.S. interest rates, so Asheville obtains a loan denominated in Mexican pesos in order to support its expansion in the United States. Will the borrowing of pesos increase, decrease, or have no effect on its exposure to exchange rate risk? Briefly explain. Borrowing pesos will _________3___________ Asheville's exposure because it will ________4________ the amount of dollar cash outflows that are needed to cover expenses.

1) A Favorable 2) A Lower 3) Increase 4) Increase

Arlington Co. expects to receive 10 million euros in each of the next 10 years. It will need to obtain 2 million Mexican pesos in each of the next 10 years. The euro exchange rate is presently valued at $1.38 and is expected to depreciate by 2 percent each year over time. The peso is valued at $0.13 and is expected to depreciate by 2 percent each year over time. Review the valuation equation for an MNC. Do you think that the exchange rate movements will have a favorable or unfavorable effect on the MNC? The movements in the euro are expected to have ______1_______ effect on Arlington's value. The expected movements in the peso are expected to have _______2________ effect on Arlington's value. However, the expected peso effect should be ________3_______ because the dollar amount of business in pesos is smaller. Thus, the overall effect should be _______4_______.

1) A Unfavorable 2) A Favorable 3) Smaller 4) Unfavorable

Olmsted Co. has small computer chips assembled in Poland and transports the final assembled products to the parent, where they are sold by the parent in the United States. The assembled products are invoiced in dollars. Olmsted Co.uses Polish currency (the zloty) to produce these chips and assemble them in Poland. The Polish subsidiary pays the employees in the local currency (zloty), and Olmsted Co. finances its subsidiary operations with loans from a Polish bank (in zloty). The parent of Olmsted will send sufficient monthly payments (in dollars) to the subsidiary in order to repay the loan and other expenses incurred by the subsidiary. If the Polish zloty appreciates against the dollar over time, will that have a favorable, unfavorable, or neutral effect on the value of Olmsted Co.? Briefly explain. It will have _________1__________ effect because Olmsted incurs expenses in the zloty and it will be able to cover these expenses with _______2_________ dollars if the zloty appreciates. It will be able to repay the zloty loan with __________3________ dollars if the zloty appreciates.

1) A Unfavorable 2) More 3) More

What are the main components of the capital account?

1) Financial assets transferred across country borders by people who move to a different country. 2) Sales of patents and trademarks.

Assume a simple world in which the U.S. exports soft drinks and beer to France and imports wine from France. If the U.S. imposes large tariffs on the French wine, explain the likely impact on the values of the U.S. beverage firms, U.S. wine producers, the French beverage firms, and the French wine producers. The U.S. wine producers _______1_________ from the U.S. tariffs. The French wine producers _______2_______ from the U.S. tariffs. The French government would likely retaliate by imposing tariffs on the U.S. beverage firms, which would _______3_____ affect their value. The French beverage firms would _______4_______ from the French tariffs.

1) Benefit 2) Loss 3) Adversely 4) Benefit

As of today, the interest rate in Countries X, Y, and Z, are similar. In the next month, Country X is expected to have a weak economy, while Countries Y and Z are expected to experience a 6% increase in economic growth. However, conditions this month will also cause an increase in default risk of borrowers in Country Z in the next month because of political concerns, while the default risk of Countries X and Y remain unchanged. During the next month, which country should have the lowest interest rate? _________1_______should have the lowest interest rate because it is expected to have a _______2_______ economy and a _______3_______ level of default risk.

1) Country X 2) Weak 3) Low

Assume U.S. interest rates rise relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound? Demand for pounds should _______1________. Supply of pounds for sale should _______2________. The pound's value should __________3_________.

1) Decrease 2) Increase 3) Decrease

Assume that the U.S. inflation rate becomes low relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? Demand for Canadian dollars should ________1________. Supply of Canadian dollars for sale should ________2________. The Canadian dollar's value should ________3________.

