Solution_国际财务管理_切奥尔尤恩_课后习题答案_第十四章

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国际财务管理课后作业答案

《国际财务管理》章后练习题第一章【题1—1】某跨国公司A，2006年11月兼并某亏损国有企业B。

B企业兼并时账面净资产为500万元，2005年亏损100万元（以前年度无亏损），评估确认的价值为550万元。

经双方协商，A 跨国公司可以用以下两种方式兼并B企业。

甲方式：A公司以180万股和10万元人民币购买B企业（A公司股票市价为3元/股）；乙方式：A公司以150万股和100万元人民币购买B企业。

兼并后A公司股票市价3.1元/股。

A公司共有已发行的股票2000万股（面值为1元/股）。

假设兼并后B企业的股东在A公司中所占的股份以后年度不发生变化，兼并后A公司企业每年未弥补亏损前应纳税所得额为900万元，增值后的资产的平均折旧年限为5年，行业平均利润率为10%。

所得税税率为33%。

请计算方式两种发方式的差异。

【题1—1】答案（1）甲方式：B企业不需将转让所得缴纳所得税；B 企业2005年的亏损可以由A公司弥补。

A公司当年应缴所得税=（900-100）×33%=264万元，与合并前相比少缴33万元所得税，但每年必须为增加的股权支付股利。

（2）乙方式：由于支付的非股权额（100万元）大于股权面值的20%（30万元）。

所以，被兼并企业B应就转让所得缴纳所得税。

B企业应缴纳的所得税=（150 ×3 + 100- 500）×33% = 16.5（万元）B企业去年的亏损不能由A公司再弥补。

（3）A公司可按评估后的资产价值入帐,计提折旧,每年可减少所得税(550-500)/5×33%=3.3万元。

【题1—2】东方跨国公司有A、B、C、D四个下属公司，2006年四个公司计税所得额和所在国的所得税税率为：A公司：500万美元 33%B公司：400万美元 33%C公司：300万美元 24%D公司：-300万美元 15%东方公司的计税所得额为-100万美元，其所在地区的所得税税率为15%。

国际财务管理课后习题答案chapter

CHAPTER 10 MANAGEMENT OF TRANSLATION EXPOSURESUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method.Answer: Under the monetary/nonmonetary method, all monetary balance sheet accounts of a foreign subsidiary are translated at the current exchange rate. Other balance sheet accounts are translated at the historical rate exchange rate in effect when the account was first recorded. Under the temporal method, monetary accounts are translated at the current exchange rate. Other balance sheet accounts are also translated at the current rate, if they are carried on the books at current value. If they are carried at historical value, they are translated at the rate in effect on the date the item was put on the books. Since fixed assets and inventory are usually carried at historical costs, the temporal method and the monetary/nonmonetary method will typically provide the same translation.2. How are translation gains and losses handled differently according to the current rate method in comparison to the other three methods, that is, the current/noncurrent method, the monetary/nonmonetary method, and the temporal method?Answer: Under the current rate method, translation gains and losses are handled only as an adjustment to net worth through an equity account named the “cumulative translation adjustment” account. Nothing passes through the income statement. The other three translation methods pass foreign exchange gains or losses through the income statement before they enter on to the balance sheet through the accumulated retained earnings account.3. Identify some instances under FASB 52 when a foreign enti ty’s functional currency would be the same as the parent firm’s currency.Answer: Three examples under FASB 52, where the foreign entity’s functional currency will be the same as the parent firm’s currency, are: i) the foreign entity’s cash flows directly affect the parent’s cash flows and are readily available for remittance to the parent firm; ii) the sales prices for the foreign entity’s products are responsive on a short-term basis to exchange rate changes, where sales prices are determined through wo rldwide competition; and, iii) the sales market is primarily located in the parent’s country or sales contracts are denominated in the parent’s currency.4. Describe the remeasurement and translation process under FASB 52 of a wholly owned affiliate that keeps its books in the local currency of the country in which it operates, which is different than its functional currency.Answer: For a foreign entity that keeps its books in its local currency, which is different from its functional currency, the translation process according to FASB 52 is to: first, remeasure the financial reports from the local currency into the functional currency using the temporal method of translation, and second, translate from the functional currency into the reporting currency using the current rate method of translation.5. It is, generally, not possible to completely eliminate both translation exposure and transaction exposure. In some cases, the elimination of one exposure will also eliminate the other. But in other cases, the elimination of one exposure actually creates the other. Discuss which exposure might be viewed as the most important to effectively manage, if a conflict between controlling both arises. Also, discuss and critique the common methods for controlling translation exposure.Answer: Since it is, generally, not possible to completely eliminate both transaction and translation exposure, we recommend that transaction exposure be given first priority since it involves real cash flows. The translation process, on-the-other hand, has no direct effect on reporting currency cash flows, and will only have a realizable effect on net investment upon the sale or liquidation of the assets.There are two common methods for controlling translation exposure: a balance sheet hedge and a derivatives hedge. The balance sheet hedge involves equating the amount of exposed assets in an exposure currency with the exposed liabilities in that currency, so the net exposure is zero. Thus when an exposure currency exchange rate changes versus the reporting currency, the change in assets will offset the change in liabilities. To create a balance sheet hedge, once transaction exposure has been controlled, often means creating new transaction exposure. This is not wise since real cash flow losses can result. A derivatives hedge is not really a hedge, but rather a speculative position, since the size of the “hedge” is based on the future expected spot rate of exchange for the exposure currency with the reporting currency. If the actual spot rate differs from the expected rate, the “hedge” may result in the loss of real cash flows.PROBLEMS1. Assume that FASB 8 is still in effect instead of FASB 52. Construct a translation exposure report for Centralia Corporation and its affiliates that is the counterpart to Exhibit 10.7 in the text. Centralia and its affiliates carry inventory and fixed assets on the books at historical values.Solution: The following table provides a translation exposure report for Centralia Corporation and its affiliates under FASB 8, which is essentially the temporal method of translation. The difference between the new report and Exhibit 10.7 is that nonmonetary accounts such as inventory and fixed assets are translated at the historical exchange rate if they are carried at historical costs. Thus, these accounts will not change values when exchange rates change and they do not create translation exposure.Examination of the table indicates that under FASB 8 there is negative net exposure for the Mexican peso and the euro, whereas under FASB 52 the net exposure for these currencies is positive. There is no change in net exposure for the Canadian dollar and the Swiss franc. Consequently, if the euro depreciates against the dollar from €1.1000/$1.00 to €1.1786/$1.00, as the text example assumed, exposed assets will now fall in value by a smaller amount than exposed liabilities, instead of vice versa. The associated reporting currency imbalance will be $239,415, calculated as follows:Reporting Currency Imbalance=-€3,949,0000€1.1786/$1.00--€3,949,0000€1.1000/$1.00=$239,415.Translation Exposure Report under FASB 8 for Centralia Corporation and its Mexican and Spanish Affiliates, December 31, 2005 (in 000 Currency Units)Canadian Dollar MexicanPeso EuroSwissFrancAssetsCash CD200 Ps 6,000 € 825SF 0 Accounts receivable 0 9,000 1,045 0Inventory 0 0 0 0Net fixed assets 0 0 0 0Exposed assets CD200 Ps15,000 € 1,870SF 0LiabilitiesAccounts payable CD 0 Ps 7,000 € 1,364SF 0Notes payable 0 17,000 935 1,400Long-term debt 0 27,000 3,520 0Exposed liabilities CD 0 Ps51,000 € 5,819SF1,400Net exposure CD200 (Ps36,000) (€3,949)(SF1,400)2. Assume that FASB 8 is still in effect instead of FASB 52. Construct a consolidated balance sheet for Centralia Corporation and its affiliates after a depreciation of the euro from €1.1000/$1.00 to €1.1786/$1.00 that is the counterpart to Exhibit 10.8 in the text. Centralia and its affiliates c arry inventory and fixed assets on the books at historical values.Solution: This problem is the sequel to Problem 1. The solution to Problem 1 showed that if the euro depreciated there would be a reporting currency imbalance of $239,415. Under FASB 8 this is carried through the income statement as a foreign exchange gain to the retained earnings on the balance sheet. The following table shows that consolidated retained earnings increased to $4,190,000 from $3,950,000 in Exhibit 10.8. This is an increase of $240,000, which is the same as the reporting currency imbalance after accounting for rounding error.Consolidated Balance Sheet under FASB 8 for Centralia Corporation and its Mexican and Spanisha This includes CD200,000 the parent firm has in a Canadian bank, carried as $150,000. CD200,000/(CD1.3333/$1.00) = $150,000.b$1,750,000 - $300,000 (= Ps3,000,000/(Ps10.00/$1.00)) intracompany loan = $1,450,000.c,d Investment in affiliates cancels with the net worth of the affiliates in the consolidation.e The Spanish affiliate owes a Swiss bank SF375,000 (÷ SF1.2727/€1.00 = €294,649). This is carried on the books,after the exchange rate change, as part of €1,229,649 = €294,649 + €935,000. €1,229,649/(€1.1786/$1.00) = $1,043,313.3. In Example 10.2, a f orward contract was used to establish a derivatives “hedge” to protect Centralia from a translation loss if the euro depreciated from €1.1000/$1.00 to €1.1786/$1.00. Assume that an over-the-counter put option on the euro with a strike price of €1.1393/$1.00 (or $0.8777/€1.00) can be purchased for $0.0088 per euro. Show how the potential translation loss can be “hedged” with an option contract.Solution: As in example 10.2, if the potential translation loss is $110,704, the equivalent amount in functiona l currency that needs to be hedged is €3,782,468. If in fact the euro does depreciate to €1.1786/$1.00 ($0.8485/€1.00), €3,782,468 can be purchased in the spot market for $3,209,289. At a striking price of €1.1393/$1.00, the €3,782,468 can be sold throu gh the put for $3,319,993, yielding a gross profit of $110,704. The put option cost $33,286 (= €3,782,468 x $0.0088). Thus, at an exchange rate of €1.1786/$1.00, the put option will effectively hedge $110,704 - $33,286 = $77,418 of the potential translat ion loss. At terminal exchange rates of €1.1393/$1.00 to €1.1786/$1.00, the put option hedge will be less effective. An option contract does not have to be exercised if doing so is disadvantageous to the option owner. Therefore, the put will not be exer cised at exchange rates of less than €1.1393/$1.00 (more than $0.8777/€1.00), in which case the “hedge” will lose the $33,286 cost of the option.MINI CASE: SUNDANCE SPORTING GOODS, INC.Sundance Sporting Goods, Inc., is a U.S. manufacturer of high-quality sporting goods--principally golf, tennis and other racquet equipment, and also lawn sports, such as croquet and badminton-- with administrative offices and manufacturing facilities in Chicago, Illinois. Sundance has two wholly owned manufacturing affiliates, one in Mexico and the other in Canada. The Mexican affiliate is located in Mexico City and services all of Latin America. The Canadian affiliate is in Toronto and serves only Canada. Each affiliate keeps its books in its local currency, which is also the functional currency for the affiliate. The current exchange rates are: $1.00 = CD1.25 = Ps3.30 = A1.00 = ¥105 = W800. The nonconsolidated balance sheets for Sundance and its two affiliates appear in the accompanying table.Nonconsolidated Balance Sheet for Sundance Sporting Goods, Inc. and Its Mexican and Canadiana The parent firm is owed Ps1,320,000 by the Mexican affiliate. This sum is included in the parent’s accounts receivable as $400,000, translated at Ps3.30/$1.00. The remainder of the parent’s (Mexican affiliate’s) a ccounts receivable (payable) is denominated in dollars (pesos).b The Mexican affiliate is wholly owned by the parent firm. It is carried on the parent firm’s books at $2,400,000. This represents the sum of the common stock (Ps4,500,000) and retained earnings (Ps3,420,000) on the Mexican affiliate’s books, translated at Ps3.30/$1.00.c The Canadian affiliate is wholly owned by the parent firm. It is carried on the parent firm’s books at $3,600,000. This represents the sum of the common stock (CD2,900,000) and the retained earnings (CD1,600,000) on the Canadian affiliate’s books, translated at CD1.25/$1.00.d The parent firm has outstanding notes payable of ¥126,000,000 due a Japanese bank. This sum is carried on th e parent firm’s books as $1,200,000, translated at ¥105/$1.00. Other notes payable are denominated in U.S. dollars.e The Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import house. This sum is carried on the Mexican affi liate’s books as Ps396,000, translated at A1.00/Ps3.30. Other accounts receivable are denominated in Mexican pesos.f The Canadian affiliate has sold on account W192,000,000 of merchandise to a Korean importer. This sum is carried on the Canadian affilia te’s books as CD300,000, translated at W800/CD1.25. Other accounts receivable are denominated in Canadian dollars.You joined the International Treasury division of Sundance six months ago after spending the last two years receiving your MBA degree. The corporate treasurer has asked you to prepare a report analyzing all aspects of the translation exposure faced by Sundance as a MNC. She has also asked you to address in your analysis the relationship between the firm’s translation exposure and its transa ction exposure. After performing a forecast of future spot rates of exchange, you decide that you must do the following before any sensible report can be written.a. Using the current exchange rates and the nonconsolidated balance sheets for Sundance and its affiliates, prepare a consolidated balance sheet for the MNC according to FASB 52.b. i. Prepare a translation exposure report for Sundance Sporting Goods, Inc., and its two affiliates.ii. Using the translation exposure report you have prepared, determine if any reporting currency imbalance will result from a change in exchange rates to which the firm has currency exposure. Your forecast is that exchange rates will change from $1.00 = CD1.25 = Ps3.30 = A1.00 = ¥105 = W800 to $1.00 = CD1.30 = Ps3.30 = A1.03 = ¥105 = W800.c. Prepare a second consolidated balance sheet for the MNC using the exchange rates you expect in the future. Determine how any reporting currency imbalance will affect the new consolidated balance sheet for the MNC.d. i. Prepare a transaction exposure report for Sundance and its affiliates. Determine if any transaction exposures are also translation exposures.ii. Investigate what Sundance and its affiliates can do to control its transaction and translation exposures. Determine if any of the translation exposure should be hedged.Suggested Solution to Sundance Sporting Goods, Inc.Note to Instructor: It is not necessary to assign the entire case problem. Parts a. and b.i. can be used as self-contained problems, respectively, on basic balance sheet consolidation and the preparation of a translation exposure report.a. Below is the consolidated balance sheet for the MNC prepared according to the current rate method prescribed by FASB 52. Note that the balance sheet balances. That is, Total Assets and Total Liabilities and Net Worth equal one another. Thus, the assumption is that the current exchange rates are the same as when the affiliates were established. This assumption is relaxed in part c.Consolidated Balance Sheet for Sundance Sporting Goods, Inc. its Mexican and Canadian Affiliates, December 31, 2005: Pre-Exchange Rate Change (in 000 Dollars)Sundance, Inc. Mexican Canadian Consolidateda$2,500,000 - $400,000 (= Ps1,320,000/(Ps3.30/$1.00)) intracompany loan = $2,100,000.b,c The investment in the affiliates cancels with the net worth of the affiliates in the consolidation.d The parent owes a Japanese bank ¥126,000,000. This is carried on the books as $1,200,000 (=¥126,000,000/(¥105/$1.00)).e The Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import house. This is carried on the Mexican affiliate’s books as Ps396,000 (= A120,000 x Ps3.30/A1.00).f The Canadian affiliate has sold on account W192,000,000 of merchandise to a Korean importer. This is carried on the Canadian affiliate’s books as CD300,000 (= W192,000,000/(W800/CD1.25)).b. i. Below is presented the translation exposure report for the Sundance MNC. Note, from the report that there is net positive exposure in the Mexican peso, Canadian dollar, Argentine austral and Korean won. If any of these exposure currencies appreciates (depreciates) against the U.S. dollar, exposed assets denominated in these currencies will increase (fall) in translated value by a greater amount than the exposed liabilities denominated in these currencies. There is negative net exposure in the Japanese yen. If the yen appreciates (depreciates) against the U.S. dollar, exposed assets denominated in the yen will increase (fall) in translated value by smaller amount than the exposed liabilities denominated in the yen.Translation Exposure Report for Sundance Sporting Goods, Inc. and its Mexican and Canadian Affiliates, December 31, 2005 (in 000 Currency Units)b. ii. The problem assumes that Canadian dollar depreciates from CD1.25/$1.00 to CD1.30/$1.00 and that the Argentine austral depreciates from A1.00/$1.00 to A1.03/$1.00. To determine the reporting currency imbalance in translated value caused by these exchange rate changes, we can use the following formula:Net Exposure Currency i S(i/reporting)-Net Exposure Currency i S(i/reporting)new old = Reporting Currency Imbalance.From the translation exposure report we can determine that the depreciation in the Canadian dollar will cause aCD4,200,000 CD1.30/$1.00-CD4,200,000CD1.25/$1.00= -$129,231reporting currency imbalance.Similarly, the depreciation in the Argentine austral will cause aA120,000 A1.03/$1.00-A120,000A1.00/$1.00= -$3,495reporting currency imbalance.In total, the depreciation of the Canadian dollar and the Argentine austral will cause a reporting currency imbalance in translated value equal to -$129,231 -$3,495= -$132,726.c. The new consolidated balance sheet for Sundance MNC after the depreciation of the Canadian dollar and the Argentine austral is presented below. Note that in order for the new consolidated balance sheet to balance after the exchange rate change, it is necessary to have a cumulative translation adjustment account balance of -$133 thousand, which is the amount of the reporting currency imbalance determined in part b. ii (rounded to the nearest thousand).Consolidated Balance Sheet for Sundance Sporting Goods, Inc. its Mexican and Canadian Affiliates, December 31, 2005: Post-Exchange Rate Change (in 000 Dollars)a$2,500,000 - $400,000 (= Ps1,320,000/(Ps3.30/$1.00)) intracompany loan = $2,100,000.b,c The investment in the affiliates cancels with the net worth of the affiliates in the consolidation.d The parent owes a Japanese bank ¥126,000,000. This is carried on the books as $1,200,000 (=¥126,000,000/(¥105/$1.00)).e The Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import house. This is carried on the Mexican affiliate’s books as Ps384,466 (= A120,000 x Ps3.30/A1.03).f The Canadian affiliate has sold on account W192,000,000 of merchandise to a Korean importer. This is carried on the Canadian affiliate’s books as CD312,000 (=W192,000,000/(W800/CD1.30)).d. i. The transaction exposure report for Sundance, Inc. and its two affiliates is presented below. The report indicates that the Ps1,320,000 accounts receivable due from the Mexican affiliate is not also a translation exposure because this is netted out in the consolidation. However, the ¥126,000,000 notes payable of the parent is also a translation exposure. Additionally, the A120,000 accounts receivable of the Mexican affiliate and the W192,000,000 accounts receivable of the Canadian affiliate are both translation exposures.Transaction Exposure Report for Sundance Sporting Goods, Inc. andits Mexican and Canadian Affiliates, December 31, 2005d. ii. Since transaction exposure may potentially result in real cash flow losses while translation exposure does not have an immediate direct effect on operating cash flows, we will first address the transaction exposure that confronts Sundance and its affiliates. The analysis assumes the depreciation in the Canadian dollar and the Argentine austral have already taken place.The parent firm can pay off the ¥126,000,000 loan from the Japanese bank using funds from the cash account and money from accounts receivable that it will collect. Additionally, the parent firm can collect the accounts receivable of Ps1,320,000 from its Mexican affiliate that is carried on the books as $400,000. In turn, the Mexican affiliate can collect the A120,000 accounts receivable from the Argentine importer, valued at Ps384,466 after the depreciation in the austral, to guard against further depreciation and to use to partially pay off the peso liability to the parent. The Canadian affiliate can eliminate its transaction exposure by collecting the W192,000,000 accounts receivable as soon as possible, which is currently valued at CD312,000.The elimination of these transaction exposures will affect the translation exposure of Sundance MNC. A revised translation exposure report follows.Revised Translation Exposure Report for Sundance Sporting Goods, Inc. and its Mexican and Canadian Affiliates, December 31, 2005 (in 000 Currency Units)Note from the revised translation exposure report that the elimination of the transaction exposure will also eliminate the translation exposure in the Japanese yen, Argentine austral and the Korean won. Moreover, the net translation exposure in the Mexican peso has been reduced. But the net translation exposure in the Canadian dollar has increased as a result of the Canadian affiliate’s collection of the won receivable.The remaining translation exposure can be hedged using a balance sheet hedge or a derivatives hedge. Use of a balance sheet hedge is likely to create new transaction exposure, however. Use of a derivatives hedge is actually speculative, and not a real hedge, since the size of the “hedge” is based on one’s expectation as to the future spot exchange rate. An incorrect estimate will result in the “hedge” losing money for the MNC.。

