MULTINATIONAL FINANCIAL
CHAPTER 17 MANAGEMENT

(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)

 Please see the preface

preface for information on the AACSB letter indicators (F
(F,, M, etc.) on the subject 
lines.

Multiple Choice: True/False

(17-2) Multinational fin. mgmt. F T Answer: a E
EAASY
1
. Multi
Multinat
natio
ional
nal fin
finan
ancia
cial
l man
manag
ageme
ement
nt requi
require
res
s that
that finan
financi
cial
al analy
analyst
sts
s
consider the effects of changing currency values.

a. True
b. False

(17-2) Multinational fin. mgmt. F T Answer: b E

EAASY
2
. Legal
Legal and econo
economic
mic dif
diffe
feren
rence
ces
s a
amo
mong
ng cou
count
ntrie
ries,
s, alt
althou
hough
gh imp
impor
ortan
tant,
t, do
NOT pose significant problems for most multinational corporations when
they coordinate and control worldwide operations and subsidiaries.
a. True
b. False

(17-3) Currency appreciation F T Answer: a E

EA
ASY
3
. When
When the
the value
value of the
the U
U.S.
.S. dolla
dollar
r a
app
pprec
recia
iates
tes again
against
st anoth
another
er cou
countr
ntry'
y's
s
currency, we may purchase more of the foreign currency with a dollar.

a. True
b. False

(17-3) Floating exchange rates F T Answer: a E

EAASY
4
. The Unite
United
d Sta
States
tes and
and m
most
ost other
other maj
major
or indu
industr
stria
ializ
lized
ed natio
nations
ns cur
curren
rentl
tly
y
operate under a system of floating exchange rates.

a. True
b. False

(17-4) Exchange rates F T Answer: b EASY

5
. Exch
Exchan
ange
ge rate
rate quot
quotat
atio
ions
ns cons
consis
ist
t s
sol
olel
ely
y o
of
f d
dir
irec
ect
t q
quo
uota
tati
tion
ons.
s.

a. True
b. False

(17-4) Cross rates F T Answer: a EASY

6
. Calc
Calcul
ulat
atin
ing
g a curr
curren
ency
cy c
cro
ross
ss r
rat
ate
e in
invo
volv
lves
es d
det
eter
ermi
mini
ning
ng t
the
he e
exc
xcha
hang
nge
e
rate for two currencies by using a third currency as a base.

Chapter 17: Multinational True/False Page 165

 

a. True
b. False

(17-9) Eurodollars F T Answer: a EASY

7
. A Euro
Eurodo
doll
llar
ar is
is a U
U.S
.S.
. d
dol
olla
lar
r de
depo
posi
site
ted
d in a ba
bank
nk o
out
utsi
side
de t
the
he Unit
United
ed
States.

a. True
b. False
(17-9) LIBOR F T Answer: b EASY
8
. LIBO
LIBOR
R i
is
s an
an a
acr
cron
onym
ym for
for L
Lon
ondo
don
n I
Int
nter
erba
bank
nk Offe
Offer
r Rat
Rate,
e, whic
which
h i
is
s a
an
n
average of interest rates offered by London banks to smaller U.S.
corporations.

a. True
b. False

(17-10) Exchange rate risk F T Answer: a E

EA
ASY
9
. Exch
Exchan
ange
ge rate
rate risk
risk is the
the r
ris
isk
k t
tha
hat
t t
the
he cash
cash flow
flows
s f
fro
rom
m a f
for
orei
eign
gn
project, when converted to the parent company's currency, will be worth
less than was originally projected because of exchange rate changes.

a. True
b. False

(17-11) Political risk F T Answer: b EASY

10
. Becau
Because
se polit
politic
ical
al risk
risk is seldo
seldom
m n
nego
egotia
tiabl
ble,
e, it can
cannot
not be expl
explici
icitly
tly
addressed in multinational corporate financial analysis.

a. True
b. False

(17-5) Forward market hedging F T Answer: b M

MEEDIUM  
11
. Indiv
Individu
idual
als
s a
and
nd corp
corpora
oratio
tions
ns can buy or sell
sell fo
forwa
rward
rd curr
currenc
encie
ies
s t
to
o
hedge their exchange rate exposure. Essentially, the process involves
simultaneously selling the currency expected to appreciate in value and

buying the currency expected to depreciate.

a. True
b. False

(17-5) Discount on forward rate F T Answer: a MEDIUM  

12
. If an inv
inves
estor
tor can obt
obtai
ain
n m
mor
ore
e o
of
f a forei
foreign
gn curr
currenc
ency
y ffor
or a d
dol
ollar
lar in
the forward market than in the spot market, then the forward currency
is said to be selling at a discount to the spot rate.

a. True
b. False

(17-5) Premium on forward rate F T Answer: a MEDIUM  

Page 166 True/False Chapter 17: Multinational

 

13
. If a doll
dollar
ar will
will buy
buy f
few
ewer
er units
units of a ffor
orei
eign
gn curre
currency
ncy in the
the f
for
orwar
ward
d
market than in the spot market, then the forward currency is said to be
selling at a premium to the spot rate.

a. True
b. False

Chapter 17: Multinational True/False Page 167

 

(17-8) Currency value and inflation F T Answer: a MEDIUM  

14
. A fore
foreign
ign curre
currency
ncy wil
will,
l, o
on
n a
aver
verag
age,
e, d
depr
eprec
eciat
iate
e ag
agai
ainst
nst the U.S.
U.S. d
doll
ollar
ar
at a percentage rate approximately equal to the amount by which its
inflation rate exceeds that of the United States.

a. True
b. False

(17-11) Relevant investment CFs F T Answer: b MEDIUM  

15
. The cash
cash flows
flows rel
relev
evant
ant for a f
for
oreig
eign
n iinv
nves
estme
tment
nt shoul
should,
d, fro
from
m t
the
he
parent company's perspective, include the financial cash flows that the
subsidiary can legally send back to the parent company plus the cash
flows that must remain in the foreign country.