1) Decrease 2) Increase 3) Decrease

Suppose that the economy in France weakens, leading to a lower national income. This lower national income in France will most likely ______1_________the demand for Triloo products, leading to _______2________expected cash flows denoted in euros and ________3_________ in the value of Triloo Inc. This example is best classified as a case of exposure to ________4________ . Suppose that Triloo Inc. expects cash flows from its French subsidiaries of 18,000,000 euros at the end of the current time period. Management at Triloo forecasts the exchange rate to be $1.80 per euro at the end of this time period. This means that Triloo will have an estimated _______5_________ in cash flows from French subsidiaries at the end of the current time period. Suppose that, after further analysis, management at Triloo now forecasts the euro to weaken against the dollar. Triloo expects the exchange rate at the end of the current time period to be $1.60 per euro. This means that Triloo will now have an estimated ______6______ in cash flows from French subsidiaries, which represents a decrease of ______7_______ from the company's original forecast.

1) Decrease 2) Lower 3) A decrease 4) International Economic Conditions 5) $32,400,000 6) $28,800,000 7) $3,600,000

All else equal, an expected decrease in the value of a country's currency will _______1________ portfolio investment in that country. A decrease in the tax rate on dividends in a country is likely to _______2________ direct foreign investment (DFI) in that country.

1) Decrease 2) Increase

Assume that Alpine Co. is a U.S. firm that has direct foreign investment in Brazil as a result establishing a subsidiary there. Political conditions have changed in Brazil, but the best guess by investors of the future cash flows per year for Alpine Co. has not changed. Yet there is more uncertainty surrounding the best guess of Alpine's cash flows. In other words, the distribution of possible outcomes above and below the best guess has expanded. Would the change in uncertainty cause the prevailing value of Alpine Co. to increase, decrease, or remain unchanged? Briefly explain. The increase in uncertainty surrounding cash flows would cause the prevailing value of Alpine Co. to ________1________, because the required rate of return by investors would _______2________.

1) Decrease 2) Increase

Explain how more standardized product specifications across countries can influence global competition. Standardized product specifications allow firms to _______1______ expand their business across other countries, which _______2_______ global competition.

1) Easily 2) Increases

Describe the trade-offs that are involved for each method below that Snyder could use to achieve its goal. 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 below that Snyder could use to achieve its goal. 1) Exporting: 2) Establishing a Subsidiary in Brazil: 3) Licensing: Which method would you recommend for this firm? Justify your recommendation. If the amount of golf clubs to be sold in Brazil is small, it may decide to _______4_______. If the expected sales level is high but may fall, it may benefit from ______5________. If it is confident that the expected sales level will remain high, it may be willing to ______6________.

1) Expensive transportation 2) Requires a large investment sum 3) They do not have their own established subsidiary 4) Export 5) Licensing 6) Establishing a subsidiary in Brazil

A balance-of-trade deficit implies that the value of imports is ________1________than the value of exports. As the supply of dollars increases (in exchange for foreign currency to purchase imports), the value of the dollar _______2______ . This would lead to _______3_______ demand for American products in foreign countries.

1) Greater 2) Decreased 3) Increased

If the Japanese yen depreciates over the borrowing period, this implies that the U.S. firm converted yen to U.S. dollars at a ________1_______ exchange rate than the rate at which it paid for yen at the time it would repay the loan. Thus, it is _______2_______ affected by the depreciation. Its cost of borrowing will be ________3_______ as a result of this depreciation.

1) Higher 2) Positively 3) Lower

Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things (including interest rates) being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? Demand for Canadian dollars should __________1________. Supply of Canadian dollars for sale should _______2________. The Canadian dollar's value should ______3_______.

1) Increase 2) Not be affected 3) Increase

A low home inflation rate relative to other countries would ______1______ the home country's current account balance, other things being equal. Low growth in the home income level relative to other countries would _______2_______ the home country's current account balance, other things being equal.