国际财务管理课后习题答案解析chapter

CHAPTER 5 THE MARKET FOR FOREIGN EXCHANGESUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Give a full definition of the market for foreign exchange.Answer: Broadly defined, the foreign exchange (FX) market encompasses the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, and trading in foreign currency options and futures contracts.2. What is the difference between the retail or client market and the wholesale or interbank market for foreign exchange?Answer: The market for foreign exchange can be viewed as a two-tier market. One tier is the wholesale or interbank market and the other tier is the retail or client market. International banks provide the core of the FX market. They stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, corporations or individuals, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange. Retail transactions account for only about 14 percent of FX trades. The other 86 percent is interbank trades between international banks, or non-bank dealers large enough to transact in the interbank market.3. Who are the market participants in the foreign exchange market?Answer: The market participants that comprise the FX market can be categorized into five groups: international banks, bank customers, non-bank dealers, FX brokers, and central banks. International banks provide the core of the FX market. Approximately 100 to 200 banks worldwide make a market in foreign exchange, i.e., they stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, the bank customers, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange. Non-bank dealers are large non-bank financial institutions, such as investment banks, mutual funds, pension funds, and hedge funds, whose size and frequency of trades make it cost- effective to establish their own dealing rooms to trade directly in the interbank market for their foreign exchange needs.Most interbank trades are speculative or arbitrage transactions where market participants attempt to correctly judge the future direction of price movements in one currency versus another or attempt to profit from temporary price discrepancies in currencies between competing dealers.FX brokers match dealer orders to buy and sell currencies for a fee, but do not take a position themselves. Interbank traders use a broker primarily to disseminate as quickly as possible a currency quote to many other dealers.Central banks sometimes intervene in the foreign exchange market in an attempt to influence the price of its currency against that of a major trading partner, or a country that it “fixes” or “pegs” its currency against. Intervention is the process of using foreign currency reserves to buy one’s own currency in order to decrease its supply and thus increase its value in the foreign exchange market, or alternatively, selling one’s own currency for foreign currency in order to increase its supply and lower its price.4. How are foreign exchange transactions between international banks settled?Answer: The interbank market is a network of correspondent banking relationships, with large commercial banks maintaining demand deposit accounts with one another, called correspondent bank accounts. The correspondent bank account network allows for the efficient functioning of the foreign exchange market. As an example of how the network of correspondent bank accounts facilities international foreign exchange transactions, consider a U.S. importer desiring to purchase merchandise invoiced in guilders from a Dutch exporter. The U.S. importer will contact his bank and inquire about the exchange rate. If the U.S. importer accepts the offered exchange rate, the bank will debit the U.S. importer’s account for the purchase of the Dutch guilders. The bank will instruct its correspondent bank in the Netherlands to debit its correspondent bank account the appropriate amount of guilders and to credit th e Dutch exporter’s bank account. The importer’s bank will then debit its books to offset the debit of U.S. importer’s account, reflecting the decrease in its correspondent bank account balance.5. What is meant by a currency trading at a discount or at a premium in the forward market?Answer: The forward market involves contracting today for the future purchase or sale of foreign exchange. The forward price may be the same as the spot price, but usually it is higher (at a premium) or lower (at a discount) than the spot price.6. Why does most interbank currency trading worldwide involve the U.S. dollar?Answer: Trading in currencies worldwide is against a common currency that has international appeal. That currency has been the U.S. dollar since the end of World War II. However, the euro and Japanese yen have started to be used much more as international currencies in recent years. More importantly, trading would be exceedingly cumbersome and difficult to manage if each trader made a market against all other currencies.7. Banks find it necessary to accommodate their clients’ needs to buy or sell FX forward, in many instances for hedging purposes. How can the bank eliminate the currency exposure it has created for itself by accommodating a cl ient’s forward transaction?Answer: Swap transactions provide a means for the bank to mitigate the currency exposure in a forward trade. A swap transaction is the simultaneous sale (or purchase) of spot foreign exchange against a forward purchase (or sale) of an approximately equal amount of the foreign currency. To illustrate, suppose a bank customer wants to buy dollars three months forward against British pound sterling. The bank can handle this trade for its customer and simultaneously neutralize the exchange rate risk in the trade by selling (borrowed) British pound sterling spot against dollars. The bank will lend the dollars for three months until they are needed to deliver against the dollars it has sold forward. The British pounds received will be used to liquidate the sterling loan.8. A CD/$ bank trader is currently quoting a small figure bid-ask of 35-40, when the rest of the market is trading at CD1.3436-CD1.3441. What is implied about the trader’s beliefs by his prices?Answer: The trader must think the Canadian dollar is going to appreciate against the U.S. dollar and therefore he is trying to increase his inventory of Canadian dollars by discouraging purchases of U.S. dollars by standing willing to buy $ at only CD1.3435/$1.00 and offering to sell from inventory at the slightly lower than market price of CD1.3440/$1.00.9. What is triangular arbitrage? What is a condition that will give rise to a triangular arbitrage opportunity?Answer: Triangular arbitrage is the process of trading out of the U.S. dollar into a second currency, then trading it for a third currency, which is in turn traded for U.S. dollars. The purpose is to earn an arbitrageprofit via trading from the second to the third currency when the direct exchange between the two is not in alignment with the cross exchange rate.Most, but not all, currency transactions go through the dollar. Certain banks specialize in making a direct market between non-dollar currencies, pricing at a narrower bid-ask spread than the cross-rate spread. Nevertheless, the implied cross-rate bid-ask quotations impose a discipline on the non-dollar market makers. If their direct quotes are not consistent with the cross exchange rates, a triangular arbitrage profit is possible.PROBLEMS1. Using Exhibit 5.4, calculate a cross-rate matrix for the euro, Swiss franc, Japanese yen, and the British pound. Use the most current American term quotes to calculate the cross-rates so that the triangular matrix resulting is similar to the portion above the diagonal in Exhibit 5.6.Solution: The cross-rate formula we want to use is:S(j/k) = S($/k)/S($/j).The triangular matrix will contain 4 x (4 + 1)/2 = 10 elements.¥SF £$Euro 138.05 1.5481 .6873 1.3112 Japan (100) 1.1214 .4979 .9498 Switzerland .4440 .8470U.K 1.90772. Using Exhibit 5.4, calculate the one-, three-, and six-month forward cross-exchange rates between the Canadian dollar and the Swiss franc using the most current quotations. State the forward cross-rates in “Canadian” terms.Solution: The formulas we want to use are:F N(CD/SF) = F N($/SF)/F N($/CD)orF N(CD/SF) = F N(CD/$)/F N(SF/$).We will use the top formula that uses American term forward exchange rates.F1(CD/SF) = .8485/.8037 = 1.0557F3(CD/SF) = .8517/.8043 = 1.0589F6(CD/SF) = .8573/.8057 = 1.06403. Restate the following one-, three-, and six-month outright forward European term bid-ask quotes in forward points.Spot 1.3431-1.3436One-Month 1.3432-1.3442Three-Month 1.3448-1.3463Six-Month 1.3488-1.3508Solution:One-Month 01-06Three-Month 17-27Six-Month 57-724. Using the spot and outright forward quotes in problem 3, determine the corresponding bid-ask spreads in points.Solution:Spot 5One-Month 10Three-Month 15Six-Month 205. Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium or discount for the Canadian dollar versus the U.S. dollar using American term quotations. For simplicity, assume each month has 30 days. What is the interpretation of your results?Solution: The formula we want to use is:f N,CD = [(F N($/CD) - S($/CD/$)/S($/CD)] x 360/Nf1,CD = [(.8037 - .8037)/.8037] x 360/30 = .0000f3,CD = [(.8043 - .8037)/.8037] x 360/90 = .0030f6,CD = [(.8057 - .8037)/.8037] x 360/180 = .0050The pattern of forward premiums indicates that the Canadian dollar is trading at an increasing premium versus the U.S. dollar. That is, it becomes more expensive (in both absolute and percentage terms) to buy a Canadian dollar forward for U.S. dollars the further into the future one contracts.6. Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium or discount for the U.S. dollar versus the British pound using European term quotations. For simplicity, assume each month has 30 days. What is the interpretation of your results?Solution: The formula we want to use is:f N,$ = [(F N (£/$) - S(£/$))/S(£/$)] x 360/Nf1,$ = [(.5251 - .5242)/.5242] x 360/30 = -.0023f3,$ = [(.5268 - .5242)/.5242] x 360/90 = -.0198f6,$ = [(.5290 - .5242)/.5242] x 360/180 = -.0183The pattern of forward premiums indicates that the British pound is trading at a discount versus the U.S. dollar. That is, it becomes more expensive to buy a U.S. dollar forward for British pounds (in absolute but not percentage terms) the further into the future one contracts.7. Given the following information, what are the NZD/SGD currency against currency bid-ask quotations?American Terms European TermsBank Quotations Bid Ask Bid AskNew Zealand dollar .7265 .7272 1.3751 1.3765Singapore dollar .6135 .6140 1.6287 1.6300Solution: Equation 5.12 from the text implies S b(NZD/SGD) = S b($/SGD) x S b(NZD/$) = .6135 x 1.3765 = .8445. The reciprocal, 1/S b(NZD/SGD)= S a(SGD/NZD)= 1.1841. Analogously, it is implied that S a(NZD/SGD) = S a($/SGD) x S a(NZD/$) = .6140 x 1.3765 = .8452. The reciprocal, 1/S a(NZD/SGD) = S b(SGD/NZD)= 1.1832. Thus, the NZD/SGD bid-ask spread is NZD0.8445-NZD0.8452 and the SGD/NZD spread is SGD1.1832-SGD1.1841.8. Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting €0.7627/$1.00 and Credit Suisse is offering SF1.1806/$1.00. You learn that UBS is making a direct market between the Swiss franc and the euro, w ith a current €/SF quote of .6395. Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage. What h appens if you initially sell dollars for Swiss francs? What €/SF price will eliminate triangular arbitrage?Solution: To make a triangular arbitrage profit the Deutsche Bank trader would sell $5,000,000 to Dresdner Bank at €0.7627/$1.00. This trade wou ld yield €3,813,500= $5,000,000 x .7627. The Deutsche Bank trader would then sell the euros for Swiss francs to Union Bank of Switzerland at a price of €0.6395/SF1.00, yieldin g SF5,963,253 = €3,813,500/.6395. The Deutsche Bank trader will resell the Swiss francs to Credit Suisse for $5,051,036 = SF5,963,253/1.1806, yielding a triangular arbitrage profit of $51,036.If the Deutsche Bank trader initially sold $5,000,000 for Swiss francs, instead of euros, the trade would yield SF5,903,000 = $5,000,000 x 1.1806. The Swiss francs would in turn be traded for euros to UBS for €3,774,969= SF5,903,000 x .6395. The euros would be resold to Dresdner Bank for $4,949,481 = €3,774,969/.7627, or a loss of $50,519. Thus, it is necessary to conduct the triangular arbitrage in the correct order.The S(€/SF)cross exchange rate should be .7627/1.1806 = .6460. This is an equilibrium rate at which a triangular arbitrage profit will not exist. (The student can determine this for himself.) A profit results from the triangular arbitrage when dollars are first sold for euros because Swiss francs are purchased for euros at too low a rate in comparison to the equilibrium cross-rate, i.e., Swiss francs are purchased for only €0.6395/SF1.00 instead of the no-arbitrage rate of €0.6460/SF1.00. Similarly, when dollars are first sold for Swiss francs, an arbitrage loss results because Swiss francs are sold for euros at too low a rate, resulting in too few euros. That is, each Swiss franc is sold for €0.6395/SF1.00 instead of the higher no-arbitrage rate of €0.6460/SF1.00.9. The current spot exchange rate is $1.95/£ and the three-month forward rate is $1.90/£. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.92/£ in three months. Assume that you would like to buy or sell £1,000,000.a. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?b. What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.86/£.Solution:a. If you believe the spot exchange rate will be $1.92/£ in three months, you should buy £1,000,000 forward for $1.90/£. Your expected profit will be:$20,000 = £1,000,000 x ($1.92 -$1.90).b. If the spot exchange rate actually turns out to be $1.86/£ in three months, your loss from the long position will be:-$40,000 = £1,000,000 x ($1.86 -$1.90).10. Omni Advisors, an international pension fund manager, plans to sell equities denominated in Swiss Francs (CHF) and purchase an equivalent amount of equities denominated in South African Rands (ZAR).Omni will realize net proceeds of 3 million CHF at the end of 30 days and wants to eliminate the risk that the ZAR will appreciate relative to the CHF during this 30-day period. The following exhibit shows current exchange rates between the ZAR, CHF, and the U.S. dollar (USD).Currency Exchange Ratesa.Describe the currency transaction that Omni should undertake to eliminate currency riskover the 30-day period.b.Calculate the following:• The CHF/ZAR cross-currency rate Omni would use in valuing the Swiss equityportfolio.• The current value of Omni’s Swiss equity portfolio in ZAR.• The annualized forward premium or discount at which the ZA R is trading versus theCHF.CFA Guideline Answer:a.To eliminate the currency risk arising from the possibility that ZAR will appreciateagainst the CHF over the next 30-day period, Omni should sell 30-day forward CHF against 30-day forward ZAR delivery (sell 30-day forward CHF against USD and buy 30-day forward ZAR against USD).b.The calculations are as follows:• Using the currency cross rates of two forward foreign currencies and three currencies(CHF, ZAR, USD), the exchange would be as follows:--30 day forward CHF are sold for USD. Dollars are bought at the forward sellingprice of CHF1.5285 = $1 (done at ask side because going from currency intodollars)--30 day forward ZAR are purchased for USD. Dollars are simultaneously sold topurchase ZAR at the rate of 6.2538 = $1 (done at the bid side because going fromdollars into currency)--For every 1.5285 CHF held, 6.2538 ZAR are received; thus the cross currency rate is1.5285 CHF/6.2538 ZAR = 0.244411398.• At the time of execution of the forward contracts, the value of the 3 million CHFequity portfolio would be 3,000,000 CHF/0.244411398 = 12,274,386.65 ZAR.• To calculate the annuali zed premium or discount of the ZAR against the CHF requires comparison of the spot selling exchange rate to the forward selling price of CHF for ZAR.Spot rate = 1.5343 CHF/6.2681 ZAR = 0.24477912030 day forward ask rate 1.5285 CHF/6.2538 ZAR = 0.244411398The premium/discount formula is:[(forward rate – spot rate) / spot rate] x (360 / # day contract) =[(0.244411398 – 0.24477912) / 0.24477912] x (360 / 30) =-1.8027126 % = -1.80% discount ZAR to CHFMINI CASE: SHREWSBURY HERBAL PRODUCTS, LTD.Shrewsbury Herbal Products, located in central England close to the Welsh border, is an old-line producer of herbal teas, seasonings, and medicines. Its products are marketed all over the United Kingdom and in many parts of continental Europe as well.Shrewsbury Herbal generally invoices in British pound sterling when it sells to foreign customers in order to guard against adverse exchange rate changes. Nevertheless, it has just received an order from a large wholesaler in central France for £320,000 of its products, conditional upon delivery being made in three months’ time and the order invoiced in euros.Shrewsbury’s controller, Elton Peters, is concerned with whether the pound will appreciate versus the euro over the next three months, thus eliminating all or most of the profit when the euro receivable is paid. He thinks this is an unlikely possibility, but he decides to contact the firm’s banker for suggestions about hedging the exchange rate exposure.Mr. Peters learns from the banker that the current spot exchange rate is €/£ is €1.4537, thus the i nvoice amount should be €465,184. Mr. Peters also learns that the three-month forward rates for the pound and the euro versus the U.S. dollar are $1.8990/£1.00 and $1.3154/€1.00, respectively. The banker offers to set up a forward hedge for selling the euro receivable for pound sterling based on the €/£ forward cross-exchange rate implicit in the forward rates against the dollar.What would you do if you were Mr. Peters?Suggested Solution to Shrewsbury Herbal Products, Ltd.Note to Instructor: This elementary case provides an intuitive look at hedging exchange rate exposure. Students should not have difficulty with it even though hedging will not be formally discussed until Chapter 8. The case is consistent with the discussion that accompanies Exhibit 5.9 of the text. Professor of Finance, Banikanta Mishra, of Xavier Institute of Management –Bhubaneswar, India contributed to this solution.Suppose Shrewsbury sells at a twenty percent markup. Thus the cost to the firm of the £320,000 order is £256,000. Thus, the pound could appreciate to €465,184/£256,000 = €1.8171/1.00 before all profit was eliminated. This seems rather unlikely. Nevertheless, a ten percent appreciation of the pound (€1.4537 x 1.10) to €1.5991/£1.00 would only yield a profit of £34,904 (= €465,184/1.5991 - £256,000). Shrewsbury can hedge the exposure by selling the euros forward for British pounds at F3(€/£) = F3($/£) ÷ F3($/€) = 1.8990 ÷1.3154 = 1.4437. At this forward exchange rate, Shrewsbury can “lock-in” a price of £322,217 (= €465,184/1.4437) for the sale. The forward exchange rate indicates that the euro is trading at a premium to the British pound in the forward market. Thus, the forward hedge allows Shrewsbury to lock-in a greater amount (£2,217) than if the euro receivable was converted into pounds at the current spotIf the euro was trading at a forward discount, Shrewsbury would end up locking-in an amount less than £320,000. Whether that would lead to a loss for the company would depend upon the extent of the discount and the amount of profit built into the price of £320,000. Only if the forward exchange rate is even with the spot rate will Shrewsbury receive exactly £320,000.Obviously, Shrewsbury could ensure that it receives exactly £320,000 at the end of three-month accounts receivable period if it could invoice in £. That, however, is not acceptable to the French wholesaler. When invoicing in euros, Shrewsbury could establish the euro invoice amount by use of the forward exchange rate instead of the current spot rate. The invoice amount in that case would be €461,984 = £320,000 x 1.4437. Shrewsbury can now lock-in a receipt of £320,000 if it simultaneously hedges its euro exposure by selling €461,984 at the forward rate of 1.4437. That is, £320,000 = €461,984/1.4437.。