a. True
b. False

(17-11) For. proj. cost of capital F T Answer: a MEDIUM  

16
. The cost
cost of capit
capital
al may be diffe
differe
rent
nt for a f
for
orei
eign
gn pro
proje
ject
ct than
than for
for a
an
n
equivalent domestic project because foreign projects may be more or
less risky.

a. True
b. False

(17-11) Risk and int'l. investment F T Answer: a MEDIUM  

17
. When
When cons
consid
ideri
ering
ng t
the
he r
ris
isk
k of a fo
forei
reign
gn i
inv
nvest
estme
ment,
nt, a hi
high
gher
er r
risk
isk mig
might
ht
arise from exchange rate risk and political risk while lower risk might
result from international diversification.

a. True
b. False

Multiple Choice: Conceptual

(17-1) Motive for going global C T Answer: e E

EAASY

18
. Whic
Which
h of the
the foll
follow
owin
ing
g a
are
re r
rea
easo
sons
ns w
why
hy c
com
ompa
pani
nies
es m
mov
ove
e in
into
to
international operations?

a. To take ad
advantage
vantage of
of lower pr
production
oduction costs in rregions
egions wh
where
ere labor
costs are relatively low.
b. To dev
develop
elop new
new mark
markets
ets for
for the firm's product
products.
s.
c. To be
better
tter serve their primary customers.
customers.
d. Because important
important raw materials
materials are located
located abroad.
abroad.
e. All
All of
of the
the abo
above
ve.
.

Page 168 Conceptual M/C Chapter 17: Multinational

 

(17-2) Multinational fin. mgmt. C T Answer: a E

EAASY
19
. Mult
Multin
inat
atio
iona
nal
l f
fin
inan
anci
cial
al mana
manage
geme
ment
nt requ
requir
ires
es that
that

a. The effe
effects
cts of changing
changing curr
currency
ency valu
values
es be included
included in fi
financial
nancial
analyses.
b. Legal an
and
d economic
economic differe
differences
nces need not
not be cons
considered
idered in financia
financial
l
decisions because these differences are insignificant.
c. Politic
Political
al risk should
should be exc
excluded
luded fro
from
m multinational
multinational ccorporate
orporate
financial analyses.
d. Traditi
Traditional
onal U.S. and Europ
European
ean financial
financial mode
models
ls incorp
incorporating
orating t
the
he
existence of a competitive marketplace not be recast when analyzing
projects in other parts of the world.
e. Cultura
Cultural
l differences
differences need not be ac
accounted
counted for
for when consid
considering
ering firm
goals and employee management.

(17-8) Currency depreciation C T Answer: a MEDIUM  

20
. If the
the inf
infla
lati
tion
on r
rat
ate
e in the
the Un
Unit
ited
ed S
Sta
tate
tes
s is grea
greate
ter
r th
than
an t
the
he
inflation rate in Britain, other things held constant, the British
pound will

a. Appreci
Appreciate
ate aga
agains
inst
t the U.S
U.S.
. dollar.
dollar.
b. Depreci
Depreciate
ate aga
agains
inst
t the U.S
U.S.
. dollar.
dollar.
c. Remain unchanged
unchanged against
against the UU.S.
.S. d
dollar.
ollar.
d. Appreci
Appreciate
ate against
against other major currenci
currencies.
es.
e. Appreci
Appreciate
ate against
against the dol
dollar
lar and oth
other
er major c
currenci
urrencies.
es.

(17-6) Interest rate parity C T Answer: a M

MEEDIUM  
21
. In Japan
Japan,
, 90-d
90-day
ay secur
securit
ities
ies hav
have
e a 4% ann
annua
ualiz
lized
ed retur
return
n a
and
nd 180-d
180-day
ay
securities have a 5% annualized return. In the United States, 90-day
securities have a 4% annualized return and 180-day securities have an
annualized return of 4.5%. All securities are of equal risk, and
Japanese securities are denominated in terms of the Japanese yen.
Assuming that interest rate parity holds in all markets, which of the
following statements is most CORRECT?

a. The yen-
yen-dollar
dollar spot
spot exchan
exchange
ge rate equals
equals the ye
yen-dolla
n-dollar
r exchange
exchange
rate in the 90-day forward market.

b. rate
The yen-
yen-dollar
in dollar spot
spot forward
the 180-day exchan
exchange
gemarket.
rate equals
equals the ye
yen-dolla
n-dollarr exchange
exchange
c. The yen-
yen-dollar
dollar exchange
exchange ra
rate
te in the 90-day
90-day forw
forward
ard marke
markett equals tthe
he
yen-dollar exchange rate in the 180-day forward market.
d. The yen-
yen-dollar
dollar exchange
exchange ra
rate
te in the 180-day
180-day for
forward
ward mark
market
et equals
the yen-dollar exchange rate in the 90-day spot market.
e. The rela
relationship
tionship between s
spot
pot and forward
forward int
interest
erest rat
rates
es cannot bbe
e
inferred.

Chapter 17: Multinational Conceptual M/C Page 169

 

(17-9) Int'l. bond markets C T Answer: d M

ME
EDIUM  
22
. Whic
Which
h of the
the f
fol
ollo
lowi
wing
ng stat
statem
emen
ents
ts is NOT
NOT CORR
CORREC
ECT?
T?

a. Any bond s
sold
old outside
outside the cou
country
ntry of th
the
e borrowe
borrower
r is calle
called
d an
international bond.
b. Foreign bo
bonds
nds and Eurobonds
Eurobonds are two im
important
portant types
types of intern
international
ational
bonds.
c. Foreign bonds are bonds
bonds sold by a forei
foreign
gn borrow
borrower
er but den
denominated
ominated
in the currency of the country in which the issue is sold.
d. The term EEurobond
urobond applies
applies on
only
ly to fore
foreign
ign bonds denomina
denominated
ted in U.S.
U.S.
currency.
e. A Eurodo
Eurodollar
llar is a U.S.
U.S. dollar deposite
deposited
d in a bank outside
outside t
the
he U.S.