1) Increase 2) Increase

Explain how the existence of the euro may affect U.S. international trade. The euro allowed for a single currency among many European countries. The existence of the euro can _______1_________ trade within Europe and this would possibly cause European countries to trade ________2_______ with the U.S.

1) Increased 2) Less

When South Korea's export growth stalled, some South Korean firms suggested that South Korea's primary export problem was the weakness in the Japanese yen. Assume Japan is one of South Korea's primary competitors in exporting. How would you interpret this statement? When the Japanese yen is weak, some importers switch to ________1___________ products causes the _________2_________ of South Korean exports.

1) Japanese 2) Decline

U.S.-based MNCs commonly invest in foreign securities. Assume that the dollar is presently strong and is expected to weaken over time. How will these expectations affect the tendency of U.S. investors to invest in foreign securities? The U.S. investors would invest _______1_________ abroad if the dollar is expected to weaken. If the dollar is relatively strong now, U.S. investors need ________2__________ dollars to make purchase foreign currency (when investing). If the dollar weakens over their investment horizon, the exchange rate effect would _______3_______ the yield that they earn on their investment. Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest abroad. Low U.S. interest rates can ________4_________ the tendency of U.S.-based MNCs to invest abroad, as investors seek higher returns on their investment.

1) Less 2) More 3) Reduce 4) Increase

For each of the following characteristics of governance, use the table to indicate whether more or less trading activity in the stock market is likely to result. 1) weaker rights of shareholders 2) weaker legal protection for shareholders 3) less corporate corruption 4) less uniform accounting laws

1) Less Trading Activity 2) Less Trading Activity 3) More Trading Activity 4) Less Trading Activity

Duve, Inc., desires to penetrate a foreign market with either a licensing agreement with a foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and return between a licensing agreement with a foreign firm and the acquisition of a foreign firm. __________________1________________ has limited potential for return, because the foreign firm will receive much of the benefits, and therefore the MNC has limited risk because it did not need to invest substantial funds. __________________2_________________ requires a substantial investment, and therefore the MNC has more risk, but also has a higher potential for return.

1) Licensing Agreement 2) Acquisition

The subsidies lead to _____1________ production costs for the firms receiving subsidies. When exported to the United States, the Chinese firms _________2_________ sell the toys for a lower price than their US competitors, leading to a _______3_________effect on US toy producers.

1) Lower 2) Can 3) Negative

Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently decreased. Hudson's best guess of its future peso cash flows to be received has not changed. Explain how its valuation has changed as a result of the decrease in political risk The valuation of the MNC is the present value of expected cash flows. The decrease in risk results in a ________1________ expected return, which ______2________ the present value of the expected future cash flows, and therefore its valuation has _______3________.

1) Lower 2) Increased 3) Increased

If perfect markets existed, would wages, prices, and interest rates among countries be more similar or less similar than under conditions of imperfect markets? Why? If perfect markets existed, resources would be ____1______mobile and therefore _______2_______ be transferred to other countries. As this occurred, shortages of resources in any particular country would be ______3_______and the costs of such resources would be _____4_____ similar across countries.

1) More 2) Could 3) Alleviated 4) More

A stronger dollar makes U.S. exports ________1_______ to importers and may _________2___________ imports. A weaker dollar makes U.S. exports ________3__________ to importers and may _______4_________ imports. This should cause ________5_________ in the home country's demand for imports and __________6__________ in the foreign demand for the home country's exports, and therefore _________7________ the current account. It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate any current account deficit. Explain why this adjustment would occur. A current account deficit reflects a net sale of the home currency in exchange for other currencies. The exchange of its currency (to buy foreign goods) in greater volume than the foreign demand for its currency could place _________8__________ pressure on the value of that currency.

1) More expensive 2) Reduced 3) Cheaper 4) Increase 5) A Decrease 6) An Increase 7) Increase 8) Downward

Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect the (a) U.S. demand for Japanese yen, (b) supply of yen for sale, and (c) equilibrium value of the yen? Demand for yen should ________1__________. Supply of yen for sale should _______2________. The value of yen should _________3_________.