Solution_国际财务管理_切奥尔尤恩_课后习题答案_第一章

CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRMSUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONSQUESTIONS1. Why is it important to study international financial management?Answer: We are now living in a world where all the major economic functions, i.e., consumption, production, and investment, are highly globalized. It is thus essential for financial managers to fully understand vital international dimensions of financial management. This global shift is in marked contrast to a situation that existed when the authors of this book were learning finance some twenty years ago. At that time, most professors customarily (and safely, to some extent) ignored international aspects of finance. This mode of operation has become untenable since then.2. How is international financial management different from domestic financial management?Answer: There are three major dimensions that set apart international finance from domestic finance. They are:1. foreign exchange and political risks,2. market imperfections, and3. expanded opportunity set.3. Discuss the three major trends that have prevailed in international business during the last two decades.Answer: The 1980s brought a rapid integration of international capital and financial markets. Impetus for globalized financial markets initially came from the governments of major countries that had begun to deregulate their foreign exchange and capital markets. The economic integration and globalization that began in the eighties is picking up speed in the 1990s via privatization. Privatization is the process by which a country divests itself of the ownership and operation of a business venture by turning it over to the free market system. Lastly, trade liberalization and economic integration continued to proceed at both the regional and global levels.4. How is a country’s economic well-being enhanced through free international trade in goods and services?Answer: According to David Ricardo, with free international trade, it is mutually beneficial for two countries to each specialize in the production of the goods that it can produce relatively most efficiently and then trade those goods. By doing so, the two countries can increase their combined production, which allows both countries to consume more of both goods. This argument remains valid even if a country can produce both goods more efficiently than the other country. International trade is not a ‘zero-sum’ game in which one country benefits at the expense of another country. Rather, international trade could be an ‘increasing-sum’ game at which all players become winners.5. What considerations might limit the extent to which the theory of comparative advantage is realistic?Answer: The theory of comparative advantage was originally advanced by the nineteenth century economist David Ricardo as an explanation for why nations trade with one another. The theory claims that economic well-being is enhanced if each country’s citizens produce what they have a comparative advantage in producing relative to the citizens of other countries, and then trade products. Underlying the theory are the assumptions of free trade between nations and that the factors of production (land, buildings, labor, technology, and capital) are relatively immobile. To the extent that these assumptions do not hold, the theory of comparative advantage will not realistically describe international trade.6. What are multinational corporations (MNCs) and what economic roles do they play?Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in one country that has production and sales operations in several other countries. Indeed, some MNCs have operations in dozens of different countries. MNCs obtain financing from major money centers around the world in many different currencies to finance their operations. Global operations force the treasurer’s office to establish international banking relationships, to place short-term funds in several currency denominations, and to effectively manage foreign exchange risk.7. Mr. Ross Perot, a former Presidential candidate of the Reform Party, which is a third political party in the United States, had strongly objected to the creation of the North American Trade Agreement (NAFTA), which nonetheless was inaugurated in 1994, for the fear of losing American jobs to Mexico where it is much cheaper to hire workers. What are the merits and demerits of Mr. Perot’s position on NAFTA? Considering the recent economic developments in North America, how would you assess Mr. Perot’s position on NAFTA?Answer: Since the inception of NAFTA, many American companies indeed have invested heavily in Mexico, sometimes relocating production from the United States to Mexico. Although this might have temporarily caused unemployment of some American workers, they were eventually rehired by other industries often for higher wages. Currently, the unemployment rate in the U.S. is quite low by historical standard. At the same time, Mexico has been experiencing a major economic boom. It seems clear that both Mexico and the U.S. have benefited from NAFTA. Mr. Perot’s concern appears to have been ill founded.8. In 1995, a working group of French chief executive officers was set up by the Confederation of French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the French corporate governance structure. The group reported the following, among other things “The board of directors should not simply aim at maximizing share values as in the U.K. and the U.S. Rather, its goal should be to serve the company, whose interests should be clearly distinguished from those of its shareholders, employees, creditors, suppliers and clients but still equated with their general common interest, which is to safeguard the prosperity and continuity of the company”. Evaluate the above recommendation of the working group.Answer: The recommendations of the French working group clearly show that shareholder wealth maximization is not a universally accepted goal of corporate management, especially outside the United States and possibly a few other Anglo-Saxon countries including the United Kingdom and Canada. To some extent, this may reflect the fact that share ownership is not wide spread in most other countries. In France, about 15% of households own shares.9. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the aftermath of corporate scandals, e.g., Enron and WorldCom, U.S. President George W. Bush stated that while tougher laws might help, “ultimately, the ethics of American business depends on the conscience of America’s business leaders.” Describe your view on this statement.Answer: There can be different answers to this question. If business leaders always behave with a high ethical standard, many of the corporate scandals we have seen lately might not have happened. Since we cannot fully depend on the ethical behavior on the part of business leaders, the society should protect itself by adopting the rules/regulations and governance structure that would induce business leaders to behave in the interest of the society at large.10. Suppose you are interested in investing in shares of Nokia Corporation of Finland, which is a world leader in wireless communication. But before you make investment decision, you would like to learn about the company. Visit the website of Yahoo () and collect information about Nokia, including the recent stock price history and analysts’ views of the company. Discuss what you learn about the company. Also discuss how the instantaneous access to information via internet would affect the nature and workings of financial markets.Answer: As students might have learned from visiting the website, information is readily available even for foreign companies like Nokia. Ready access to international information helps integrate financial markets, dismantling barriers to international investment and financing. Integration, however, may help a financial shock in one market to be transmitted to other markets.MINI CASE: NIKE AND SWEATSHOP LABORNike, a company headquartered in Beaverton, Oregon, is a major force in the sports footwear and fashion industry, with annual sales exceeding $ 12 billion, more than half of which now come from outside the United States. The company was co-founded in 1964 by Phil Knight, a CPA at Price Waterhouse, and Bill Bowerman, college track coach, each investing $ 500 to start. The company, initially called Blue Ribbon Sports, changed its name to Nike in 1971 and adopted the “Swoosh” logo—recognizable around the world—originally designed by a college student for $35. Nike became highly successful in designing and marketing mass-appealing products such as the Air Jordan, the best selling athletic shoe of all time.Nike has no production facilities in the United States. Rather, the company manufactures athletic shoes and garments in such Asian countries as China, Indonesia, and Vietnam using subcontractors, and sells the products in the U.S. and international markets. In each of those Asian countries where Nike has production facilities, the rates of unemployment and under-employment are quite high. The wage rate is very low in those countries by U.S. standards—the hourly wage rate in the manufacturing sector is less than $ 1 in each of those countries, compared with about $ 20 in the United States. In addition, workers in those countries often operate in poor and unhealthy environments and their rights are not particularly well protected. Understandably, host countries are eager to attract foreign investments like Nike’s to develop their economies and raise the living standards of their citizens. Recently, however, Nike came under worldwide criticism for its practice of hiring workers for such a low rate of pay—“next to nothing” in the words of critics—and condoning poor working conditions in host countries.Initially, Nike denied the sweatshop charges and lashed out at critics. But later, the company began monitoring the labor practice at its overseas factories and grading the factories in order to improve labor standards. Nike also agreed to random factory inspections by disinterested parties.Discussion points1.Do you think the criticism of Nike is fair, considering that the host countries are in dire needsof creating jobs?2.What do you think Nike’s executives might have done differently to prevent the sensitivecharges of sweatshop labor in overseas factories?3.Do firms need to consider the so-called corporate social responsibilities in making investmentdecisions?Suggested Solution to Nike and Sweatshop LaborObviously, Nike’s investments in such Asian countries as China, Indonesia, and Vietnam were motivated to take advantage of low labor costs in those countries. While Nike was criticized for the poor working conditions for its workers, the company has recognized the problem and has substantially improved the working environments recently. Although Nike’s workers get paid very low wages by the Western standard, they probably are making substantially more than their local compatriots who are either under- or unemployed. While Nike’s detractors may have valid points, one should not ignore the fact that the company is making contributions to the economic welfare of those Asian countries by creating job opportunities.CHAPTER 1A THEORY OF COMPARATIVE ADVANTAGESUGGESTED SOLUTIONS TO APPENDIX PROBLEMSPROBLEMS1. Country C can produce seven pounds of food or four yards of textiles per unit of input. Compute the opportunity cost of producing food instead of textiles. Similarly, compute the opportunity cost of producing textiles instead of food.Solution: The opportunity cost of producing food instead of textiles is one yard of textiles per 7/4 = 1.75 pounds of food. A pound of food has an opportunity cost of 4/7 = .57 yards of textiles.2. Consider the no-trade input/output situation presented in the following table for Countries X and Y. Assuming that free trade is allowed, develop a scenario that will benefit the citizens of both countries.INPUT/OUTPUT WITHOUT TRADE_______________________________________________________________________CountryX Y Total________________________________________________________________________ I. Units of Input(000,000)_______________________ ______________________________70 60FoodTextiles 40 30________________________________________________________________________ II. Output per Unit of Input(lbs or yards)______________________ ______________________________17 5FoodTextiles 5 2________________________________________________________________________ III. Total Output(lbs or yards)(000,000)______________________ ______________________________Food 1,190 300 1,490260Textiles 200 60________________________________________________________________________ IV. Consumption(lbs or yards)(000,000)_____________________ ______________________________Food 1,190 300 1,490260Textiles 200 60________________________________________________________________________Solution:Examination of the no-trade input/output table indicates that Country X has an absolute advantage in the production of food and textiles. Country X can “trade off” one unit of production needed to produce 17 pounds of food for five yards of textiles. Thus, a yard of textiles has an opportunity cost of 17/5 = 3.40 pounds of food, or a pound of food has an opportunity cost of 5/17 = .29 yards of textiles. Analogously, Country Y has an opportunity cost of 5/2 = 2.50 pounds of food per yard of textiles, or 2/5 = .40 yards of textiles per pound of food. In terms of opportunity cost, it is clear that Country X is relatively more efficient in producing food and Country Y is relatively more efficient in producing textiles. Thus, Country X (Y) has a comparative advantage in producing food (textile) is comparison to Country Y (X).When there are no restrictions or impediments to free trade the economic-well being of the citizens of both countries is enhanced through trade. Suppose that Country X shifts 20,000,000 units from the production of textiles to the production of food where it has a comparative advantage and that Country Y shifts 60,000,000 units from the production of food to the production of textiles where it has a comparative advantage. Total output will now be (90,000,000 x 17 =) 1,530,000,000 pounds of food and [(20,000,000 x 5 =100,000,000) + (90,000,000 x 2 =180,000,000) =] 280,000,000 yards of textiles. Further suppose that Country X and Country Y agree on a price of 3.00 pounds of food for one yard of textiles, and that Country X sells Country Y 330,000,000 pounds of food for 110,000,000 yards of textiles. Under free trade, the following table shows that the citizens of Country X (Y) have increased their consumption of food by 10,000,000 (30,000,000) pounds and textiles by 10,000,000 (10,000,000) yards.INPUT/OUTPUT WITH FREE TRADE__________________________________________________________________________CountryX Y Total__________________________________________________________________________ I. Units of Input(000,000)_______________________ ________________________________90 0FoodTextiles 20 90__________________________________________________________________________ II. Output per Unit of Input(lbs or yards)______________________ ________________________________17 5FoodTextiles 5 2__________________________________________________________________________ III. Total Output(lbs or yards)(000,000)_____________________ ________________________________Food 1,530 0 1,530180280Textiles 100__________________________________________________________________________ IV. Consumption(lbs or yards)(000,000)_____________________ ________________________________Food 1,200 330 1,530280Textiles 210 70__________________________________________________________________________。