(17-6) Interest rate parity C T Answer: c MEDIUM/HARD

23
. Curre
Currentl
ntly,
y, a U.
U.S.
S. t
trad
rader
er n
not
otes
es t
tha
hat
t in the
the 6-
6-mo
month
nth for
forwa
ward
rd m
mar
arket
ket,
, th
the
e
Japanese yen is selling at a premium (that is, you receive more dollars
per yen in the forward market than you do in the spot market), while
the British pound is selling at a discount. Which of the following
statements is CORRECT?

a. If inter
interest
est rate parity
parity hold
holds,
s, 6-mont
6-month
h interest
interest rates sh
should
ould be th
the
e
same in the U.S., Britain, and Japan.
b. If inter
interest
est rate parity
parity hold
holds
s among th
the
e three co
countries,
untries, the United
United
States should have the highest 6-month interest rates and Japan
should have the lowest rates.
c. If inter
interest
est rate parity
parity hold
holds
s among th
the
e three co
countries,
untries, Britain
should have the highest 6-month interest rates and Japan should have
the lowest rates.
d. If inter
interest
est rate parity
parity hold
holds
s among th
the
e three co
countries,
untries, Japan
should have the highest 6-month interest rates and Britain should
have the lowest rates.
e. If inter
interest
est rate parity
parity hold
holds
s among th
the
e three co
countries,
untries, the United
United
States should have the highest 6-month interest rates and Britain
should have the lowest rates.

(17-6) Interest rate parity C T Answer: b H

HA
ARD
24
. Today
Today in the
the s
spot
pot marke
market
t $
$1
1 = 1.82
1.82 Swiss
Swiss franc
francs
s a
and
nd $1 = 1
130
30 Jap
Japan
anese
ese

yen. In yen.
Japanese the 90-day forward
Assume market, rate
that interest $1 = parity
1.84 Swiss francs
holds and $1 Which
worldwide. = 127
of the following statements is most CORRECT?

a. Interes
Interest
t rates on 90-day
90-day ris
risk-free
k-free U.
U.S.
S. securities
securities are hhigher
igher tha
than
n
the interest rates on 90-day risk-free Swiss securities.
b. Interes
Interest
t rates on 90-day
90-day ris
risk-free
k-free U.
U.S.
S. securities
securities are hhigher
igher tha
than
n
the interest rates on 90-day risk-free Japanese securities.
c. Interes
Interest
t rates on 90-day
90-day ris
risk-free
k-free U.
U.S.
S. securities
securities equ
equal
al the
interest rates on 90-day risk-free Japanese securities.
d. Since in
interest
terest rate
rate parity h
holds
olds inte
interest
rest rates
rates should bbe
e the same
in all three countries.
e. Interes
Interest
t rates on 90-day
90-day ris
risk-free
k-free U.
U.S.
S. securities
securities equ
equal
al the
interest rates on 90-day risk-free Swiss securities.

Page 170 Conceptual M/C Chapter 17: Multinational

 

Chapter 17: Multinational Conceptual M/C Page 171

 

Problems

 Problems with
with * in the topic line are nonalgorithmic.

(17-4) Exchange rates C T Answer: d EASY

25
. If one
one S
Swi
wiss
ss franc
franc can pur
purch
chase
ase $0.76
$0.76 U.S
U.S.
. d
dol
olla
lars,
rs, how man
many
y S
Swis
wiss
s
francs can one U.S. dollar buy?

a. 0.9592
b. 1.0658
c. 1.1842
d. 1.3158
e. 1.4474

(17-4) Exchange rates C T Answer: b EASY

26
. If one
one U
U.S
.S.
. d
dol
ollar
lar buy
buys
s 1
1.6
.64
4 C
Can
anad
adian
ian dol
dolla
lars,
rs, how man
many
y U
U.S.
.S. dol
dolla
lars
rs
can you purchase for one Canadian dollar?

a. 0.5488
b. 0.6098
c. 0.6707
d. 0.7378

e. 0.8116
(17-4) Exchange rates C T Answer: a EASY
27
. If one
one Bri
Britis
tish
h po
poun
und
d ca
can
n pu
purc
rchas
hase
e $1
$1.9
.98
8 U.
U.S.
S. d
dol
ollar
lars,
s, h
how
ow m
man
any
y Br
Briti
itish
sh
pounds can one U.S. dollar buy?

a. 0.5051
b. 0.5556
c. 0.6111
d. 0.6722
e. 0.7394

(17-4) Exchange rates C T Answer: e EASY

28
. If one
one U
U.S
.S.
. d
dol
ollar
lar buy
buys
s 0
0.6
.63
3 e
eur
uro,
o, how
how m
man
any
y d
dol
ollar
lars
s c
can
an you purch
purchase
ase
for one euro?

a. 1.0414
b. 1.1571
c. 1.2857
d. 1.4286
e. 1.5873

(17-4) Exchange rates C T Answer: b EASY

29
. If one
one U
U.S
.S.
. d
dol
ollar
lar sel
sells
ls fo
for
r 0
0.6
.60
0 BBri
ritis
tish
h p
poun
ound,
d, how
how m
man
any
y d
dol
ollar
lars
s
should one British pound sell for?

a. 1.0935
b. 1.2150
c. 1.3500

Page 172 Problems Chapter 17: Multinational

 

d. 1.5000
e. 1.6667

Chapter 17: Multinational Problems Page 173

 

(17-4) Currency appreciation C T Answer: a E

EA
ASY
30
. Suppo
Suppose
se 144
144 y
yen
en coul
could
d b
be
e p
pur
urcha
chase
sed
d i
in
n t
the
he for
forei
eign
gn excha
exchang
nge
e m
mar
arket
ket for
one U.S. dollar today. If the yen depreciates by 8.0% tomorrow, how
many yen could one U.S. dollar buy tomorrow?