1) Not affected 2) Increase 3) Decrease

Would the agency problem be more pronounced for Berkely Corp., whose parent company makes most major decisions for its foreign subsidiaries, or Oakland Corp., which uses a decentralized approach? The agency problem would be more pronounced for ______1________ because of the agency costs would be ________2________.

1) Oakland 2) Higher

The managers of Loyola Corp. recently had a meeting to discuss new opportunities in Europe as a result of the recent integration among Eastern European countries. They decided not to penetrate new markets because of their present focus on expanding market share in the United States. Loyola's financial managers have developed forecasts for earnings based on the 12 percent market share (defined here as its percentage of total European sales) that Loyola currently has in Eastern Europe. Is 12 percent an appropriate estimate for next year's Eastern European market share? If not, does it likely overestimate or underestimate the actual Eastern European market share next year? It would likely _____________1____________ its market share because the competition should __________2__________ as competitors penetrate the European countries.

1) Overestimate 2) Increase

An American-based subsidiary remits earnings to the parent company in Canada. 1) Component 2) US Cash Flow Position 3) Entry on US Balance of Payments Account

1) Primary Income 2) Outflow 3) Debit

Why do you think international trade volume has increased over time? In general, how are inefficient firms affected by the continuous increase in international trade? International trade volume has increased because of the _______1_______ in trade restrictions over time. Inefficient firms are ________2__________ affected by ________3________ competition from foreign firms as a result of increased international trade.

1) Reduction 2) Adversely 3) Increased

Chapman Co. is a privately owned MNC in the U.S. that plans to engage in an initial public offering (IPO) of stock, so that it can finance its international expansion. At the present time, world stock market conditions are very weak but are expected to improve. The U.S. market tends to be weak in periods when the other stock markets around the world are weak. A financial manager of Chapman Co. recommends that it wait until the world stock markets recover before it issues stock. Another manager believes that Chapman Co. could issue its stock now even if the price would be low, since its stock price should rise later once world stock markets recover. Who is correct? Explain. The ________1_________ manager is correct. If Chapman Co. issues stock now when the price is low, it would receive a ______2______ dollar amount of proceeds to use for its expansion. If its stock price rises later and the shares have already been sold, _______3______ would benefit.

1) Second 2) Lower 3) its shareholders

A) France provides funds to the United States as a gift to be used for the construction of a large monument. 1) Component 2) US Cash Flow Position 3) Entry on US Balance of Payments Account B) Consider the case of a foreign firm acquiring an American firm. This component of the financial account is known as ________4___________.

1) Secondary Income 2) Inflow 3) Credit 4) Direct Foreign Investment

The Wolfpack Corp. is a U.S. exporter that invoices its exports to the United Kingdom in British pounds. If it expects that the pound will appreciate against the dollar in the future, should it hedge its exports with a forward contract? Explain. The Wolfpack Corporation ______1______ hedge because it would _____2______from appreciation of the pound when it converts the pounds to dollars.

1) Should Not 2) Benefit

Would the U.S. balance-of-trade deficit be larger or smaller if the dollar depreciates against all currencies, versus depreciating against some currencies but appreciated against others? Explain. If the dollar weakens against all currencies, the U.S. balance-of-trade deficit will likely be ________1________. Some U.S. importers would have _________2________their purchasing of goods in the U.S. if all currencies simultaneously strengthened against the dollar. If some currencies weaken against the dollar, the U.S. importers ________3________ shifted their importing from one foreign country to another.

1) Smaller 2) Increased 3) Would have

The strong demand for U.S. exports is commonly attributed to _______________ foreign economies or to a ______________ dollar.