Solution_国际财务管理_切奥尔尤恩_课后习题答案_第十四章

CHAPTER 14 INTEREST RATE AND CURRENCY SWAPSSUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Describe the difference between a swap broker and a swap dealer.Answer: A swap broker arranges a swap between two counterparties for a fee without taking a risk position in the swap. A swap dealer is a market maker of swaps and assumes a risk position in matching opposite sides of a swap and in assuring that each counterparty fulfills its contractual obligation to the other.2. What is the necessary condition for a fixed-for-floating interest rate swap to be possible?Answer: For a fixed-for-floating interest rate swap to be possible it is necessary for a quality spread differential to exist. In general, the default-risk premium of the fixed-rate debt will be larger than the default-risk premium of the floating-rate debt.3. Discuss the basic motivations for a counterparty to enter into a currency swap.Answer: One basic reason for a counterparty to enter into a currency swap is to exploit the comparative advantage of the other in obtaining debt financing at a lower interest rate than could be obtained on its own. A second basic reason is to lock in long-term exchange rates in the repayment of debt service obligations denominated in a foreign currency.4. How does the theory of comparative advantage relate to the currency swap market?Answer: Name recognition is extremely important in the international bond market. Without it, even a creditworthy corporation will find itself paying a higher interest rate for foreign denominated funds than a local borrower of equivalent creditworthiness. Consequently, two firms of equivalent creditworthiness can each exploit their, respective, name recognition by borrowing in their local capital market at a favorable rate and then re-lending at the same rate to the other.5. Discuss the risks confronting an interest rate and currency swap dealer.Answer: An interest rate and currency swap dealer confronts many different types of risk. Interest rate risk refers to the risk of interest rates changing unfavorably before the swap dealer can lay off on an opposing counterparty the unplaced side of a swap with another counterparty. Basis risk refers to the floating rates of two counterparties being pegged to two different indices. In this situation, since the indexes are not perfectly positively correlated, the swap bank may not always receive enough floating rate funds from one counterparty to pass through to satisfy the other side, while still covering its desired spread, or avoiding a loss. Exchange-rate risk refers to the risk the swap bank faces from fluctuating exchange rates during the time it takes the bank to lay off a swap it undertakes on an opposing counterparty before exchange rates change. Additionally, the dealer confronts credit risk from one counterparty defaulting and its having to fulfill the defaulting party’s obligation to the other counterparty. Mismatch risk refers to the difficulty of the dealer finding an exact opposite match for a swap it has agreed to take. Sovereign risk refers to a country imposing exchange restrictions on a currency involved in a swap making it costly, or impossible, for a counterparty to honor its swap obligations to the dealer. In this event, provisions exist for the early termination of a swap, which means a loss of revenue to the swap bank.6. Briefly discuss some variants of the basic interest rate and currency swaps diagramed in the chapter.Answer: Instead of the basic fixed-for-floating interest rate swap, there are also zero-coupon-for-floating rate swaps where the fixed rate payer makes only one zero-coupon payment at maturity on the notional value. There are also floating-for-floating rate swaps where each side is tied to a different floating rate index or a different frequency of the same index. Currency swaps need not be fixed-for-fixed; fixed-for-floating and floating-for-floating rate currency swaps are frequently arranged. Moreover, both currency and interest rate swaps can be amortizing as well as non-amortizing.7. If the cost advantage of interest rate swaps would likely be arbitraged away in competitive markets, what other explanations exist to explain the rapid development of the interest rate swap market?Answer: All types of debt instruments are not always available to all borrowers. Interest rate swaps can assist in market completeness. That is, a borrower may use a swap to get out of one type of financing and to obtain a more desirable type of credit that is more suitable for its asset maturity structure.8. Suppose Morgan Guaranty, Ltd. is quoting swap rates as follows: 7.75 - 8.10 percent annually against six-month dollar LIBOR for dollars and 11.25 - 11.65 percent annually against six-month dollar LIBOR for British pound sterling. At what rates will Morgan Guaranty enter into a $/£ currency swap?Answer: Morgan Guaranty will pay annual fixed-rate dollar payments of 7.75 percent against receiving six-month dollar LIBOR flat, or it will receive fixed-rate annual dollar payments at 8.10 percent against paying six-month dollar LIBOR flat. Morgan Guaranty will make annual fixed-rate £ payments at 11.25 percent against receiving six-month dollar LIBOR flat, or it will receive annual fixed-rate £ payments at 11.65 percent against paying six-month dollar LIBOR flat. Thus, Morgan Guaranty will enter into a currency swap in which it would pay annual fixed-rate dollar payments of 7.75 percent in return for receiving semi-annual fixed-rate £ payments at 11.65 percent, or it will receive annual fixed-rate dollar payments at 8.10 percent against paying annual fixed-rate £ payments at 11.25 percent.9. A U.S. company needs to raise €50,000,000. It plans to raise this money by issuing dollar-denominated bonds and using a currency swap to convert the dollars to euros. The company expects interest rates in both the United States and the euro zone to fall.a. Should the swap be structured with interest paid at a fixed or a floating rate?b. Should the swap be structured with interest received at a fixed or a floating rate?CFA Guideline Answer:a. The U.S. company would pay the interest rate in euros. Because it expects that the interest rate in the euro zone will fall in the future, it should choose a swap with a floating rate on the interest paid in euros to let the interest rate on its debt float down.b. The U.S. company would receive the interest rate in dollars. Because it expects that the interest rate in the United States will fall in the future, it should choose a swap with a fixed rate on the interest received in dollars to prevent the interest rate it receives from going down.*10. Assume a currency swap in which two counterparties of comparable credit risk each borrow at the best rate available, yet the nominal rate of one counterparty is higher than the other. After the initial principal exchange, is the counterparty that is required to make interest payments at the higher nominal rate at a financial disadvantage to the other in the swap agreement? Explain your thinking.Answer: Superficially, it may appear that the counterparty paying the higher nominal rate is at a disadvantage since it has borrowed at a lower rate. However, if the forward rate is an unbiased predictor of the expected spot rate and if IRP holds, then the currency with the higher nominal rate is expected to depreciate versus the other. In this case, the counterparty making the interest payments at the higher nominal rate is in effect making interest payments at the lower interest rate because the payment currency is depreciating in value versus the borrowing currency.PROBLEMS1. Alpha and Beta Companies can borrow for a five-year term at the following rates:Alpha BetaMoody’s credit rating Aa BaaFixed-rate borrowing cost 10.5% 12.0%Floating-rate borrowing cost LIBOR LIBOR + 1%a. Calculate the quality spread differential (QSD).b. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. No swap bank is involved in this transaction.Solution:a. The QSD = (12.0% - 10.5%) minus (LIBOR + 1% - LIBOR) = .5%.b. Alpha needs to issue fixed-rate debt at 10.5% and Beta needs to issue floating rate-debt at LIBOR + 1%. Alpha needs to pay LIBOR to Beta. Beta needs to pay 10.75% to Alpha. If this is done, Alpha’s floating-rate all-in-cost is: 10.5% + LIBOR - 10.75% = LIBOR - .25%, a .25% savings over issuing floating-rate debt on its own. Beta’s fixed-rate all-in-cost is: LIBOR+ 1% + 10.75% - LIBOR = 11.75%, a .25% savings over issuing fixed-rate debt.2. Do problem 1 over again, this time assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 10.7% - 10.8% against LIBOR flat.Solution: Alpha will issue fixed-rate debt at 10.5% and Beta will issue floating rate-debt at LIBOR + 1%. Alpha will receive 10.7% from the swap bank and pay it LIBOR. Beta will pay 10.8% to the swap bank and receive from it LIBOR. If this is done, Alpha’s floating-rate all-in-cost is: 10.5% + LIBOR - 10.7% = LIBOR - .20%, a .20% savings over issuing floating-rate debt on its own. Beta’s fixed-rate all-in-cost is: LIBOR+ 1% + 10.8% - LIBOR = 11.8%, a .20% savings over issuing fixed-rate debt.3. Company A is a AAA-rated firm desiring to issue five-year FRNs. It finds that it can issue FRNs at six-month LIBOR + .125 percent or at three-month LIBOR + .125 percent. Given its asset structure, three-month LIBOR is the preferred index. Company B is an A-rated firm that also desires to issue five-year FRNs. It finds it can issue at six-month LIBOR + 1.0 percent or at three-month LIBOR + .625 percent. Given its asset structure, six-month LIBOR is the preferred index. Assume a notional principal of $15,000,000. Determine the QSD and set up a floating-for-floating rate swap where the swap bank receives .125 percent and the two counterparties share the remaining savings equally.Solution: The quality spread differential is [(Six-month LIBOR + 1.0 percent) minus (Six-month LIBOR + .125 percent) =] .875 percent minus [(Three-month LIBOR + .625 percent) minus (Three-month LIBOR + .125 percent) =] .50 percent, which equals .375 percent. If the swap bank receives .125 percent, each counterparty is to save .125 percent. To affect the swap, Company A would issue FRNs indexed to six-month LIBOR and Company B would issue FRNs indexed three-month LIBOR. Company B might make semi-annual payments of six-month LIBOR + .125 percent to the swap bank, which would pass all of it through to Company A. Company A, in turn, might make quarterly payments of three-month LIBOR to the swap bank, which would pass through three-month LIBOR - .125 percent to Company B. On an annualized basis, Company B will remit to the swap bank six-month LIBOR + .125 percent and pay three-month LIBOR + .625 percent on its FRNs. It will receive three-month LIBOR - .125 percent from the swap bank. This arrangement results in an all-in cost of six-month LIBOR + .825 percent, which is a rate .125 percent below the FRNs indexed to six-month LIBOR + 1.0 percent Company B could issue on its own. Company A will remit three-month LIBOR to the swap bank and pay six-month LIBOR + .125 percent on its FRNs. It will receive six-month LIBOR + .125 percent from the swap bank. This arrangement results in an all-in cost of three-month LIBOR for Company A, which is .125 percent less than the FRNs indexed to three-month LIBOR + .125 percent it could issue on its own. The arrangements with the two counterparties net the swap bank .125 percent per annum, received quarterly.*4. A corporation enters into a five-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed rate of 9.75 percent annually on a notional amount of €15,000,000 and receive LIBOR. As of the second reset date, determine the price of the swap from the corporation’s viewpoint assuming that the fixed-rate side of the swap has increased to 10.25 percent.Solution: On the reset date, the present value of the future floating-rate payments the corporation will receive from the swap bank based on the notional value will be €15,000,000. The present value of a hypothetical bond issue of €15,000,000 with three remaining 9.75 percent coupon payments at the newfixed-rate of 10.25 percent is €14,814,304. This sum represents the present value of the remaining payments the swap bank will receive from the corporation. Thus, the swap bank should be willing to buy and the corporation should be willing to sell the swap for €15,000,000 - €14,814,304 = €185,696.5. Karla Ferris, a fixed income manager at Mangus Capital Management, expects the current positively sloped U.S. Treasury yield curve to shift parallel upward.Ferris owns two $1,000,000 corporate bonds maturing on June 15, 1999, one with a variable rate based on 6-month U.S. dollar LIBOR and one with a fixed rate. Both yield 50 basis points over comparable U.S. Treasury market rates, have very similar credit quality, and pay interest semi-annually.Ferris wished to execute a swap to take advantage of her expectation of a yield curve shift and believes that any difference in credit spread between LIBOR and U.S. Treasury market rates will remain constant.a. Describe a six-month U.S. dollar LIBOR-based swap that would allow Ferris to take advantage of her expectation. Discuss, assuming Ferris’ expectation is correct, the change in the swap’s value and how that change would affect the value of her portfolio. [No calculations required to answer part a.] Instead of the swap described in part a, Ferris would use the following alternative derivative strategy to achieve the same result.b. Explain, assuming Ferris’ expectation is correct, how the following strategy achieves the same result in response to the yield curve shift. [No calculations required to answer part b.]Date Nominal Eurodollar Futures Contract ValueSettlement12-15-97 $1,000,00003-15-98 1,000,00006-15-98 1,000,00009-15-98 1,000,00012-15-98 1,000,00003-15-99 1,000,000c. Discuss one reason why these two derivative strategies provide the same result.CFA Guideline Answera.The Swap Value and its Effect on Ferris’ PortfolioBecause Karla Ferris believes interest rates will rise, she will want to swap her $1,000,000 fixed-rate corporate bond interest to receive six-month U.S. dollar LIBOR. She will continue to hold her variable-rate six-month U.S. dollar LIBOR rate bond because its payments will increase as interest rates rise. Because the credit risk between the U.S. dollar LIBOR and the U.S. Treasury market is expected to remain constant, Ferris can use the U.S. dollar LIBOR market to take advantage of her interest rate expectation without affecting her credit risk exposure.To execute this swap, she would enter into a two-year term, semi-annual settle, $1,000,000 nominal principal, pay fixed-receive floating U.S. dollar LIBOR swap. If rates rise, the swap’s mark-to-market value will increase because the U.S. dollar LIBOR Ferris receives will be higher than the LIBOR rates from which the swap was priced. If Ferris were to enter into the same swap after interest rates rise, she would pay a higher fixed rate to receive LIBOR rates. This higher fixed rate would be calculated as the present value of now higher forward LIBOR rates. Because Ferris would be paying a stated fixed rate that is lower than this new higher-present-value fixed rate, she could sell her swap at a premium. This premium is called the “replacement cost” value of the swap.b. Eurodollar Futures StrategyThe appropriate futures hedge is to short a combination of Eurodollar futures contracts with different settlement dates to match the coupon payments and principal. This futures hedge accomplishes the same objective as the pay fixed-receive floating swap described in Part a. By discussing how the yield-curve shift affects the value of the futures hedge, the candidate can show an understanding of how Eurodollar futures contracts can be used instead of a pay fixed-receive floating swap.If rates rise, the mark-to-market values of the Eurodollar contracts decrease; their yields must increase to equal the new higher forward and spot LIBOR rates. Because Ferris must short or sell the Eurodollar contracts to duplicate the pay fixed-receive variable swap in Part a, she gains as the Eurodollar futures contracts decline in value and the futures hedge increases in value. As the contracts expire, or if Ferris sells the remaining contracts prior to maturity, she will recognize a gain that increases her return. With higher interest rates, the value of the fixed-rate bond will decrease. If the hedge ratios are appropriate, the value of the portfolio, however, will remain unchanged because of the increased value of the hedge, which offsets the fixed-rate bond’s decrease.c. Why the Derivative Strategies Achieve the Same ResultArbitrage market forces make these two strategies provide the same result to Ferris. The two strategies are different mechanisms for different market participants to hedge against increasing rates. Some money managers prefer swaps; others, Eurodollar futures contracts. Each institutional marketparticipant has different preferences and choices in hedging interest rate risk. The key is that market makers moving into and out of these two markets ensure that the markets are similarly priced and provide similar returns. As an example of such an arbitrage, consider what would happen if forward market LIBOR rates were lower than swap market LIBOR rates. An arbitrageur would, under such circumstances, sell the futures/forwards contracts and enter into a received fixed-pay variable swap. This arbitrageur could now receive the higher fixed rate of the swap market and pay the lower fixed rate of the futures market. He or she would pocket the differences between the two rates (without risk and without having to make any [net] investment.) This arbitrage could not last.As more and more market makers sold Eurodollar futures contracts, the selling pressure would cause their prices to fall and yields to rise, which would cause the present value cost of selling the Eurodollar contracts also to increase. Similarly, as more and more market makers offer to receive fixed rates in the swap market, market makers would have to lower their fixed rates to attract customers so they could lock in the lower hedge cost in the Eurodollar futures market. Thus, Eurodollar forward contract yields would rise and/or swap market receive-fixed rates would fall until the two rates converge. At this point, the arbitrage opportunity would no longer exist and the swap and forwards/futures markets would be in equilibrium.6. Rone Company asks Paula Scott, a treasury analyst, to recommend a flexible way to manage the company’s financial risks.Two years ago, Rone issued a $25 million (U.S.$), five-year floating rate note (FRN). The FRN pays an annual coupon equal to one-year LIBOR plus 75 basis points. The FRN is non-callable and will be repaid at par at maturity.Scott expects interest rates to increase and she recognizes that Rone could protect itself against the increase by using a pay-fixed swap. However, Rone’s Board of Directors prohibits both short sales of securities and swap transactions. Scott decides to replicate a pay-fixed swap using a combination of capital market instruments.a. Identify the instruments needed by Scott to replicate a pay-fixed swap and describe the required transactions.b. Explain how the transactions in Part a are equivalent to using a pay-fixed swap.CFA Guideline Answera. The instruments needed by Scott are a fixed-coupon bond and a floating rate note (FRN).The transactions required are to:· issue a fixed-coupon bond with a maturity of three years and a notional amount of $25 million, and· buy a $25 million FRN of the same maturity that pays one-year LIBOR plus 75 bps.b. At the outset, Rone will issue the bond and buy the FRN, resulting in a zero net cash flow at initiation. At the end of the third year, Rone will repay the fixed-coupon bond and will be repaid the FRN, resulting in a zero net cash flow at maturity. The net cash flow associated with each of the three annual coupon payments will be the difference between the inflow (to Rone) on the FRN and the outflow (to Rone) on the bond. Movements in interest rates during the three-year period will determine whether the net cash flow associated with the coupons is positive or negative to Rone. Thus, the bond transactions are financially equivalent to a plain vanilla pay-fixed interest rate swap.7. A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates €25,000,000 a year, received in equivalent semiannual installments of €12,500,000. The British company wishes to convert the euro cash flows to pounds twice a year. It plans to engage in a currency swap in order to lock in the exchange rate at which it can convert the euros to pounds. The current exchange rate is €1.5/£. The fixed rate on a plain vaninilla currency swap in pounds is 7.5 percent per year, and the fixed rate on a plain vanilla currency swap in euros is 6.5 percent per year.a. Determine the notional principals in euros and pounds for a swap with semiannual payments that will help achieve the objective.b. Determine the semiannual cash flows from this swap.CFA Guideline Answera. The semiannual cash flow must be converted into pounds is €25,000,000/2 = €12,500,000. In order to create a swap to convert €12,500,000, the equivalent notional principals are · Euro notional principal = €12,500,000/(0.065/2) = €384,615,385· Pound notional principal = €384,615,385/€1.5/£ = £256,410,257b. The cash flows from the swap will now be· Company makes swap payment = €384,615,385(0.065/2) = €12,500,000· Company receives swap payment = £256,410,257(0.075/2) = £9,615,385The company has effectively converted euro cash receipts to pounds.8. Ashton Bishop is the debt manager for World Telephone, which needs €3.33 billion Euro financing for its operations. Bishop is considering the choice between issuance of debt denominated in: ∙ Euros (€), or∙ U.S. dollars, accompanied by a combined interest rate and currency swap.a. Explain one risk World would assume by entering into the combined interest rate and currency swap.Bishop believes that issuing the U.S.-dollar debt and entering into the swap can lower World’s cost of debt by 45 basis points. Immediately after selling the debt issue, World would swap the U.S. dollar payments for Euro payments throughout the maturity of the debt. She assumes a constant currency exchange rate throughout the tenor of the swap.Exhibit 1 gives details for the two alternative debt issues. Exhibit 2 provides current information about spot currency exchange rates and the 3-year tenor Euro/U.S. Dollar currency and interest rate swap.Exhibit 1World Telephone Debt DetailsCharacteristic Euro Currency Debt U.S. Dollar Currency DebtPar value €3.33 billion $3 billionTerm to maturity 3 years 3 yearsFixed interest rate 6.25% 7.75%Interest payment Annual AnnualExhibit 2Currency Exchange Rate and Swap InformationSpot currency exchange rate $0.90 per Euro ($0.90/€1.00)3-year tenor Euro/U.S. Dollarfixed interest rates 5.80% Euro/7.30% U.S. Dollarb. Show the notional principal and interest payment cash flows of the combined interest rate and currency swap.Note: Your response should show both the correct currency ($ or €) and amount for each cash flow. Answer problem b in the template provided.Template for problem bc. State whether or not World would reduce its borrowing cost by issuing the debt denominated in U.S. dollars, accompanied by the combined interest rate and currency swap. Justify your response with one reason.CFA Guideline Answera. World would assume both counterparty risk and currency risk. Counterparty risk is the risk that Bishop’s counterparty will default on payment of principal or interest cash flows in the swap.Currency risk is the currency exposure risk associated with all cash flows. If the US$ appreciates (Euro depreciates), there would be a loss on funding of the coupon payments; however, if the US$ depreciates, then the dollars will be worth less at the swap’s maturity.b.0 YearYear32 Year1 YearWorld paysNotional$3 billion €3.33 billion PrincipalInterest payment €193.14 million1€193.14 million €193.14 million World receives$3.33 billion €3 billion NotionalPrincipalInterest payment $219 million2$219 million $219 million1 € 193.14 million = € 3.33 billion x 5.8%2 $219 million = $3 billion x 7.3%c. World would not reduce its borrowing cost, because what Bishop saves in the Euro market, she loses in the dollar market. The interest rate on the Euro pay side of her swap is 5.80 percent, lower than the 6.25 percent she would pay on her Euro debt issue, an interest savings of 45 bps. But Bishop is only receiving 7.30 percent in U.S. dollars to pay on her 7.75 percent U.S. debt interest payment, an interest shortfall of 45 bps. Given a constant currency exchange rate, this 45 bps shortfall exactly offsets the savings from paying 5.80 percent versus the 6.25 percent. Thus there is no interest cost savings by sellingthe U.S. dollar debt issue and entering into the swap arrangement.MINI CASE: THE CENTRALIA CORPORATION’S CURRENCY SWAPThe Centralia Corporation is a U.S. manufacturer of small kitchen electrical appliances. It has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, to manufacture microwave ovens for sale in the European Union. The plant is expected to cost €5,500,000, and to take about one year to complete. The plant is to be financed over its economic life of eight years. The borrowing capacity created by this capital expenditure is $2,900,000; the remainder of the plant will be equity financed. Centralia is not well known in the Spanish or international bond market; consequently, it would have to pay 7 percent per annum to borrow euros, whereas the normal borrowing rate in the euro zone for well-known firms of equivalent risk is 6 percent. Alternatively, Centralia can borrow dollars in the U.S. at a rate of 8 percent.Study Questions1. Suppose a Spanish MNC has a mirror-image situation and needs $2,900,000 to finance a capital expenditure of one of its U.S. subsidiaries. It finds that it must pay a 9 percent fixed rate in the United States for dollars, whereas it can borrow euros at 6 percent. The exchange rate has been forecast to be $1.33/€1.00 in one year. Set up a currency swap that will benefit each counterparty.*2. Suppose that one year after the inception of the currency swap between Centralia and the Spanish MNC, the U.S. dollar fixed-rate has fallen from 8 to 6 percent and the euro zone fixed-rate for euros has fallen from 6 to 5.50 percent. In both dollars and euros, determine the market value of the swap if the exchange rate is $1.3343/€1.00.Suggested Solution to The Centralia Corporation’s Currency Swap1. The Spanish MNC should issue €2,180,500 of 6 percent fixed-rate debt and Centralia should issue $2,900,000 of fixed-rate 8 percent debt, since each counterparty has a relative comparative advantage in their home market. They will exchange principal sums in one year. The contractual exchange rate for the initial exchange is $2,900,000/€2,180,500, or $1.33/€1.00. Annually the counterparties will swap debt service: the Spanish MNC will pay Centralia $232,000 (= $2,900,000 x .08) and Centralia will pay the Spanish MNC €130,830 (= €2,180,500 x .06). The contractual exchange rate of the first seven annual debt service exchanges is $232,000/€130,830, or $1.7733/€1.00. At maturity, Centralia and the Spanish MNC will re-exchange the principal sums and the final debt service payments. The contractual exchange rate of the final currency exchange is $3,132,000/€2,311,330 = ($2,900,000 + $232,000)/(€2,180,500 + €130,830), or $1.3551/€1.00.*2. The market value of the dollar debt is the present value of a seven-year annuity of $232,000 and a lump sum of $2,900,000 discounted at 6 percent. This present value is $3,223,778. Similarly, the market value of the euro debt is the present value of a seven-year annuity of €130,830 and a lump sum of €2,180,500 discounted at 5.50 percent. This present value is €2,242,459. The dollar value of the swap is $3,223,778 - €2,242,459 x 1.3343 = $231,665. The euro value of the swap is €2,242,459 - $3,223,778/1.3343 = -€173,623.。