a. 15
155.
5.52
5200
00
b. 16
163.
3.29
2960
60
c. 17
171.
1.46
4608
08
d. 18
180.
0.03
0338
38
e. 18
189.
9.03
0355
55

(17-9) Eurobonds vs. domestic bonds C T Answer: d EASY

31
. Suppo
Suppose
se a for
forei
eign
gn i
inve
nvest
stor
or w
who
ho h
hol
olds
ds t
tax-
ax-ex
exemp
empt
t Eu
Euro
robon
bonds
ds p
pay
aying
ing 9% i
is
s
considering investing in an equivalent-risk domestic bond in a country
with a 28% withholding tax on interest paid to foreigners. If 9%
after-tax is the investor's required return, what before-tax rate would
the domestic bond need to pay to provide the required after-tax return?

a. 9.11%
b. 10.13%
c. 11.25%
d. 12.50%
e. 13.75%

(17-10) Exchange rate risk C T Answer: e E

EA
ASY
32
. Suppo
Suppose
se DeGra
DeGraw
w C
Cor
orpo
porat
ration
ion,
, a U.S.
U.S. expor
exporte
ter,
r, so
sold
ld a s
sol
olar
ar heat
heating
ing
station to a Japanese customer at a price of 143.5 million yen, when
the exchange rate was 140 yen per dollar. In order to close the sale,
DeGraw agreed to make the bill payable in yen, thus agreeing to take
some exchange rate risk for the transaction. The terms were net 6
months. If the yen fell against the dollar such that one dollar would
buy 154.4 yen when the invoice was paid, what dollar amount would
DeGraw actually receive after it exchanged yen for U.S. dollars?

a. $7
$757
57,0
,005
05.4
.48
8
b. $7
$796
96,8
,847
47.8
.88
8
c. $8
$838
38,7
,787
87.2
.24
4

d.
e. $8
$882
$982,9
$929,933
29,433.9
,404.94
04.14
.15
5

(17-4) Cross rates C T Answer: b MEDIUM  

33
. Suppo
Suppose
se the
the e
exc
xchan
hange
ge rate
rate betwe
between
en U.S
U.S.
. d
dol
ollar
lars
s a
and
nd Swi
Swiss
ss fra
franc
ncs
s i
is
s SSF
F
1.41 = $1.00, and the exchange rate between the U.S. dollar and the
euro is $1.00 = 0.64 euros. What is the cross rate of Swiss francs to
euros?

a. 1.9828
b. 2.2031
c. 2.4234
d. 2.6658
e. 2.9324

Page 174 Problems Chapter 17: Multinational

 

(17-4) Cross rates C T Answer: b MEDIUM  

34
. Suppo
Suppose
se t
tha
hat
t cu
curre
rrent
ntly,
ly, 1 Br
Briti
itish
sh pou
pound
nd e
equ
quals
als 1.9
1.98
8 U.
U.S.
S. dol
dolla
lars
rs a
and
nd 1
U.S. dollar equals 1.02 Swiss francs. How many Swiss francs are needed
to purchase 1 pound?

a. 1.9691
b. 2.0196
c. 2.0701
d. 2.1218
e. 2.1749

(17-4) Cross rates C T Answer: c MEDIUM  

35
. A cur
curren
rency
cy tra
trader
der obser
observes
ves the
the f
fol
ollow
lowing
ing quote
quotes
s i
in
n t
the
he spot
spot marke
market:
t:

1 U.S. dollar = 122 Japanese yen

1 British pound = 2.25 Swiss francs
1 British pound = 1.65 U.S. dollars

Given this information, how many yen can be purchased for 1 Swiss franc?

a. 0.8505
b. 0.8723
c. 0.8947
d. 0.9170
e. 0.9400

(17-4) Cross rates C T Answer: c MEDIUM  

36
. A cur
curren
rency
cy tra
trader
der obser
observes
ves the
the f
fol
ollow
lowing
ing quote
quotes
s i
in
n t
the
he spot
spot marke
market:
t:

1 U.S. dollar = 10.875 Mexican pesos

1 British pound = 6.205 Danish krone
1 British pound = 1.98 U.S. dollars

Given this information, how many Mexican pesos can be purchased for 1
Danish krone?

a. 2.7490

b
c.
. 2
2.
.8
81
9915
8
d. 2.9641
e. 3.0382

(17-5) Forward rates* C T Answer: d MEDIUM  

37
. If the
the s
spo
pot
t r
rat
ate
e o
of
f t
the
he Isr
Israe
aeli
li sheke
shekel
l i
is
s 5
5.51
.51 she
sheke
kels
ls per
per d
dol
ollar
lar and
the 180-day forward rate is 5.97 shekels per dollar, then the forward
rate for the Israeli shekel is selling at a ______________ to the spot
rate.

a. 6.
6.09
09%
% pr
prem
emiu
ium
m
b. 6.
6.76
76%
% pr
prem
emiu
ium
m
c. 7.51%
7.51% disco
discount
unt
d. 8.35%
8.35% disco
discount
unt

Chapter 17: Multinational Problems Page 175

 

e. 9.18%
9.18% disco
discount
unt

Page 176 Problems Chapter 17: Multinational

 

(17-5) Currency depreciation C T Answer: d MEDIUM  

38
. Suppo
Suppose
se one
one B
Bri
ritis
tish
h p
pou
ound
nd can
can p
pur
urcha
chase
se 1.82
1.82 U.S.
U.S. dolla
dollars
rs tod
today
ay in the
foreign exchange market, and currency forecasters predict that the U.S.
dollar will depreciate by 12.0% against the pound over the next 30
days. How many dollars will a pound buy in 30 days?

