Module 10

British pound (£)$1.8970 / pound Euro (€ )$1.4200 / euro Australian dollar (AU$)$0.8970 / Australian dollar Given these rates, an Australian dollar can purchase______British pounds.

0.4729 Cross Rate (Pound / Australian Dollar) =(Pound / U.S. Dollar) x (U.S. Dollar / Australian Dollar) =(£1 / $ 1.8970) x ($ 0.8970 / AU$1) =£ 0.4729 / AU$

Euro€ 0.5447 / $1Yen¥ 99.4400 / $1 How many euros can ¥1 purchase?

0.5447/99.440

A scanner costs £65.45 in England. The spot rate is currently $2.0145 per pound. Assuming that PPP holds true, what is the price of the scanner in the United States?

131.85

If the customer pays Loud Sound Recordings Inc. the ¥658 million today, how much will Loud Sound Recordings Inc. receive in dollars?

4.96 658x1/132.78

The investor's annualized return on these bonds—if he or she can lock in the dollar return by selling the foreign currency in the forward market—will be

8.836

Magic Milling Company is a U.S.-based firm that produces stereos in Germany at a cost of € 120 (including production and transportation costs) and sells them in England for £ 97. Based on the exchange rate table given in the preceding question, what is Magic Milling Company's dollar profit for each unit sold?

=13.61 Euro Cost x (Dollar / Euro Spot Exchange Rate) =€ 120 x ($1.4200 / euro) =$170.40 per unit Pound Price x (Dollar / Pound Spot Exchange Rate) =£97 x ($1.8970 / pound) =$184.01 =$184.01 - $170.40 =$13.61

Which of the following statements is implied by interest rate parity theory?

An investment in one's home country should have the same return as a similar investment in a foreign country.

Suppose you make a £500,000 sale to a British customer who has 60 days to pay you in cash. The customer will pay you in British pounds, but your company is based in the United States, so you are most concerned with the dollar value of the payment. If the customer pays you £500,000 today, how much is that worth in dollars? spot exchange rate =0.5415

Dollar Value TodayDollar Value Today = £500,000 × $1/£0.5415

Assume that the forward market is correct and the 60-day forward exchange rate quoted in the newspaper today (above) is the spot exchange rate 60 days from now. If the customer waits the full 60 days and pays you £500,000, how much have you lost (in dollar terms) due to exchange rate fluctuations?

Dollar Value in 60 DaysDollar Value in 60 Days = £500,000 × $1/£0.5445 = $918,274 Loss in Dollar Terms = $923,361−$918,274 = $5,087

Canoqola Domain Inc., a U.S.-based company, issued dollar-denominated bonds in China and India to finance a multinational project.

Eurobond

When exchange rates are stated in_____ terms, the foreign exchange rate quotation represents the units of domestic currency that can be purchased with $1.

European

companies go global for various reasons. Although becoming a multinational corporation provides prospects for high returns and diversification, it makes financial management more complicated for financial executives and managers. Based on your understanding of the factors that complicate financial management in multinational firms, complete the following statement: Compared to domestic corporations, multinational corporations have_______ risk from exchange rate fluctuations.

Increased

Suppose the price of the scanner in the United States was actually $145.04. Assuming no transaction costs, transportation costs, or import restrictions, what does PPP predict would happen to the demand for the scanner in the United States?

The demand for the scanner would decrease in the United States.

Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid or invalid.

The statement is valid, because the nominal interest rate is the sum of the real interest rate plus inflation, so lower inflation rates would result in lower interest rates.

Loud Sound Recordings Inc., a U.S. company, produces and exports industrial machinery overseas. It recently made a sale to a Japanese manufacturing firm for ¥658 million, but the Japanese firm has 60 days before it must make the payment to Loud Sound Recordings Inc. The spot exchange rate is ¥132.78 per dollar, and the 60-day forward rate is ¥134.72 per dollar. Is the yen selling at a premium or at a discount in the forward market relative to the U.S. dollar?

The yen is trading at a discount in the forward market.

Salty Lemon Manufacturers is an American company that produces high-tech electronics. Its managers have decided to move some of its production facilities to Japan in an attempt to circumvent certain governmental regulations.

To avoid political, trade, and regulatory hurdles

Saltwater Logistics Corp. is located in Germany, a high-cost country, and its managers have decided to shift some of its production facilities to Indonesia, a low-cost country, in an attempt to lower production costs. Which of the following best describes the reason Saltwater Logistics Corp. has decided to go global?

To seek production efficiency

Interest rate parity recognizes that when you invest in a country other than your home country, two factors affect your investment—returns on the investment itself and changes in the exchange rate. Which of the following would cause the overall return on your investment to be lower than the investment's stated return?

Your home currency appreciates relative to the currency in which the investment is denominated.

The currency of a country with a lower inflation rate than the U.S. inflation rate will______ over time against the dollar.

appreciate

The home currency price of one unit of foreign currency is called a ___quotation.

direct

suppose an American investor is given the current exchange rates in the following table. The listed quotations are_______ quotations stated in American terms.

direct

Now consider the case of Blue Moose Producers, which has decided to establish worldwide production facilities and markets to cushion itself from adverse economic conditions in any particular country. Blue Moose Producers has decided to go global in order to

diversify

Companies go global for various reasons. Although becoming a multinational corporation provides prospects for high returns and diversification, it makes financial management more complicated for financial executives and managers. Based on your understanding of the factors that complicate financial management in multinational firms, complete the following statement: Compared to domestic corporations, multinational corporations have_______ exposure to risks that arise from complex tax laws and multiple money markets.

higher

If companies borrow from countries with low interest rates, the potential gains from the interest savings will likely be____ by the losses from currency appreciation.

offset

Now consider the case of Northern Rubber Company. To conceal its trade secrets, Northern Rubber Company has decided to invest abroad instead of licensing to local foreign firms. Northern Rubber Company has decided to go global in order to

protect processes and products

Now consider the case of Blue Box Crate Company. Many of Blue Box Crate Company's customers have expanded to India. Consequently, Blue Box Crate Company has decided to expand its operations to India to better serve its customers. Blue Box Crate Company has decided to go global in order to

retain customer

Assuming that the forward market is correct and the spot exchange rate in 60 days will equal the 60-day forward exchange rate today, Loud Sound Recordings Inc. would get more dollars if the Japanese firm paid off its account

today