国际财务学习管理课后练习习题答案chapter

CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURESUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONSAND PROBLEMSQUESTIONS1. How would you define transaction exposure?How is it different from economic exposure?Answer: Transaction exposure is the sensitivity of realized domestic currency valuesof the firm’s contractual cash flows denominated in foreign currencies to unexpectedchanges in exchange rates. Unlike economic exposure, transaction exposure is well-defined and short-term.2. Discuss and compare hedging transaction exposure money market instruments. When do the alternativeusinghedgingthe forwardapproachescontractproducevs.thesame result?Answer: Hedging transaction exposure by a forward contract is achieved by selling orbuying foreign currency receivables or payables forward.On the other hand, money market hedge is achieved by borrowing or lending the present value of foreign currency receivables or payables,thereby creating offsetting foreign currency positions.If the interest rate parity is holding,the two hedging methods are equivalent.3.Discuss and compare the costs of hedging via the forward contract and the optionscontract.Answer: There is no up-front cost of hedging by forward contracts. In the case of optionshedging, however, hedgers should pay the premiums for the contracts up-front. The cost offorward hedging, however, may be realized ex post when the hedger regretshis/her hedging decision.4.What are the advantages of a currency options contract as a hedging tool comparedwith the forward contract?Answer: The main advantage of using options contracts for hedging is that the hedgercan decide whether to exercise options upon observing the realized future exchange rate. Options thus provide a hedge against ex post regret that forward hedger mighthave to suffer.Hedgers can only eliminate the downside risk while retaining the upside potential.5.Suppose your company has purchased a put option on the German mark to manage exchange exposure associated with an account receivable denominated in that currency.In this case, your company can be said to have an ‘insurance ’ policy on its receivable. Explain in what sense this is so.Answer: Your company in this case knows in advance that it will receive a certainminimum dollar amount no matter what might happen to the $/ ?exchange rate. Furthermore,if the German mark appreciates,your company will benefit from the rising euro.6.Recent surveys of corporate exchange risk management practices indicate that manyU.S. firms simply do not hedge. How would you explain this result?Answer: There can be many possible reasons for this. First, many firms may feel thatthey are not really exposed to exchange risk due to product diversification, diversified markets for their products,etc.Second,firms may be using self-insurance against exchange risk.Third,firms may feel that shareholders can diversify exchange risk themselves, rendering corporate risk management unnecessary.7. Should a firm hedge? Why or why not?Answer: In a perfect capital market, firms may not need to hedge exchange risk. Butfirms can add to their value by hedging if markets are imperfect. First, if management knows about the firm ’s exposure better than shareholders, the firm, notits shareholders, should hedge. Second, firms may be able to hedge at a lower cost.Third, if default costs are significant, corporate hedging can be justifiable because itreduces the probability of default. Fourth, if the firm faces progressive taxes, it canreduce tax obligations by hedging which stabilizes corporate earnings.8. Using an example,discuss the possible effect of hedging on a firm’s tax obligations.Answer: One can use an example similar to the one presented in the chapter.9.Explain contingent exposure and discuss the advantages of using currency optionsto manage this type of currency exposure.Answer: Companies may encounter a situation where they may or may not face currency exposure. In this situation, companies need options, not obligations, to buy or sella given amount of foreign exchange they may or may not receive or have to pay. If companies either hedge using forward contracts or do not hedge at all, they may face definite currency exposure.10. Explain cross-hedging and discuss the factors determining its effectiveness.Answer: Cross-hedging involves hedging a position in one asset by taking a positionin another asset. The effectiveness of cross-hedging would depend on the strengthand stability of the relationship between the two assets.PROBLEMS1.Cray Research sold a super computer to the Max Planck Institutecredit and invoiced?10 million payable in six months.Currently, forward exchange rate is $? and the foreign exchange advisor for predicts that the spot rate is likely to be $? in six months.(a)What is the expected gain/loss from the forward hedging?(b)If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? Why or why not?(c)Suppose the foreign exchange advisor predicts that the future spot rate will bethe same as the forward exchange rate quoted today. Would you recommend hedging in this case? Why or why not?in Germany on the six -month Cray ResearchSolution: (a) Expected gain($) = 10,000,000–=10,000,000(.05)=$500,000.(b)I would recommend hedging because Cray Research can increase the expected dollarreceipt by $500,000 and also eliminate the exchange risk.(c) Since I eliminate risk without sacrificing dollar receipt,I still would recommend hedging.2. IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed￥250 million payable in three months. Currently, the spot exchange rate is￥105/$ and the three- month forward rate is￥100/$. The three -month money market interest rate is 8 percent per annum in the U.S. and 7 percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable.(a) Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation.(b) Conduct the cash flow analysis of the money market hedge.Solution: (a). Let’s first compute the PV of￥250 million, .,250m/ = ￥245,700,So if the above yen amount is invested today at the Japanese interest rate for threemonths, the maturity value will be exactly equal to￥25 million which is the amountof payable.To buy the above yen amount today, it will cost:$2,340, =￥250,000,000/105.The dollar cost of meeting this yen obligation is $2,340, as of today.(b)___________________________________________________________________Transaction CF0CF1____________________________________________________________________1.Buy yens spot-$2,340,with dollars￥245,700,2.Invest in Japan- ￥245,700,￥250,000,0003.Pay yens- ￥250,000,000Net cash flow- $2,340,____________________________________________________________________3. You plan to visit Geneva, Switzerland in three months to attend an internationalbusiness conference. You expect to incur the total cost of SF 5,000 for lodging, meals and transportation during your stay. As of today, the spot exchange rate is $SF and the three-month forward rate is $SF. You can buy the three-month call option onSF with the exercise rate of $SF for the premium of $ per SF. Assume that your expected future spot exchange rate is the same as the forward rate. The three-monthinterest rate is 6 percent per annum in the United States and 4 percent per annum inSwitzerland.(a)Calculate your expected dollar cost of buying SF5,000 if you choose to hedge viacall option on SF.(b)Calculate the future dollar cost of meeting this SF obligation if you decideto hedge using a forward contract.(c)At what future spot exchange rate will you be indifferent between the forward andoption market hedges?(d)Illustrate the future dollar costs of meeting the SF payable against thefuture spot exchange rate under both the options and forward market hedges.Solution:(a)Total option premium = (.05)(5000)=$250. In three months,$250is worth $= $250. At the expected future spot rate of$SF,which is less than the exercise price,you don’t expect to exercise options.Rather,you expect to buy Swiss franc at $SF. Since you are going to buy SF5,000, you expect to spend $3,150(=.63x5,000).Thus,the total expected cost of buying SF5,000 will be the sum of $3,150 and $, ., $3,.(b)$3,150 = (.63)(5,000).(c)$3,150 = 5,000x + , where x represents the break-even future spot rate.Solving for x, we obtain x = $SF. Note that at the break-even future spot rate,options will not be exercised.(d) If the Swiss franc appreciates beyond $SF, which is the exercise price of calloption, you will exercise the option and buy SF5,000 for $3,200. The total cost of buying SF5,000 willbe $3, = $3,200 + $.This is the maximum you will pay.$ Cost$3,Options hedge$3,150Forward hedge$$/SF(strikeprice)4. Boeing just signed a contract to sell a Boeing737aircraft to Air France.Air France will be billed?20million which is payable in one year.The curre nt spot exchange rate is $? and the one- year forward rate is $?. The annual interest rateis % in the U.S. and % in France. Boeing is concerned with the volatile exchange ratebetween the dollar and the euro and would like to hedge exchange exposure.(a)It is considering two hedging alternatives: sell the euro proceeds from the saleforward or borrow euros from the Credit Lyonnaise against the euro receivable.Which alternative would you recommend? Why?(b) O ther things being equal,at what forward exchange rate would Boeing be indifferent between the two hedging methods?Solution:(a) In the case of forward hedge, the future dollar proceeds (20,000,000) = $22,000,000. In the case of money market hedge (MMH), the firm has tofirst borrow the PV o f its euro receivable, ., 20,000,000/ =?19,047,619. Then thefirm should exchange this euro amount into dollars at the current spot receive:(?19,047,619)($?)= $20,000,000,which can be invested at the will berate to dollarinterest rate for one year to yield:$20,000,000 = $21,200,000.Clearly, the firm can receive $800,000more by using forward hedging.(b) According to IRP, F = S(1+i$)/(1+i F). Thus the“indifferent”forward rate willbe:F=/=$?.5.Suppose that Baltimore Machinery sold a drilling machine to a Swiss firm andgave the Swiss client a choice of paying either $10,000 or SF 15,000 in three months.(a) In the above example, Baltimore Machinery effectively gave the Swiss client a free option to buy up to $10,000 dollars u sing Swiss franc. What is the‘implied’exercise exchange rate?(b)If the spot exchange rate turns out to be $SF, which currency do you think theSwiss client will choose to use for payment? What is the value of this free optionfor the Swiss client?(c)What is the best way for Baltimore Machinery to deal with the exchange exposure?Solution: (a) The implied exercise (price) rate is: 10,000/15,000 = $SF.(b) If the Swiss client chooses to pay $10,000, it will cost SF16,129 (=10,000/.62). Since the Swiss client has an option to pay SF15,000, it will choose to do so. Thevalue of this option is obviously SF1,129 (=SF16,129-SF15,000).(c)Baltimore Machinery faces a contingent exposure in the sense that it may or maynot receive SF15,000 in the future. The firm thus can hedge this exposure by buyinga put option on SF15,000.6. Princess Cruise Company (PCC) purchased a ship from Mitsubishi PCC owesHeavy Industry. Mitsubishi Heavy Industry 500 million yen in one year. The current spot rate is 124 yenper dollar and the one-year forward rate is 110 yen per dollar. The annual interest rateis 5% in Japan and 8% in the . PCC can also buy a one-year call option on yen at thestrike price of $.0081 per yen for a premium of .014 cents per yen.(a)Compute the future dollar costs of meeting this obligation using the money markethedge and the forward hedges.(b)Assuming that the forward exchange rate is the best predictor of the future spotrate, compute the expected future dollar cost of meeting this obligation option hedge isused.when the (c)At what future spot rate do you think PCC may be indifferent between the optionand forward hedge?Solution: (a) In the case of forward hedge, the dollar cost will be 500,000,000/110 =$4,545,455.In the case of money market hedge, the future dollar cost will be: 500,000,000/(124)= $4,147,465.(b)The option premium is: (.014/100)(500,000,000) = $70,000. Its future valuewill be $70,000 = $75,600.At the expected future spot rate of $.0091(=1/110), which is higher than the exerciseof $.0081, PCC will exercise its call option and buy ￥500,000,000 for $4,050,000 (=500,000,.The total expected cost will thus be $4,125,600, which is the sum of $75,600 and $4,050,000.(c) When the option hedge is used, PCC will spend“at most”$4,125,000. On the other hand, when the forward hedging is used, PCC will have to spend $4,545,455 regardlessof the future spot rate. This means that the options hedge dominates the forward hedge.At no future spot rate, PCC will be indifferent between forward and options hedges.7. Airbus sold an aircraft, A400, to Delta Airlines, a U.S. company, and billed $30million payable in six months. Airbus is concerned with the euro proceeds international sales and would like to control exchange risk.The current exchange rate is $? and six- month forward exchange rate is $? at the moment. Airbuscan buy a six-month put option on . dollars with a strike price of ?$ for a premium from spotof ? per . dollar. Currently, six-month interest rate is % in the euro zone and % in the U.S.pute the guaranteed euro proceeds from the American sale if Airbus decidesto hedge using a forward contract.b. If Airbus decides to hedge using money market instruments,what actionAirbus need to take? What would be the guaranteed euro proceeds from the Americansale in this case?c. If Airbus decides to hedge using put options on .dollars,what woulddoes be the‘expected’ euro proceeds from the American sale? Assume that Airbus regards thecurrent forward exchange rate as an unbiased predictor of the futureexchange rate.spot d.At what future spot exchange rate do you think Airbus will be indifferentbetween the option and money market hedge?Solution:a. Airbus will sell $30 million forward for ?27,272,727 = ($30,000,000) / ($?).b. Airbus will borrow the present value of the dollar receivable, ., $29,126,214 =$30,000,000/, and then sell the dollar proceeds spot for euros: ?27,739,251. Thisis the euro amount that Airbus is going to keep.c. Since the expected future spot rate is less than the strike price of the put option, ., ?