a. $1.48
486
60
b. $1.65
651
11
c. $1.83
834
46
d. $2.03
038
84
e. $2.24
242
22

(17-5) Forward market hedge C T Answer: e M

MEEDIUM  
39
. Stove
Stover
r Co
Corp
rpora
oratio
tion,
n, a U.
U.S.
S. b
base
ased
d i
impo
mporte
rter,
r, mak
makes
es a pur
purch
chase
ase of c
cry
rysta
stal
l
glassware from a firm in Switzerland for 39,960 Swiss francs, or
$24,000, at the spot rate of 1.665 francs per dollar. The terms of the
purchase are net 90 days, and the U.S. firm wants to cover this trade
payable with a forward market hedge to eliminate its exchange rate
risk. Suppose the firm completes a forward hedge at the 90-day forward
rate of 1.682 francs. If the spot rate in 90 days is actually 1.64
francs, how much will the U.S. firm have saved or lost in U.S. dollars
by hedging its exchange rate exposure?

a. $399
b. $444
c. $493
d. $548
e. $608

(17-5) Forward market hedge C T Answer: d M

MEEDIUM  
40
. Suppo
Suppose
se a U.S.
U.S. fir
firm
m b
buy
uys
s $
$20
200,0
0,000
00 wor
worth
th of tel
telev
evisi
ision
on tubes
tubes from
from a
Mexican manufacturer for delivery in 60 days with payment to be made in
90 days (30 days after the goods are received). The rising U.S.
deficit has caused the dollar to depreciate against the peso recently.
The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day
forward rate is 5.45 pesos/dollar. The firm goes into the forward
market today and buys enough Mexican pesos at the 90-day forward rate

to completely
days cover its
is 5.30 Mexican trade
pesos per obligation.
U.S. dollar.Assume the in
How much spot rate
U.S. in 90
dollars
did the firm save by eliminating its foreign exchange currency risk
with its forward market hedge?

a. $4
$4,8
,897
97.5
.59
9
b. $5
$5,1
,155
55.3
.36
6
c. $5
$5,4
,426
26.6
.69
9
d. $5
$5,7
,712
12.3
.31
1
e. $5
$5,9
,997
97.9
.92
2

Chapter 17: Multinational Problems Page 177

 

(17-6) Interest rate parity C T Answer: b M

MEEDIUM  
41
. Suppo
Suppose
se 9
90-
0-day
day inv
inves
estme
tments
nts in B
Bri
ritai
tain
n ha
have
ve a 6% ann
annual
ualiz
ized
ed r
ret
eturn
urn and a
1.5% quarterly (90-day) return. In the U.S., 90-day investments of
similar risk have a 4% annualized return and a 1% quarterly (90-day)
return. In the 90-day forward market, 1 British pound equals $1.65.
If interest rate parity holds, what is the spot exchange rate ($/£)?

a. $1.49
492
24
b. $1.65
658
82
c. $1.82
824
40
d. $2.00
006
64
e. $2.20
207
70

(17-7) Purchasing power parity C T Answer: c MEDIUM  

42
. Suppo
Suppose
se hocke
hockey
y s
ska
kate
tes
s s
sell
ell in Cana
Canada
da for 105
105 C
Can
anadi
adian
an dolla
dollars
rs,
, a
and
nd 1
Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity
(PPP) holds, what is the price of hockey skates in the United States?

a. $60.39
b. $67.10
c. $74.55
d. $82.01
e. $90.21

(17-9) Exchange fluctuations C T Answer: a MEDIUM  

43
. Suppo
Suppose
se 6 mont
months
hs ago
ago a Swi
Swiss
ss inv
inves
estor
tor bou
bough
ght
t a 6-m
6-mon
onth
th U.S.
U.S. Treas
Treasury
ury
bill at a price of $9,708.74, with a maturity value of $10,000. The
exchange rate at that time was 1.420 Swiss francs per dollar. Today,
at maturity, the exchange rate is 1.324 Swiss francs per dollar. What
is the annualized rate of return to the Swiss investor?

a. -7.93%
b. -7.13%
c. -6.42%
d. -5.78%
e. -5.20%

(17-10) Exchg. rates & asset val. C T Answer: c MEDIUM  

44
. In 1985,
1985, a giv
given
en Japan
Japanes
ese
e i
imp
mport
orted
ed autom
automob
obile
ile sold
sold for 1,476
1,476,0
,000
00 yen
yen,
,
or $8,200. If the car still sold for the same amount of yen today but
the current exchange rate is 144 yen per dollar, what would the car be
selling for today in U.S. dollars?

a. $8,303
b. $9,225
c. $10,2
,25
50
d. $11,2
,27
75
e. $12,4
,40
03

Page 178 Problems Chapter 17: Multinational

 

(17-10) Inventory and exchg. rates C T Answer: b MEDIUM  

45
. Suppo
Suppose
se one
one y
yea
ear
r a
ago
go,
, H
Hein
ein Compa
Company
ny had
had i
inv
nvent
entor
ory
y i
in
n B
Bri
rita
tain
in value
valued
d a
at
t
240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2
U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars.
The inventory in Britain is still valued at 240,000 pounds. What is
the gain or loss in inventory value in U.S. dollars as a result of the
change in exchange rates?

a. -$
-$38
38,8
,880
80.0
.00
0
b. -$
-$43
43,2
,200
00.0
.00
0
c. -$
-$47
47,5
,520
20.0
.00
0
d. -$
-$52
52,2
,272
72.0
.00
0
e. -$
-$57
57,4
,499
99.2
.20
0

(17-5) Exchg. rates & req. return C T Answer: e MEDIUM/HARD

46
. One year
year ago,
ago, a U
U.S
.S.
. i
inv
nvest
estor
or conv
convert
erted
ed dolla
dollars
rs to yen and
and p
pur
urcha
chased
sed
100 shares of stock in a Japanese company at a price of 3,150 yen per
share. The stock's total purchase cost was 315,000 yen. At the time
of purchase, in the currency market 1 yen equaled $0.00952. Today, the
stock is selling at a price of 3,465 yen per share, and in the currency
market $1 equals 130 yen. The stock does not pay a dividend. If the
investor were to sell the stock today and convert the proceeds back to
dollars, what would be his realized return on his initial dollar
investment from holding the stock?