1) Strong 2) Weak

Because of the low labor costs in Thailand, Melnick Co. (based in the United States) recently established a major research and development subsidiary there that it owns. The subsidiary was created to improve new products that the parent of Melnick can sell in the United States (denominated in dollars) to U.S. customers. The subsidiary pays its local employees in baht (the Thai currency). The subsidiary has a small amount of sales denominated in baht, but its expenses are much larger than its revenue. It has just obtained a large loan denominated in baht that will be used to expand its subsidiary. The business that the parent of Melnick Co. conducts in the United States is not exposed to exchange rate risk. If the Thai baht weakens over the next three years, will the value of Melnick Co. be favorably affected, unfavorably affected, or not affected? Briefly explain. It ________________1_______________ affected since it needs __________2_____________ dollars over time to cover its loan payments and its baht expenses.

1) Will Be Favorable 2) Fewer

Plak Co. of Chicago has several European subsidiaries that remit earnings to it each year. Explain how depreciation of the euro (the currency used in many European countries) would affect Plak's valuation? Plak's valuation should _______1_________because the depreciation of the euro will ________2________ the dollar value of the cash flows remitted by the European subsidiaries.

1) decrease 2) decrease

Assume that during this semester, the euro depreciated against the dollar. Did the direct exchange rate of the euro increase or decrease? Did the indirect exchange rate of the euro increase or decrease? As the euro depreciates against the U.S. dollar over time, this means that the direct rate of the euro _______________1___________ and the indirect rate of the euro _________2__________.

1) decreases 2) Increases

Consumers in Japan purchase baseball jerseys from their favorite US baseball teams. The jerseys are produced in the United States. 1) Component 2) US Cash Flow Position 3) Entry on US Balance of Payments Account

1) payments for goods and services 2) Inflow 3) Credit

If the Australian dollar depreciates over the investment period, this implies that the U.S. firm purchased the Australian dollars to make its investment at a ______1______exchange rate than the rate at which it will convert Australian dollars to U.S. dollars when the investment period is over. Thus, it ______2_____from the depreciation. Its return will be ______3_____ as a result of this depreciation.

1)higher 2)loses 3)lower

If the direct exchange rate of the euro is $1.16, what is the euro's indirect exchange rate? That is, what is the value of a dollar in euros? Round your answer to two decimal places

1.16/1= .862

Fort Worth, Inc., specializes in manufacturing some basic parts for sports utility vehicles (SUVs) that are produced and sold in the United States. Its main advantage in the United States is that its production is efficient and less costly than that of some other unionized manufacturers. It has a substantial market share in the United States. Its manufacturing process is labor intensive. It pays relatively low wages compared to U.S. competitors, but has guaranteed the local workers that their positions will not be eliminated for the next 30 years. It hired a consultant to determine whether it should set up a subsidiary in Mexico, where the parts would be produced. The consultant suggested that Fort Worth should expand because there are not many SUVs sold in Mexico, so Fort Worth, Inc., would not have to face much competition there. Offer your opinion on whether the consultant's reason is logical. A) The argument is logical because even if there are not many SUVs sold in Mexico, Fort Worth can become a monopolist in the Mexican market and set its own price. B) The argument is not logical because if SUVs are not sold in the Mexican market, there is no need for these parts in Mexico. C) The argument is logical because because SUVs are sold in the Mexican market and there are opportunities for Fort Worth to grow in that market.

B

Which of the following statements is not true? a. Exporters commonly complain that they are being mistreated because the currency of their country is too strong. b. Outsourcing means that an MNC has initiated the exporting of its products. c. Sometimes, trade policies are used to punish countries for various actions. d. All of the above are true.

B

Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets.

Because of imperfect markets, resources cannot be easily and freely retrieved by the MNC, and therefore the MNC must sometimes go to the resources rather than retrieve resources.

If the yuan was revalued to the extent that it substantially reduced the U.S. demand for Chinese products, would this shift the U.S. demand toward the U.S. or toward other countries where wage rates are relatively low? In other words, would the correction of the U.S. balance of trade deficit have a major impact on U.S. productivity and jobs?

Because there are other low wage countries which provide decent substitutes of Chinese products, a correction in the U.S. balance of trade deficit with China would shift jobs to those countries rather than to the U.S.