< ?, Airbus expects to exercise the option and receive ?28,500,000 =($30,000,000)(?$).This is gross proceeds.Airbus spent?600,000(=,000,000) upfront for the option and its future cost is equal to?615,000= ?600,000x . Thus the net euro proceeds from the American sale is?27,885,000,which is the difference between the gross proceeds and the option costs.d. At the indifferent future spot rate, the following will hold:?28,432,732 = S T (30,000,000) -?615,000.Solving for S T, we obtain the“indifference” future spot exchange rate, ., ?$,or$?.Note that ?28,432,732is the future value of the proceeds under money market hedging:?28,432,732 = (?27,739,251) .Suggested solution for Mini Case: Chase Options, Inc.[See Chapter 13 for the case text]Chase Options, Inc.Hedging Foreign Currency Exposure Through Currency OptionsHarvey A. PoniachekI. Case SummaryThis case reviews the foreign exchange options market and hedging. It presents various international transactions that require currency options hedging strategies by the corporations involved. Seven transactions under a variety of circumstances areintroduced that require hedging by currency options. The transactions involve hedgingof dividend remittances,portfolio investment exposure,and strategic economic competitiveness.Market quotations are provided for options (and options hedging ratios), forwards, and interest rates for various maturities.II. Case Objective.The case introduces the student to the principles of currency options market and hedging strategies.The transactions are of various types that often confront companies that are involved in extensive international business or multinational corporations. The case induces students to acquire hands-on experience in addressingspecific exposure and hedging concerns,including how to apply various market quotations, which hedging strategy is most suitable, and how to address exposure inforeign currency through cross hedging policies.III. Proposed Assignment Solution1.The company expects DM100 million in repatriated profits, and does not want theDM/$ exchange rate at which they convert those profits to rise above . They can hedgethis exposure using DM put options with a strike price of . If the spot rate risesabove , they can exercise the option,while if that rate fallsthey can enjoy additional profits from favorable exchange rate movements.To purchase the options would require an up-front premium of:DM 100,000,000 x = DM 1,640,000.With a strike price of DM/$, this would assure the U.S. company of receiving at least:DM 100,000,000–DM 1,640,000 x (1 + x 272/360)= DM 98,254,544/ DM/$ = $57,796,791by exercising the option if the DM depreciated. Note that the proceeds from the repatriated profits are reduced by the premium paid, which is further adjusted by the interest foregone on this amount.However, if the DM were to appreciate relative to the dollar, the company would allowthe option to expire, and enjoy greater dollar proceeds from this increase.Should forward contracts be used to hedge this exposure, the proceeds receivedwould be:DM100,000,000/ DM/$ = $59,790,732,regardless of the movement of the DM/$ exchange rate. While this amount is almost $2million more than that realized using option hedges above, there is no flexibility regarding the exercise date; if this date differs from that at which the repatriateprofits are available,the company may be exposed to additional further current exposure. Further, there is no opportunity to enjoy any appreciation in the DM.If the company were to buy DM puts as above, and sell an equivalent amount incalls with strike price , the premium paid would be exactly offset by the premiumreceived. This would assure that the exchange rate realized would fall between and .If the rate rises above , the company will exercise its put option, and if it fell below ,the other party would use its call; for any rate in between, both options would expire worthless. The proceeds realized would then fall between:DM 100,00,000/ DM/$ = $60,716,454andDM 100,000,000/ DM/$ = $58,823,529.This would allow the company some upside potential,while guaranteeing proceeds at least $1 million greater than the minimum for simply buying a put as above.Buy/Sell OptionsDM/$Spot Put Payoff“Put”ProfitsCallPayoff“CallProfits”Net Profit(1,742,846)01,742,84660,716,4560,716,4544(1,742,846)01,742,84660,716,4560,716,4544(1,742,846)01,742,84660,716,4560,716,4544(1,742,846)01,742,84660,716,4560,716,4544(1,742,846)01,742,84660,716,4560,716,4544(1,742,846)60,606,061,742,846060,606,061(1,742,846)60,240,961,742,846060,240,964 4(1,742,846)59,880,241,742,846059,880,240 0(1,742,846)59,523,811,742,846059,523,810 0(1,742,846)59,171,591,742,846059,171,598 8(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9(1,742,846)58,823,521,742,846058,823,529 9Since the firm believes that there is a good chance that the pound sterling weaken, locking them into a forward contract would not be appropriate, because theywould lose the opportunity to profit from this weakening. Their hedge strategy shouldfollow for an upside potential to match their viewpoint.Therefore,theywill shouldpurchase sterling call options, paying a premium of:5,000,000 STG x = 88,000 STG.If the dollar strengthens against the pound, the firm allows the option to expire,and buys sterling in the spot market at a cheaper price than they would have paid fora forward contract; otherwise, the sterling calls protect against unfavorable depreciation of the dollar.Because the fund manager is uncertain when he will sell the bonds, he requires a hedge which will allow flexibility as to the exercise date.Thus,options are the best instrument for him to use. He can buy A$ puts to lock in a floor of A$/$. Sincehe is willing to forego any further currency appreciation, he can sell A$ calls witha strike price of A$/$ to defray the cost of his hedge(in fact he earns a net premium of A$ 100,000,000 x–= A$ 2,300), while knowing that he can’t receiveless than A$/$when redeeming his investment,and can benefit from a small appreciation of the A$.Example #3:Problem: Hedge principal denominated in A$ into US$. Forgo upsidefloor protection.potential to buyI.Hedge by writing calls and buying puts1)Write calls for $/A$ @Buy puts for $/A$ @#contracts needed = Principal in A$/Contract size100,000,000A$/100,000 A$ = 1002)Revenue from sale of calls = (# contracts)(size of contract)(premium)$75,573 = (100)(100,000 A$)(.007234 $/A$)(1 + .0825 195/360) 3)Total cost of puts = (# contracts)(size of contract)(premium)$75,332 = (100)(100,000 A$)(.007211 $/A$)(1 + .0825 195/360) 4)Put payoffIf spot falls below , fund manager will exercise putIf spot rises above , fund manager will let put expire5)Call payoffIf spot rises above .8025, call will be exercisedIf spot falls below .8025, call will expire6)Net payoffStrike“Put”Call“Call”Price Put Payoff Principal Payoff Principal Net Profit(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)72,000,0075,573072,000,241(75,332)73,000,0075,573073,000,241(75,332)74,000,0075,573074,000,241(75,332)75,000,0075,573075,000,241(75,332)76,000,0075,573076,000,241(75,332)77,000,0075,573077,000,241(75,332)78,000,0075,573078,000,241(75,332)79,000,0075,573079,000,241(75,332)80,000,0075,573080,000,241(75,332)075,57380,250,0080,250,241(75,332)075,57380,250,0080,250,241(75,332)075,57380,250,0080,250,241(75,332)075,57380,250,0080,250,241(75,332)075,57380,250,0080,250,2414. The German company is bidding on a contract which they cannot be certain of winning. Thus, the need to execute a currency transaction is similarly uncertain,and using a forward or futures as a hedge is inappropriate, because it would forcethem to perform even if they do not win the contract.Using a sterling put option as a hedge for this transaction makes the most sense.For a premium of:12 million STG x = 193,200 STG,they can assure themselves that adverse movements in the pound sterling exchange ratewill not diminish their bid), while theatprofitabilitythe same timeof theallowingproject(andthe potentialhence thefor gainsfeasibilityfrom sterlingofappreciation.5.Since AMC in concerned about the adverse effects that a strengthening of the dollar would have on its business,we need to create a situation in which it will profit from such an appreciation. Purchasing a yen put or a dollar call will achievethis objective. The data in Exhibit 1, row 7 represent a 10 percent appreciation ofthe dollar strike vs.forward rate)and can be used to hedge against a similar appreciation of the dollar.For every million yen of hedging, the cost would be:Yen 100,000,000 x = 127 Yen.To determine the breakeven point, we need to compute the value of this option if thedollar appreciated 10 percent (spot rose to , and subtract from it the premium we paid. This profit would be compared with the profit earned on five to 10 percent ofAMC’s sales (which would be lost as a result of the dollar appreciation). The numberof options to be purchased which would equalize these two quantities wouldrepresent the breakeven point.Example #5:Hedge the economic cost of the depreciating Yen to AMC.If we assume that AMC sales fall in direct proportion to depreciation in the yen ., a10 percent decline in yen and 10 percent decline in sales), then we can hedge the full value of AMC ’s sales. I have assumed $100 million in sales.1)Buy yen puts# contracts needed = Expected Sales *Current￥/$ Rate / Contract size9600 = ($100,000,000)(120￥/$) /￥1,250,0002)Total Cost = (# contracts)(contract size)(premium)$1,524,000 = (9600)(￥1,250,000)($￥)3)Floor rate = Exercise– Premium￥/$ =￥/$- $1,524,000/12,000,000,000￥4)The payoff changes depending on the level of the ￥/$ rate. The following tablesummarizes the payoffs. An equilibrium is reached when the spot rate equals thefloor rate.AMC ProfitabilityYen/$ Spot Put Payoff Sales Net Profit120(1,524,990)100,000,00098,475,010 121(1,524,990)99,173,66497,648,564 122(1,524,990)98,360,65696,835,666 123(1,524,990)97,560,97686,035,986 124(1,524,990)96,774,19495,249,204 125(1,524,990)96,000,00094,475,010 126(1,524,990)95,238,09593,713,105 127(847,829)94,488,18993,640,360 128(109,640)93,750,00093,640,360 129617,10493,023,25693,640,360 1301,332,66892,307,69293,640,360 1312,037,30791,603,05393,640,360 1322,731,26990,909,09193,640,360 1333,414,79690,225,66493,640,360 1344,088,12289,552,23993,640,360 1354,751,43188,888,88993,640,360 1365,405,06688,235,29493,640,360 1376,049,11887,591,24193,640,360 1386,683,83986,966,52293,640,360 1397,308,42586,330,93693,640,360 1407,926,07585,714,28693,640,360 1418,533,97785,106,38393,640,360 1429,133,31884,507,04293,640,360 1439,724,27683,916,08493,640,360 14410,307,02783,333,33393,640,360 14510,881,74082,758,62193,640,360 14611,448,57982,191,78193,640,36014712,007,70781,632,65393,640,360 14812,569,27981,081,08193,640,360 14913,103,44880,536,91393,640,360 15013,640,36080,000,00093,640,360 The parent has a DM payable, and Lira receivable. It has several ways to cover its exposure; forwards, options, or swaps.The forward would be acceptable for and maturity, but the Lira exposure the DM loan,would retainbecause itsome of itshas a known quantityuncertainty becausethese factors are not assured.The parent advantage of could buyfavorableDM callscurrencyand Lirafluctuations,puts.This would allow butwould requirethempayingtofortaketwopremiums.Finally, they could swap their Lira receivable into DM. This would leave a net DMexposure which would probably be smaller than the amount of the loan, which they could hedge using forwards or options, depending upon their risk outlook.The company has Lira receivables,and is concerned about possible depreciation versus the dollar. Because of the high costs of Lira options, they instead buy DMputs, making the assumption that movement in the DM and Lira exchange rates versusthe dollar correlate well.A hedge of lira using DM options will depend on the relationship between lira FX rates and DM options. This relationship could be determined using a regression ofhistorical data.The hedged risk as a percent of the open risk can be estimated as:Square Root (var(error)/(b2var(lira FX rate) ) * 100。

219417国际财务管理(第四版)习题集答案解析

国际财务管理计算题答案第3章二、计算题1、（1）投资者可以这样做：在乙银行用100港币=105.86人民币的价格，即100/105.86（港币/人民币）的价格购入港币100万×（100/105.86）港币=94.46万港币在甲银行用105.96/100（人民币/港币）卖出港币94.46×（105.96/100）=100.09万人民币投资者的收益：100.09-100=0.09万人民币2、（1）如果美元未来没升值到利率平价，则海外投资者具有获利机会。

最大的获利水平：1美元兑换人民币8.28元，在中国境存款投资，1年后换回美元获利：（1+1.98%）-1=1.98%与在美国存款投资收益率1.3%相比，获利更多。

随着美元汇率接近利率平价，这个收益率会向1.3%靠近，最终与美元利率相同。

（2）由于美元存款利率低于人民币存款利率，中国投资者没有套利获利机会。

（3）投资者套利交易面临美元升值的风险，如果必要，可以采用抛补套利防。

（4）如果存在利率平价，此时美元远期汇率升水，升水幅度：K=（1+1.98%）/（1+1.3）-1=0.67%1美元=8.28×（1+0.67%）=8.3355（元人民币）（5）处于利率平价时，投资者无法获得抛补套利收益。

（6）如果目前不存在利率平价，是否抛补套利，取决于投资者对未来美元升值可能性和可能幅度的判断，以及投资者的风险承受能力。

4、公司到期收回人民币：5000×81.21/100=4060（万元）5、如果掉期交易，则卖掉美元得到的人民币: 50×6.79=339.5(万元)美元掉期交易下支付美元的人民币价格：50×6.78=339(万)买卖价差人民币收入净额=339.5-339=0.5(万元)如果不做掉期交易,则美元两周的存款利息收入为50×0.4%×14/365=0.00767(万美元)折合人民币利息收入:0.00767×6.782=0.052(万元)两者相比,掉期交易比较合适.6、2011年11月16日合约执行价格1澳元=1.02美元即期汇率1澳元=1.024美元合约价格低于即期汇率，企业应该履行该合约，企业履约支付的澳元加上期权费：1澳元=1．02+（2.6834/100）=1.0468（美元）与即期交易相比，企业亏损：50×100×（1.0468-1.024）=114（美元）8、远期汇率低于及其汇率，故远期贴水为：远期汇率-即期汇率=0.188-0.190=-0.0029、行权，因为行权价低于实施期权时的即期汇率。