a. -13.5
.51
1%
b. -12.8
.87
7%
c. -12.2
.26
6%
d. -11.6
.67
7%
e. -11.1
.12
2%

(17-7) Purchasing power parity C T Answer: d MEDIUM/HARD

47
. A prod
product
uct sells
sells for
for $75
$750
0 in the Unite
United
d Stat
States.
es. The spo
spot
t exc
excha
hange
nge rat
rate
e
is $1 to 1.65 Swiss francs. If purchasing power parity (PPP) holds,
what is the price of the product in Switzerland?

a. 902.14

b.
c. 1,
1,00
1,002.
1,112.38
113.38
3.75
75
d. 1,
1,23
237.
7.50
50
e. 1,
1,36
361.
1.25
25

(17-7) Purchasing power parity C T Answer: e MEDIUM/HARD

48
. A box
box of candy
candy cos
costs
ts 28.80
28.80 Swiss
Swiss fra
franc
ncs
s i
in
n S
Swi
witz
tzerl
erland
and and
and $$20
20 in the
United States. Assuming that purchasing power parity (PPP) holds, how
many Swiss francs are required to purchase one U.S. dollar?

a. 0.9448
b. 1.0498
c. 1.1664
d. 1.2960
e. 1.4400

Chapter 17: Multinational Problems Page 179

 

Page 180 Problems Chapter 17: Multinational

 

(17-6) Interest rate parity C T Answer: d H

HA
ARD
49
. Suppo
Suppose
se i
in
n the
the sp
spot
ot mar
market
ket 1 U.
U.S.
S. dol
dollar
lar equal
equals
s 1.
1.60
60 C
Can
anadi
adian
an dol
dollar
lars.
s.
6-month Canadian securities have an annualized return of 6% (and thus a
6-month periodic return of 3%). 6-month U.S. securities have an
annualized return of 6.5% and a periodic return of 3.25%. If interest
rate parity holds, what is the U.S. dollar-Canadian dollar exchange
rate in the 180-day forward market? In other words, how many Canadian
dollars are required to purchase one U.S. dollar in the 180-day forward
market?

a. 1.2727
b. 1.4141
c. 1.5712
d. 1.7458
e. 1.9203

(17-10) EAR on foreign debt C T Answer: e H

HA
ARD
50
. Blenm
Blenman
an Corpo
Corpora
ratio
tion,
n, based
based in the
the U
Uni
nited
ted State
States,
s, arran
arrange
ged
d a 2-yea
2-year,
r,
$1,000,000 loan to fund a project in Mexico. The loan is denominated
in Mexican pesos, carries a 10.0% nominal rate, and requires equal
semiannual payments. The exchange rate at the time of the loan was
5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before
the first payment came due. The loan was not hedged in the foreign
exchange market. Thus, Blenman must convert U.S. funds to Mexican
pesos to make its payments. If the exchange rate remains at 5.10 pesos
per dollar through the end of the loan period, what effective annual
interest rate will Blenman end up paying on the loan?

a. 17.76%
b. 18.69%
c. 19.67%
d. 20.71%
e. 21.80%

Chapter 17: Multinational Problems Page 181

 

ANSWERS AND SOLUTIONS

CHAPTER 17

Page 182 Answers Chapter 17: Multinational

 

1. (17-2) Multinational fin. mgmt. F T Answer: a EASY

2. (17-2) Multinational fin. mgmt. F T Answer: b EASY

3. (17-3) Currency appreciation F T Answer: a E

EA
ASY

4. (17-3) Floating exchange rates F T Answer: a E

EAASY

5. (17-4) Exchange rates F T Answer: b EASY

6. (17-4) Cross rates F T Answer: a EASY

7. (17-9) Eurodollars F T Answer: a EASY

8. (17-9) LIBOR F T Answer: b EASY

9. (17-10) Exchange rate risk F T Answer: a E

EAASY

10. (17-11) Political risk F T Answer: b EASY

11. (17-5) Forward market hedging F T Answer: b MEDIUM  

12. (17-5) Discount on forward rate F T Answer: a MEDIUM  

13. (17-5) Premium on forward rate F T Answer: a MEDIUM  

14. (17-8) Currency value and inflation F T Answer: a MEDIUM  

15. (17-11) Relevant investment CFs F T Answer: b MEDIUM  

16. (17-11) For. proj. cost of capital F T Answer: a MEDIUM  

17. (17-11) Risk and int'l. investment F T Answer: a MEDIUM  

18. (17-1) Motive for going global C T Answer: e EASY

19. (17-2) Multinational fin. mgmt. C T Answer: a EASY

20. (17-8) Currency depreciation C T Answer: a MEDIUM  

21. (17-6) Interest rate parity C T Answer: a MEDIUM  

22. (17-9) Int'l. bond markets C T Answer: d M
MEEDIUM  

23. (17-6) Interest rate parity C T Answer: c MEDIUM/HARD

As the yen is selling at a premium, this means that the interest rates in Japan are lower than in the U.S.
Thus, when you invest
invest in yen, you g get
et part of you
yourr return from the interest rate and part when you convert
convert
 back to doll
d ollars.
ars. The opposi
oppositete is
i s true
t rue of th
thee r ates in Brit
Britain
ain .

24. (17-6) Interest rate parity C T Answer: b H

HAARD

The easiest way

way to do this is to make an example up. Assume the annual interest rate in the U.S. is 16%.
Suppose in the U.S. you start off with $1.00 , so after 90 days you will have $1.00 × (1 + 0.16/4) = $1.04 .
In Switzerland, you will start with 1.00 × 1.82 = SF 1.82 and end up with
with 1.04 × 1.84 = SF 1.9136. The
return in Switzerland is 1.9136/1.82 – 1 = 5.14%.
5.14%. (This is higher than the 4% U.S. rate.)
In Japan, you will start with 1.00 × 130 = 130 yen and end up with 1.04 × 127 = 132.08 yen. The
return is 132.08/130 – 1 = 1.6%. (This is lower than the 4% U.S. rate.)
 