Exporting goods whose domestic production has been heavily subsidized by the government

Dumping

Which of the following would likely have the least direct influence on a country's current account?

Executive Salaries

An obligation to sell a specific amount of currency at a specific exchange rate at a future point in time is called a

Forward Contract

Suppose that an MNC wishes to purchase a foreign exchange derivative contract in order to hedge future payments they expect to make or receive. If the MNC wishes to purchase this derivative in an over-the-counter market, rather than an exchange, it will most likely choose to purchase which of the following types of contract?

Forward Contracts

If the home currency begins to depreciate against other currencies, this should ________________ the current account balance, other things being equal (assume that substitutes are readily available in other countries, and that the prices charged by firms remain the same).

Increase

Explain how governments might give their local firms a competitive advantage in the international trade arena.

Some governments can offer subsidies to their domestic firms.

Which of the following is the most direct example of political risk in Spain for a U.S.-based MNC with a subsidiary in Spain?

Spain's government may impose special taxes on the subsidiary.

Which of the following are reasons why an MNC might issue bonds in a particular foreign market?

The MNC intends to finance a project in a specific country and in a specific currency. There is a lower interest rate in that foreign country. The currency in that foreign market is expected to depreciate against the MNC's home currency.

Also referred to as the International Bank for Reconstruction and Development (IBRD), the primary objective of this agency's financing (and cofinancing) is to decrease poverty and facilitate economic development. A key feature of this agency is the use of structural adjustment loans (SALs), which are used to promote long-term economic growth. The previous description most closely matches which of the following agencies?

The World Bank

Theory of Competitive Advantage-

The theory that countries are better off by specializing in the production of a particular good, while trading for other necessary goods

Explain the foreign exchange situation for countries that use the euro when they engage in international trade among themselves.

There is no foreign exchange. Euros are used as the medium of exchange

Consider the valuation of an MNC with cash flows denoted in multiple currencies, over multiple time periods. Consider a U.S.-based MNC parent owns subsidiaries in the France, Mexico, and Australia. Suppose that recent investment decisions by the MNC parent in its local businesses has caused the cost of capital in France to decrease:

This decrease in the forecasted cost of capital will increase the value (VV) of the MNC, all else equal.

Suppose that California Co., a U.S.-based MNC that sells clothing domestically, owns a subsidiary in Mexico that handles the manufacturing of their products. California Co., has chosen to have a subsidiary in Mexico due to their relative strengths in making clothing by hand. California Co., on the other hand, focuses their efforts on the digital marketing and technological side of the business.

This reasoning for expanding their business internationally is best explained by the theory of comparative advantage

True or False: There can be incentives for governments to move slowly when validating country trade requirements.

True

Why might different tax laws on corporate income across countries allow firms from some countries to have a competitive advantage in the international trade arena?

When a government imposes lower corporate tax rates, firms may be able to charge lower prices for their products and still make a profit.

Zest Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Zest Co. has increased since last month. What could have caused this increase in value?

appreciation of the Mexican peso

The valuation of an MNC should decline when an event causes the expected cash flows from foreign subsidiaries to ____ and when the foreign currencies denominating these cash flows are expected to ____.

decrease, depreciate

When this method of conducting international business is used, cash inflows come from ___________________ while cash outflows flow to ____________________. (see card 14)

foreign firms and government agencies, foreign firms and government agencies

The main focus of the Basel Accord is requiring banks to

hold more capital if they take more risk

In general, stock markets allow for more governance and attract more investors when they have all of the following except

more flexible accounting laws when reporting corporate income.

If a U.S. firm needs 100,000 euros in 90 days and wishes to avoid the risk from exchange rate fluctuations, it could

purchase a 90-day forward contract on euros.

A reduction in the use of quotas is expected to

reduce the country's current account balance, if other governments do not change their position.

The international money market primarily concentrates on

short-term deposits and loans.