国际财务管理课后习题答案chapter

国际财务管理课后习题答案chapterCHAPTER 10 MANAGEMENT OF TRANSLATION EXPOSURESUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Explain the difference in the translation process between the monetary/nonmonetary method and the temporal method. Answer: Under the monetary/nonmonetary method, all monetary balance sheet accounts of a foreign subsidiary are translated at the current exchange rate. Other balance sheet accounts are translated at the historical rate exchange rate in effect when the account was first recorded. Under the temporal method, monetary accounts are translated at the current exchange rate. Other balance sheet accounts are also translated at the current rate, if they are carried on the books at current value. If they are carried at historical value, they are translated at the rate in effect on the date the item was put on the books. Since fixed assets and inventory are usually carried at historical costs, the temporal method and the monetary/nonmonetary method will typically provide the same translation.2. How are translation gains and losses handled differently according to the current rate method in comparison to the other three methods, that is, the current/noncurrent method, the monetary/nonmonetary method, and the temporal method? Answer: Under the current rate method, translation gains and losses are handled only as an adjustment to net worth through an equity account named the “cumulative translation adjustment” account. Nothing passes through the income statement. Th e other three translation methods pass foreign exchange gains or losses through the income statement before they enter on to the balance sheet through the accumulated retained earnings account.3. Identify some instances under FASB 52 when a foreign enti ty’s functional currency would be the same as the parent firm’s currency.Answer: Three examples under FASB 52, where the foreign entity’s functional currency will be the same as the parent firm’s currency, are: i) the foreign entity’s cash flows directly affect the parent’s cash flows and are readily available for remittance to the parent firm; ii) the sales prices for the foreign entity’s products are responsive on a short-term basis to exchange rate changes, where sales prices are determined through worldwide competition; and, iii) the sales market is primarily located in the parent’s country or sales contracts are denominated in the parent’s currency.4. Describe the remeasurement and translation process under FASB 52 of a wholly owned affiliate that keeps its books in the local currency of the country in which it operates, which is different than its functional currency.Answer: For a foreign entity that keeps its books in its local currency, which is different from its functional currency, the translation process according to FASB 52 is to: first, remeasure the financial reports from the local currency into the functional currency using the temporal method of translation, and second, translate from the functional currency into the reporting currency using the current rate method of translation.5. It is, generally, not possible to completely eliminate both translation exposure and transaction exposure. In some cases, the elimination of one exposure will also eliminate the other. But in other cases, the elimination of one exposure actually creates the other. Discuss which exposure might be viewed as the most important to effectively manage, if a conflict between controlling both arises. Also, discuss and critique the common methods for controlling translation exposure.Answer: Since it is, generally, not possible to completely eliminate both transaction and translation exposure, we recommend that transaction exposure be given first priority since it involves real cash flows. The translation process, on-the-other hand, has no direct effect on reporting currency cash flows, and will only have a realizable effect on net investment upon the sale or liquidation of the assets.There are two common methods for controlling translation exposure: a balance sheet hedge and a derivatives hedge. The balance sheet hedge involves equating the amount of exposed assets in an exposure currency with the exposed liabilities in that currency, so the net exposure is zero. Thus when an exposure currency exchange rate changes versus the reporting currency, the change in assets will offset the change in liabilities. To create a balance sheet hedge, once transaction exposure has been controlled, often means creating new transaction exposure. This is not wise since real cash flow losses can result. A derivatives hedge is not really a hedge, but rather a speculative position, since the size of the “hedge” is based on the future expected spot rate of exchange for the exposure currency with the reporting currency. If the actual spot rate differs from the expected rate, the “hedge” may result in the loss of real cash flows.PROBLEMS1. Assume that FASB 8 is still in effect instead of FASB 52. Construct a translation exposure report for Centralia Corporation and its affiliates that is the counterpart to Exhibit 10.7 in the text. Centralia and its affiliates carry inventory and fixed assets on the books at historical values.Solution: The following table provides a translation exposure report for Centralia Corporation and its affiliates under FASB 8, which is essentially the temporal method of translation. The difference between the new report and Exhibit 10.7 is that nonmonetary accounts such as inventory and fixed assets are translated at the historical exchange rate if they are carried at historical costs. Thus, these accounts will not change values when exchange rates change and they do not create translation exposure.Examination of the table indicates that under FASB 8 there is negative net exposure for the Mexican peso and the euro, whereas under FASB 52 the net exposure for these currencies is positive. There is no change in net exposure for the Canadian dollar and the Swiss franc. Consequently, if the euro depreciates against the dollar from €1.1000/$1.00 to€1.1786/$1.00, as the text example assumed, exposed assets will now fall in value by a smaller amount than exposed liabilities, instead of vice versa. The associated reporting currency imbalance will be $239,415, calculated as follows: Reporting Currency Imbalance=-€3,949,0000€1.1786/$1.00--€3,949,0000€1.1000/$1.00=$239,415.Translation Exposure Report under FASB 8 for Centralia Corporation and its Mexican and Spanish Affiliates, December 31, 2005 (in 000 Currency Units)Canadian Dollar MexicanPeso EuroSwissFrancAssetsCash CD200 Ps 6,000 € 825SF 0 Accounts receivable 0 9,000 1,045 0Inventory 0 0 0 0Net fixed assets 0 0 0Exposed assets CD200 Ps15,000 € 1,870SF 0LiabilitiesAccounts payable CD 0 Ps 7,000 € 1,364SF 0 Notes payable 0 17,000 935 1,400Long-term debt 0 27,000 3,520ExposedliabilitiesCD 0 Ps51,000 € 5,819SF1,400Net exposure CD200 (Ps36,000) (€3,949)(SF1,400)2. Assume that FASB 8 is still in effect instead of FASB 52. Construct a consolidated balance sheet for Centralia Corporation and its affiliates after a depreciation of the euro from €1.1000/$1.00 to €1.1786/$1.00 that is the counterpart to Exhibit 10.8 inthe text. Centralia and its affiliates carry inventory and fixed assets on the books at historical values.Solution: This problem is the sequel to Problem 1. The solution to Problem 1 showed that if the euro depreciated there would be a reporting currency imbalance of $239,415. Under FASB 8 this is carried through the income statement as a foreignexchange gain to the retained earnings on the balance sheet. The following table shows that consolidated retained earnings increased to $4,190,000 from $3,950,000 in Exhibit 10.8. This is an increase of $240,000, which is the same as the reporting currency imbalance after accounting for rounding error.Consolidated Balance Sheet under FASB 8 for Centralia Corporation and its Mexican anda This includes CD200,000 the parent firm has in a Canadian bank, carried as $150,000. CD200,000/(CD1.3333/$1.00) = $150,000.b$1,750,000 - $300,000 (= Ps3,000,000/(Ps10.00/$1.00)) intracompany loan = $1,450,000.c,d Investment in affiliates cancels with the net worth of the affiliates in the consolidation.e The Spanish affiliate owes a Swiss bank SF375,000 (÷ SF1.2727/€1.00 = €294,649). This is carried on the books,after the exchange rate change, as part of €1,229,649 = €294,649 + €935,000. €1,229,649/(€1.1786/$1.00) = $1,043,313.3. In Example 10.2, a f orward contract was used to establish a derivatives “hedge” to protect Centralia from a translation loss if the euro depreciated from €1.1000/$1.00 to €1.1786/$1.00. Assume that an over-the-counter put option on the euro with a strike price of €1.1393/$1.00 (or $0.8777/€1.00) can be purchased for $0.0088 per euro. Show how the potential translation loss can be “hedged” with an option contract.Solution: As in example 10.2, if the potential translation loss is $110,704, the equivalent amount in functiona l currency that needs to be hedged is €3,782,468. If in fact the euro does depreciate to €1.1786/$1.00 ($0.8485/€1.00), €3,782,468 can be purchased in the spot market for $3,209,289. At a striking price of €1.1393/$1.00, the €3,782,468 can be sold throu gh the put for $3,319,993, yielding a gross profit of $110,704. The put option cost $33,286 (= €3,782,468 x $0.0088). Thus, at an exchange rate of €1.1786/$1.00, the put option will effectively hedge $110,704 - $33,286 = $77,418 of the potential translation loss. At terminal exchange rates of €1.1393/$1.00 to €1.1786/$1.00, the put option hedge will be less effective. An option contract does not have to be exercised if doing so is disadvantageous to the option owner. Therefore, the put will not be exercised at exchange rates of less than €1.1393/$1.00 (more than $0.8777/€1.00), in which case the “hedge” will lose the $33,286 cost of the option.MINI CASE: SUNDANCE SPORTING GOODS, INC.Sundance Sporting Goods, Inc., is a U.S. manufacturer of high-quality sporting goods--principally golf, tennis and other racquet equipment, and also lawn sports, such as croquet and badminton-- with administrative offices and manufacturing facilities in Chicago, Illinois. Sundance has two wholly owned manufacturing affiliates, one in Mexico and the other in Canada. The Mexican affiliate is located in Mexico City and services all of Latin America. The Canadian affiliate is in Toronto and serves only Canada. Each affiliate keeps its books in its local currency, which is also the functional currency for the affiliate. The current exchange rates are: $1.00 = CD1.25 = Ps3.30 = A1.00 = ￥105 = W800. The nonconsolidated balance sheets for Sundance and its two affiliates appear in the accompanying table.Nonconsolidated Balance Sheet for Sundance Sporting Goods, Inc. and Its Mexican anda The parent firm is owed Ps1,320,000 by the Mexican affiliate. This sum is included in the parent’s accounts receivable as $400,000, translated at Ps3.30/$1.00. The remainder of the parent’s (Mexican affiliate’s) accounts receivable (payable) is denominated in dollars (pesos).b The Mexican affiliate is wholly owned by the parent firm. It is carried on the parent firm’s books at $2,400,000. This represents the sum of the comm on stock (Ps4,500,000) and retained earnings (Ps3,420,000) on the Mexican affiliate’s books, translated at Ps3.30/$1.00.c The Canadian affiliate is wholly owned by the parent firm. It is carried on the parent firm’s books at $3,600,000. This represents the sum of the common stock (CD2,900,000) and the retained earnings (CD1,600,000) on the Canadian affiliate’s books, translated at CD1.25/$1.00.d The parent firm has outstanding notes payable of ￥126,000,000 due a Japanese bank. This sum is carried on th e parent firm’s books as $1,200,000, translated at￥105/$1.00. Other notes payable are denominated in U.S. dollars.e The Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import house. This sum is carried on the Mexican affi liate’s books as Ps396,000, translated at A1.00/Ps3.30. Other accounts receivable are denominated in Mexican pesos.f The Canadian affiliate has sold on account W192,000,000 of merchandise to a Korean importer. This sum is carried on the Canadian affilia te’s books as CD300,000, translated at W800/CD1.25. Other accounts receivable are denominated in Canadian dollars.You joined the International Treasury division of Sundance six months ago after spending the last two years receiving your MBA degree. The corporate treasurer has asked you to prepare a report analyzing all aspects of the translation exposure faced by Sundance as a MNC. She has also asked you to address in your analysis the relationship between the firm’s translation exposure and its transa ction exposure. After performing a forecast of future spot rates of exchange, you decide that you must do the following before any sensible report can be written.a. Using the current exchange rates and the nonconsolidated balance sheets for Sundance and its affiliates, prepare a consolidated balance sheet for the MNC according to FASB 52.b. i. Prepare a translation exposure report for Sundance Sporting Goods, Inc., and its two affiliates.ii. Using the translation exposure report you have prepared, determine if any reporting currency imbalance will result from a change in exchange rates to which thefirm has currency exposure. Your forecast is that exchange rates will change from $1.00 = CD1.25 = Ps3.30 = A1.00 = ￥105 = W800 to $1.00 = CD1.30 = P s3.30 = A1.03 = ￥105 = W800.c. Prepare a second consolidated balance sheet for the MNC using the exchange rates you expect in the future. Determine how any reporting currency imbalance will affect the new consolidated balance sheet for the MNC.d. i. Prepare a transaction exposure report for Sundance and its affiliates. Determine if any transaction exposures are also translation exposures.ii. Investigate what Sundance and its affiliates can do to control its transaction and translation exposures. Determine if any of the translation exposure should be hedged.Suggested Solution to Sundance Sporting Goods, Inc.Note to Instructor: It is not necessary to assign the entire case problem. Parts a. and b.i. can be used as self-contained problems, respectively, on basic balance sheet consolidation and the preparation of a translation exposure report.a. Below is the consolidated balance sheet for the MNC prepared according to the current rate method prescribed by FASB52. Note that the balance sheet balances. That is, Total Assets and Total Liabilities and Net Worth equal one another. Thus, the assumption is that the current exchange rates are the same as when the affiliates were established. This assumption is relaxed in part c.Consolidated Balance Sheet for Sundance Sporting Goods, Inc. its Mexican and Canadian Affiliates,December 31, 2005: Pre-Exchange Rate Change (in 000 Dollars) Sundance, Inc.Mexican Affiliate Canadian AffiliateConsolidated Balance a$2,500,000 - $400,000 (= Ps1,320,000/(Ps3.30/$1.00)) intracompany loan = $2,100,000.b,c The investment in the affiliates cancels with the net worth of the affiliates in the consolidation.d The parent owes a Japanese bank ￥126,000,000. This is carried on the books as $1,200,000 (=￥126,000,000/(￥105/$1.00)).e The Mexican affiliate has sold on account A120,000 of merchandise to an Argentine import house. This is carried on the Mexican affiliate’s books as Ps396,000 (= A120,000 xPs3.30/A1.00).f The Canadian affiliate has sold on account W192,000,000 of merchandise to a Korean importer. This is carried on the Canadian affiliate’s books as CD300,000 (= W192,000,000/(W800/CD1.25)).b. i. Below is presented the translation exposure report for the Sundance MNC. Note, from the report that there is net positive exposure in the Mexican peso, Canadian dollar, Argentine austral and Korean won. If any of these exposure currencies appreciates (depreciates) against the U.S. dollar, exposed assets denominated in these currencies will increase (fall) in translated value by a greater amount than the exposed liabilities denominated in these currencies. There is negative net exposure in the Japanese yen. If the yen appreciates (depreciates) against the U.S. dollar, exposed assets denominated in the yen will increase (fall) in translated value by smaller amount than the exposed liabilities denominated in the yen. Translation Exposure Report for Sundance Sporting Goods, Inc. and its Mexican and Canadian Affiliates, December 31, 2005 (in 000 Currency Units)b. ii. The problem assumes that Canadian dollar depreciates from CD1.25/$1.00 to CD1.30/$1.00 and that the Argentine austral depreciates from A1.00/$1.00 to A1.03/$1.00. To determine the reporting currency imbalance in translated value caused by these exchange rate changes, we can use the following formula:Net Exposure Currency i S(i/reporting)-Net Exposure Currency i S(i/reporting)new old = Reporting Currency Imbalance.From the translation exposure report we can determine that the depreciation in the Canadian dollar will cause aCD4,200,000 CD1.30/$1.00-CD4,200,000CD1.25/$1.00= -$129,231reporting currency imbalance.Similarly, the depreciation in the Argentine austral will cause aA120,000 A1.03/$1.00-A120,000A1.00/$1.00= -$3,495reporting currency imbalance.In total, the depreciation of the Canadian dollar and the Argentine austral will cause a reporting currency imbalance in translated value equal to -$129,231 -$3,495= -$132,726.c. The new consolidated balance sheet for Sundance MNC after the depreciation of the Canadian dollar and the Argentine austral is presented below. Note that in order for the new consolidated balance sheet to balance after the exchange rate change, it is necessary to have a cumulative translation adjustment account balance of -$133 thousand, which is the amountof the reporting currency imbalance determined in part b. ii (rounded to the nearest thousand).。