25. (17-4) Exchange rates C T Answer: d EASY

1 Swiss franc = 0.76 U.S. dollar 

U.S. dollar = 1/0.76 Swiss francs
Swiss francs 1 U.S. $ can purchase = 1.3158

26. (17-4) Exchange rates C T Answer: b EASY

1 U.S. dollar = 1.64 Canadian dollars

Canadian dollar = 1/1.64 U.S. dollars
U.S. dollars 1 C$ can purchase = 0.6098

27. (17-4) Exchange rates C T Answer: a EASY

1 British pound = 1.98 U.S. dollar 

U.S. dollar = 1/1.98 British pounds
British pounds 1 U.S. $ can purchase = 0.5051

28. (17-4) Exchange rates C T Answer: e EASY

1 U.S. dollar = 0.63 euro

Euro = 1/0.630 U.S. dollar 
U.S. dollars 1 euro can purchase = 1.5873

29. (17-4) Exchange rates C T Answer: b EASY

1 U.S. dollar = 0.60 pound

Pound = 1/0.600 U.S. dollar 
U.S. dollars 1 euro can purchase = 1.6667

30. (17-4) Currency appreciation C T Answer: a E

EAASY

One dollar = 144.0000 Yen

Depreciation 8%
If yen depreciates against the dollar, the dollar will purchase more yen.
U.S. dollar now = 144.00 × (1 + 0.08)
U.S. dollar now = 155.5200

31. (17-9) Eurobonds vs. domestic bonds C T Answer: d EASY

r d AT 9.00% Tax rate 28.00%

r d BT = r d AT/(1 – T)

r d BT = 9.00%/72.00%
r d BT = 12.50%

32. (17-10) Exchange rate risk C T Answer: e E

EA
ASY

Spot rate at t = 0 140.0 yen per $ (Numbers in millions)

Exc
Exchang
hangee rat
ratee at
at t = 0.5
0.5 154.
154.4
4yyen
en per $

Years 0 0. 5
Payable 143.5 yen
 

Dollar value of payable = Payable in Yen/Yen exchange rate at t = 0.5

$ Value at t = 0.5 $929,404.15

33. (17-4) Cross rates C T Answer: b MEDIUM  

One U.S. dollar = 1.41 SF

One U.S. dollar = 0.64 €

SF/€ = SF/$ × $/€

SF/€ = 1.4100 × 1.5625
SF/€ = 2.2031
34. (17-4) Cross rates C T Answer: b MEDIUM  

£ = $1.98
$ = 1.02 SF

SF/£ = SF/$ × $/£

SF/£ = 1.0200 × 1.9800
SF/£ = 2.0196

35. (17-4) Cross rates C T Answer: c MEDIUM  

£ = 2.25 SF
£ = $1.65
$ = 1.22 ¥

¥/SF = ¥/$ × $/£ × £/SF

¥/SF = 1.2200 × 1.6500 × 0.4444
¥/SF = 0.8947

36. (17-4) Cross rates C T Answer: c MEDIUM  

£ = 6.205 DK 
£ = $1.65
$ = 10.875 MP

MP/DK = MP/$ × $/£ × £/DK 

MP/DK = 10.8750 × 1.6500 × 0.1612
MP/DK = 2.8918

37. (17-5) Forward rates* C T Answer: d MEDIUM  

Spot rate: $ = 5.51 shekels

180-day forward rate 5.97 shekels

Because one can obtain more Israeli shekels for a dollar in the forward market, the forward currency is
selling at a discount to the spot
spot rate. The amount of the d
discount
iscount is ca
calculated
lculated as: (Forward
(Forward rate − Spot
rate)/Spot rate.

% Discount = 8.35%

38. (17-5) Currency depreciation C T Answer: d MEDIUM  

British pound $1. 82

Dollar depreciation 12. 00%

The British pound will appreciate against the dollar by 12.00%

British pound = $/£ × (1 + % $ depreciation)
British pound = $2.0384
 

39. (17-5) Forward market hedge C T Answer: e MEDIUM  

Price of glassware in SF 39, 960 S F

Dollar price of glassware $24,000
Spot rate, SF/$ 1.6650 SF
90-day forward rate, SF/$ 1.6820 SF
Spot rate in 90 days, SF/$ 1.6400 SF

0 30
30 60 90
Price of glassware in SF 39, 96 0

$ Cost at spot in 90 days $24,366

Forward contract ($) $23,757
Savings from forward contract $ 608

40. (17-5) Forward market hedge C T Answer: d MEDIUM  

Television tubes 200,000

Dollar price of glassware $24,000
Spot rate, MP/$ 5.5000 MP
90-day forward rate, MP/$ 5. 4500 M P
Spot rate in 90 days, MP/$ 5.3000 SF

0 30
30 60 90
Trade obligation in MP (Tubes × Spot rate) $1,100,000.00

$ Cost at spot in 90 days $207,547.17

Forward contract ($) $201,834.86
Savings from forward contract $ 5,712.31

41. (17-6) Interest rate parity C T Answer: b MEDIUM  

90-day r ff   , (Annual/4) 1.50%

90-day r h , (Annual/4) 1.00%
90-day forward rate ($/£) $1. 65

Forward exchange rate = (1 + r h )

Spot exchange rate (1 + r f  )
$1.65 1.0100
=
Spot exchange rate 1.0150
$1.65
= 0.995074
Spot exchange rate
$1.65 = 0.995074 × Spot exchange rate
$1.6582 = Spot exchange rate

42. (17-7) Purchasing power parity C T Answer: c MEDIUM  

Price of skates, C$ 105.00 C$

Spot exchange rate, $/C$ $0. 71

Ph = Pf  × Spot rate

Ph = 105.00 × $0.71
 

Ph = $74.55

43. (17-9) Exchange fluctuations C T Answer: a MEDIUM  

6-mos. Treasury bill, V B $9,708.74

Maturity value $10,000.00
Spot rate, SF/$ 1.420 SF
6-mos Fwd rate, SF/$ 1.324 SF

Time 0 6 months
CF, in $ - $9, 708 . 74 $10,000 .00
CF, in SF - 13, 786 . 41 13, 240 . 00

 Now, calculate the 6-month return tto

o the Swiss investor after exchanging US $ for SF:
 N 1
PV - 13, 786. 41
PMT 0
FV 13,240.00
I/YR, 6-mos. - 3. 96%

Annual rate = 2 × 6 mos. return

Annual rate = -7.93%

44. (17-10) Exchg. rates & asset val. C T Answer: c MEDIUM  

1985 p
prric
icee in yen of autom
tomobile
ile 1,476,
476,00
000
0y yeen
1985 price in dollars of automobile $8, 200
Today's exchange rate: ¥/ ¥/$ 144 yen

Today's $ price = 1985 yen price/Today's exchange rate

Today's $ price = 1,476,000/144
Today's $ price = $10,250

45. (17-10) Inventory and exchg. rates C T Answer: b MEDIUM  

Inventory value 240, 000 £

Spot rate, $/£ 1 yr. ago $2. 00
Current spot rate $/£ $1. 82

Dollar value of inventory this year = Current spot rate $/£ ×  £ inv. value = $436,800.00
Dollar value of inventory last year = Last year’s spot rate $/£ ×  £ inv. value = $480,000.00
Change in inv value = -$43,200.00

46. (17-5) Exchg. rates & req. return C T Answer: e MEDIUM/HARD

Shares bought 100

Last year's stock price/share in yen 3,150 ¥
$/yen exchange rate at purchase $0. 00952
Current stock price/share in yen 3,465 ¥
Yen/$ spot exchange rate 130 ¥

$ investment in stock = No. of

of shares × Yen purchase price × $/y
$/yen
en rate at purchase
$ investment in stock = 100 × 3,150 × $0.00952
 

$ investment in stock = $2,998.80

$ proceeds of
of sale = (No. o
off shares × Current yen stock price)/(Yen/$ spot rate)
$ proceeds of sale = 100 × 3,465/130
$ proceeds of sale = $2,665.38

Return = ($ proceeds – $ investment)/$ investment

Return = ($2,665.38 – $2,998.80)/$2,998.80
Return = -11.12%

47. (17-7) Purchasing power parity C T Answer: d MEDIUM/HARD

Product price in U.S. $750. 00

Spot rate, SF/$ 1.65 SF

Formula below requires spot rate to be home currency/foreign currency, so need inverse of spot rate given.
Ph = Pf  × Spot rate, $/SF
$750 = Pf  × 0.6061
Pf  = 1,237.50

. (17-7) Purchasing power parity C T Answer: e MEDIUM/HARD

48
Price of candy in SF 28.80 SF
Price of candy in $ $20.00

Ph = Pf  × Spot rate

$20.00
$20 .00 = 28.80
28.80 × Sp
Spot
ot ra
rate
te
Spot rate,
Spot rate, $/S
$/SF
F =$$0.69
0.694444 p
per
er S
SF
F

 Note that the spot rat

ratee above
a bove gi
gives
ves tthe
he num
number
ber of dol
dollars
lars requi red to purch
p urchase
ase one SF. However, the
 probl em asks for t he numb er of SFs required
 problem requ ired to p
purch
urchase
ase one U.S. dollar.
doll ar. Therefore,
Ther efore, we need
ne ed to calcul
c alcul ate
the inverse of the spot rate above.

Spot rate, SF/$ = 1/Spot rate, $/SF

Spot rate, SF/$ = 1.4400

49. (17-6) Interest rate parity C T Answer: d H

HAARD
Spot rate: C$/$ 1.7500 C$
6-mos r ff ,  (Annual/2) 3.00%
6-mos r h, (Annual/2) 3.25%

 Note that the spot rat

ratee is
i s in
i n term
termss o
off C$/
C$/$.
$. However, the formula
formul a below needs
n eeds the spot rate
rat e iin
n terms
term s o
off $/C$,
$/C $,
so we need to use the inverse of this spot rate in the formula below.

Forward exchange rate (1 + r h )

=
Spot exchange rate, $/C$ (1 + r f  )
Forward exchange rate 1.0325
=
0.5714 1.0300
Forward exchange rate
= 1.0024
0.5714
Forward rate, $/C$ = $0.5728
 

 Note that the forward exchange

excha nge rat
ratee gives
g ives the number
numb er of U.S dollars
doll ars for 1 Canad
C anad ian dollar,
doll ar, but the problem
probl em
asks for the number of Canadian dollars per U.S. dollar. So, we need the inverse of the number above.

Forward exchange rate C$/$ = 1/Forward exchange rate, $/C$

Forward exchange rate C$/$ = 1.7458

50. (17-10) EAR on foreign debt C T Answer: e H

HAARD

Loan value ($) $1,000,000

Length of maturity (years) 2
 No. of payments/year 2
 Nominal rate 10.00%
Spot rate at loan date (MP/$) 5.75 MP
Spot rate before 1st payment (MP/$) 5.10 MP

Calculate MP loan payment:

 N 4
I/YR 5.000%
PV -$5,750,000 Calculated as loan value × spot rate at loan date
FV $0 Loan will be paid off at maturity, so FV = 0
PMT $1,621,568

Cash flows:
0 1 2 3 4 6 mos
os.. peri
rioods
MP - 5, 750, 000 1, 621, 568 1,621,568 1,621,568 1,621,568 (Spot at loan date)
$ 1, 000, 000 317, 955 317, 955 317, 955 317, 955 Changed spot rate

$ payments are determined by dividing peso payments by the changed spot rate.

Calculate I/YR for $ CFs:

 N 4
PV -$1,000,000 Use original loan value here
FV $0
PMT $317,955
I/YR 10.36% This is the nominal semiannual rate, r NOM
  /N

Calculate EAR of loan from periodic rate calculated above:

EFF% = (1 + (r  NOM/N)) N – 1 = 21.80%