Solution_国际财务管理_切奥尔尤恩_课后习题答案_第五章

CHAPTER 5 THE MARKET FOR FOREIGN EXCHANGESUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Give a full definition of the market for foreign exchange.Answer: Broadly defined, the foreign exchange (FX) market encompasses the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, and trading in foreign currency options and futures contracts.2. What is the difference between the retail or client market and the wholesale or interbank market for foreign exchange?Answer: The market for foreign exchange can be viewed as a two-tier market. One tier is the wholesale or interbank market and the other tier is the retail or client market. International banks provide the core of the FX market. They stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, corporations or individuals, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange. Retail transactions account for only about 14 percent of FX trades. The other 86 percent is interbank trades between international banks, or non-bank dealers large enough to transact in the interbank market.3. Who are the market participants in the foreign exchange market?Answer: The market participants that comprise the FX market can be categorized into five groups: international banks, bank customers, non-bank dealers, FX brokers, and central banks. International banks provide the core of the FX market. Approximately 100 to 200 banks worldwide make a market in foreign exchange, i.e., they stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, the bank customers, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange. Non-bank dealers are large non-bank financial institutions, such as investment banks, mutual funds, pension funds, and hedge funds, whose size and frequency of trades make it cost- effective to establish their own dealing rooms totrade directly in the interbank market for their foreign exchange needs.Most interbank trades are speculative or arbitrage transactions where market participants attempt to correctly judge the future direction of price movements in one currency versus another or attempt to profit from temporary price discrepancies in currencies between competing dealers.FX brokers match dealer orders to buy and sell currencies for a fee, but do not take a position themselves. Interbank traders use a broker primarily to disseminate as quickly as possible a currency quote to many other dealers.Central banks sometimes intervene in the foreign exchange market in an attempt to influence the price of its currency against that of a major trading partner, or a country that it “fixes” or “pegs” its currency against. Intervention is the process of using foreign currency reserves to buy one’s own currency in order to decrease its supply and thus increase its value in the foreign exchange market, or alternatively, selling one’s own currency for foreign currency in order to increase its supply and lower its price.4. How are foreign exchange transactions between international banks settled?Answer: The interbank market is a network of correspondent banking relationships, with large commercial banks maintaining demand deposit accounts with one another, called correspondent bank accounts. The correspondent bank account network allows for the efficient functioning of the foreign exchange market. As an example of how the network of correspondent bank accounts facilities international foreign exchange transactions, consider a U.S. importer desiring to purchase merchandise invoiced in guilders from a Dutch exporter. The U.S. importer will contact his bank and inquire about the exchange rate. If the U.S. importer accepts the offered exchange rate, the bank will debit the U.S. importer’s account for the purchase of the Dutch guilders. The bank will instruct its correspondent bank in the Netherlands to debit its correspondent bank account the appropriate amount of guilders and to credit the Dutch exporter’s bank account. The importer’s bank will then debit its books to offset the debit of U.S. importer’s account, reflecting the decrease in its correspondent bank account balance.5. What is meant by a currency trading at a discount or at a premium in the forward market?Answer: The forward market involves contracting today for the future purchase or sale of foreign exchange. The forward price may be the same as the spot price, but usually it is higher (at a premium) or lower (at a discount) than the spot price.6. Why does most interbank currency trading worldwide involve the U.S. dollar?Answer: Trading in currencies worldwide is against a common currency that has international appeal. That currency has been the U.S. dollar since the end of World War II. However, the euro and Japanese yen have started to be used much more as international currencies in recent years. More importantly, trading would be exceedingly cumbersome and difficult to manage if each trader made a market against all other currencies.7. Banks find it necessary to accommodate their clients’ needs to buy or sell FX forward, in many instances for hedging purposes. How can the bank eliminate the currency exposure it has created for itself by accommodating a client’s forward transaction?Answer: Swap transactions provide a means for the bank to mitigate the currency exposure in a forward trade. A swap transaction is the simultaneous sale (or purchase) of spot foreign exchange against a forward purchase (or sale) of an approximately equal amount of the foreign currency. To illustrate, suppose a bank customer wants to buy dollars three months forward against British pound sterling. The bank can handle this trade for its customer and simultaneously neutralize the exchange rate risk in the trade by selling (borrowed) British pound sterling spot against dollars. The bank will lend the dollars for three months until they are needed to deliver against the dollars it has sold forward. The British pounds received will be used to liquidate the sterling loan.8. A CD/$ bank trader is currently quoting a small figure bid-ask of 35-40, when the rest of the market is trading at CD1.3436-CD1.3441. What is implied about the trader’s beliefs by his prices?Answer: The trader must think the Canadian dollar is going to appreciate against the U.S. dollar and therefore he is trying to increase his inventory of Canadian dollars by discouraging purchases of U.S. dollars by standing willing to buy $ at only CD1.3435/$1.00 and offering to sell from inventory at the slightly lower than market price of CD1.3440/$1.00.9. What is triangular arbitrage? What is a condition that will give rise to a triangular arbitrage opportunity?Answer: Triangular arbitrage is the process of trading out of the U.S. dollar into a second currency, then trading it for a third currency, which is in turn traded for U.S. dollars. The purpose is to earn an arbitrageprofit via trading from the second to the third currency when the direct exchange between the two is not in alignment with the cross exchange rate.Most, but not all, currency transactions go through the dollar. Certain banks specialize in making a direct market between non-dollar currencies, pricing at a narrower bid-ask spread than the cross-rate spread. Nevertheless, the implied cross-rate bid-ask quotations impose a discipline on the non-dollar market makers. If their direct quotes are not consistent with the cross exchange rates, a triangular arbitrage profit is possible.10. Over the past six years, the exchange rate between Swiss franc and U.S. dollar, SFr/$, has changed from about 1.30 to about 1.60. Would you agree that over this six-year period, the Swiss goods have become cheaper for buyers in the United States? (UPDATE? SF has gone from SF1.67/$ to SF1.04/$ over the last six years.)CFA Guideline Answer:The value of the dollar in Swiss francs has gone up from about 1.30 to about 1.60. Therefore, the dollar has appreciated relative to the Swiss franc, and the dollars needed by Americans to purchase Swiss goods have decreased. Thus, the statement is correct.PROBLEMS1. Using Exhibit 5.4, calculate a cross-rate matrix for the euro, Swiss franc, Japanese yen, and the Britishpound. Use the most current American term quotes to calculate the cross-rates so that the triangular matrix resulting is similar to the portion above the diagonal in Exhibit 5.6.Solution: The cross-rate formula we want to use is:S(j/k) = S($/k)/S($/j).The triangular matrix will contain 4 x (4 + 1)/2 = 10 elements.¥ SF £ $Euro 159.91 1.6317 .7478 1.4744 Japan (100) 1.0204.4676 .9220 Switzerland.4583 .9036 U.K 1.97172. Using Exhibit 5.4, calculate the one-, three-, and six-month forward cross-exchange rates between theCanadian dollar and the Swiss franc using the most current quotations. State the forward cross-rates in“Canadian” terms.Solution: The formulas we want to use are:F N (CD/SF) = F N ($/SF)/F N ($/CD)orF N (CD/SF) = F N (CD/$)/F N (SF/$).We will use the top formula that uses American term forward exchange rates.F 1(CD/SF) = .9052/.9986 = .9065F 3(CD/SF) = .9077/.9988 = .9088F 6(CD/SF) = .9104/.9979 = .91233. A foreign exchange trader with a U.S. bank took a short position of £5,000,000 when the $/£ exchange rate was 1.55. Subsequently, the exchange rate has changed to 1.61. Is this movement in the exchange rate good from the point of view of the position taken by the trader? By how much has the bank’s liability changed because of the change in the exchange rate? UPDATE TO CURRENT EX-RATES?CFA Guideline Answer:The increase in the $/£ exchange rate implies that the pound has appreciated with respect to the dollar. This is unfavorable to the trader since the trader has a short position in pounds.Bank’s liability in dollars initially was 5,000,000 x 1.55 = $7,750,000Bank’s liability in dollars now is 5,000,000 x 1.61 = $8,050,0004. Restate the following one-, three-, and six-month outright forward European term bid-ask quotes in forward points.1.3431-1.3436SpotOne-Month 1.3432-1.3442Three-Month 1.3448-1.3463Six-Month 1.3488-1.3508Solution:One-Month 01-06Three-Month 17-27Six-Month 57-725. Using the spot and outright forward quotes in problem 3, determine the corresponding bid-ask spreads in points.Solution:5SpotOne-Month 10Three-Month 15Six-Month 206. Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium or discount for the Canadian dollar versus the U.S. dollar using American term quotations. For simplicity, assume each month has 30 days. What is the interpretation of your results?Solution: The formula we want to use is:f N,CD = [(F N($/CD) - S($/CD/$)/S($/CD)] x 360/Nf1,CD = [(.9986 - .9984)/.9984] x 360/30 = .0024f3,CD = [(.9988 - .9984)/.9984] x 360/90 = .0048f6,CD = [(.9979 - .9984)/.9984] x 360/180 = -.0060The pattern of forward premiums indicates that the Canadian dollar is trading at a premium versus the U.S. dollar for maturities up to three months into the future and then it trades at a discount.7. Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium or discount for the U.S. dollar versus the British pound using European term quotations. For simplicity, assume each month has 30 days. What is the interpretation of your results?Solution: The formula we want to use is:f N,$ = [(F N (£/$) - S(£/$))/S(£/$)] x 360/Nf1,$ = [(.5076 - .5072)/.5072] x 360/30 = .0095f3,$ = [(.5086 - .5072)/.5072] x 360/90 = .0331f6,$ = [(.5104 - .5072)/.5072] x 360/180 = .0757The pattern of forward premiums indicates that the dollar is trading at a premium versus the British pound. That is, it becomes more expensive to buy a U.S. dollar forward for British pounds (in absolute and percentage terms) the further into the future one contracts.8. A bank is quoting the following exchange rates against the dollar for the Swiss franc and the Australian dollar:SFr/$ = 1.5960--70A$/$ = 1.7225--35An Australian firm asks the bank for an A$/SFr quote. What cross-rate would the bank quote?CFA Guideline Answer:The SFr/A$ quotation is obtained as follows. In obtaining this quotation, we keep in mind that SFr/A$ = SFr/$/A$/$, and that the price (bid or ask) for each transaction is the one that is more advantageous to the bank.The SFr/A$ bid price is the number of SFr the bank is willing to pay to buy one A$. This transaction (buy A$—sell SFr) is equivalent to selling SFr to buy dollars (at the bid rate of 1.5960 and the selling those dollars to buy A$ (at an ask rate of 1.7235). Mathematically, the transaction is as follows:bid SFr/A$ = (bid SFr/$)/(ask A$/$) = 1.5960/1.7235 = 0.9260The SFr/A$ ask price is the number of SFr the bank is asking for one A$. This transaction (sell A$—buy SFr) is equivalent to buying SFr with dollars (at the ask rate of 1.5970 and then simultaneously purchasing these dollars against A$ (at a bid rate of 1.7225). This may be expressed as follows:ask SFr/A$ = (ask SFr/$)/(bid A$/$) = 1.5970/1.7225 = 0.9271The resulting quotation by the bank isSFr/A$ = 0.8752—0.87639. Given the following information, what are the NZD/SGD currency against currency bid-ask quotations?AmericanTermsTerms EuropeanBidAskAskQuotations BidBankNew Zealand dollar .7265 .7272 1.3751 1.3765Singapore dollar .6135 .6140 1.6287 1.6300Solution: Equation 5.12 from the text implies S b(NZD/SGD) = S b($/SGD) x S b(NZD/$) = .6135 x 1.3751 = .8436. The reciprocal, 1/S b(NZD/SGD) =S a(SGD/NZD) = 1.1854. Analogously, it is implied that S a(NZD/SGD) = S a($/SGD) x S a(NZD/$) = .6140 x 1.3765 = .8452. The reciprocal, 1/S a(NZD/SGD) = S b(SGD/NZD) = 1.1832. Thus, the NZD/SGD bid-ask spread is NZD0.8436-NZD0.8452 and the SGD/NZD spread is SGD1.1832-SGD1.1854.10. Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:Swiss franc/dollar = SFr1.5971?$Australian dollar/U.S. dollar = A$1.8215/$Australian dollar/Swiss franc = A$1.1440/SFrIgnoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and how would he profit if he has $1,000,000 available for this purpose.CFA Guideline Answer:A. The implicit cross-rate between Australian dollars and Swiss franc is A$/SFr = A$/$ x $/SFr = (A$/$)/(SFr/$) = 1.8215/1.5971 = 1.1405. However, the quoted cross-rate is higher at A$1.1.1440/SFr. So, triangular arbitrage is possible.B. In the quoted cross-rate of A$1.1440/SFr, one Swiss franc is worth A$1.1440, whereas the cross-rate based on the direct rates implies that one Swiss franc is worth A$1.1405. Thus, the Swiss franc is overvalued relative to the A$ in the quoted cross-rate, and Doug Bernard’s strategy for triangular arbitrage should be based on selling Swiss francs to buy A$ as per the quoted cross-rate. Accordingly, the steps Doug Bernard would take for an arbitrage profit is as follows:i.Sell dollars to get Swiss francs: Sell $1,000,000 to get $1,000,000 x SFr1.5971/$ =SFr1,597,100.ii.Sell Swiss francs to buy Australian dollars: Sell SFr1,597,100 to buy SFr1,597,100 x A$1.1440/SFr = A$1,827,082.40.iii.Sell Australian dollars for dollars: Sell A$1,827,082.40 for A$1,827,082.40/A$1.8215/$ = $1,003,064.73.Thus, your arbitrage profit is $1,003,064.73 - $1,000,000 = $3,064.73.11. Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting €0.7627/$1.00 and Credit Suisse is offering SF1.1806/$1.00. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current €/SF quote of .6395. Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage. What happens if you initially sell dollars for Swiss francs? What €/SF price will eliminate triangulararbitrage?Solution: To make a triangular arbitrage profit the Deutsche Bank trader would sell $5,000,000 to Dresdner Bank at €0.7627/$1.00. This trade would yield €3,813,500= $5,000,000 x .7627. The Deutsche Bank trader would then sell the euros for Swiss francs to Union Bank of Switzerland at a price of €0.6395/SF1.00, yielding SF5,963,253 = €3,813,500/.6395. The Deutsche Bank trader will resell the Swiss francs to Credit Suisse for $5,051,036 = SF5,963,253/1.1806, yielding a triangular arbitrage profit of $51,036.If the Deutsche Bank trader initially sold $5,000,000 for Swiss francs, instead of euros, the trade would yield SF5,903,000 = $5,000,000 x 1.1806. The Swiss francs would in turn be traded for euros to UBS for €3,774,969= SF5,903,000 x .6395. The euros would be resold to Dresdner Bank for $4,949,481 = €3,774,969/.7627, or a loss of $50,519. Thus, it is necessary to conduct the triangular arbitrage in the correct order.The S(€/SF) cross exchange rate should be .7627/1.1806 = .6460. This is an equilibrium rate at which a triangular arbitrage profit will not exist. (The student can determine this for himself.) A profit results from the triangular arbitrage when dollars are first sold for euros because Swiss francs are purchased for euros at too low a rate in comparison to the equilibrium cross-rate, i.e., Swiss francs are purchased for only €0.6395/SF1.00 instead of the no-arbitrage rate of €0.6460/SF1.00. Similarly, when dollars are first sold for Swiss francs, an arbitrage loss results because Swiss francs are sold for euros at too low a rate, resulting in too few euros. That is, each Swiss franc is sold for €0.6395/SF1.00 instead of the higher no-arbitrage rate of €0.6460/SF1.00.12. The current spot exchange rate is $1.95/£ and the three-month forward rate is $1.90/£. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.92/£ in three months. Assume that you would like to buy or sell £1,000,000.a. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?b. What would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.86/£.Solution:a. If you believe the spot exchange rate will be $1.92/£ in three months, you should buy £1,000,000 forward for $1.90/£. Your expected profit will be:$20,000 = £1,000,000 x ($1.92 -$1.90).b. If the spot exchange rate actually turns out to be $1.86/£ in three months, your loss from the long position will be:-$40,000 = £1,000,000 x ($1.86 -$1.90).13. Omni Advisors, an international pension fund manager, plans to sell equities denominated in Swiss Francs (CHF) and purchase an equivalent amount of equities denominated in South African Rands (ZAR).Omni will realize net proceeds of 3 million CHF at the end of 30 days and wants to eliminate the risk that the ZAR will appreciate relative to the CHF during this 30-day period. The following exhibit shows current exchange rates between the ZAR, CHF, and the U.S. dollar (USD).Currency Exchange RatesZAR/USD ZAR/USD CHF/USD CHF/USDMaturity Bid Ask Bid AskSpot 6.2681 6.2789 1.5282 1.534330-day 6.2538 6.2641 1.5226 1.528590-day 6.2104 6.2200 1.5058 1.5115a.Describe the currency transaction that Omni should undertake to eliminate currency riskover the 30-day period.b.Calculate the following:• The CHF/ZAR cross-currency rate Omni would use in valuing the Swiss equityportfolio.• The current value of Omni’s Swiss equity portfolio in ZAR.• The annualized forward premium or discount at which the ZAR is trading versus theCHF.CFA Guideline Answer:a.To eliminate the currency risk arising from the possibility that ZAR will appreciateagainst the CHF over the next 30-day period, Omni should sell 30-day forward CHF against 30-day forward ZAR delivery (sell 30-day forward CHF against USD and buy 30-day forward ZAR against USD).b.The calculations are as follows:• Using the currency cross rates of two forward foreign currencies and three currencies(CHF, ZAR, USD), the exchange would be as follows:--30 day forward CHF are sold for USD. Dollars are bought at the forward sellingprice of CHF1.5285 = $1 (done at ask side because going from currency intodollars)--30 day forward ZAR are purchased for USD. Dollars are simultaneously sold topurchase ZAR at the rate of 6.2538 = $1 (done at the bid side because going fromdollars into currency)--For every 1.5285 CHF held, 6.2538 ZAR are received; thus the cross currency rate is1.5285 CHF/6.2538 ZAR = 0.244411398.• At the time of execution of the forward contracts, the value of the 3 million CHFequity portfolio would be 3,000,000 CHF/0.244411398 = 12,274,386.65 ZAR.• To calculate the annualized premium or discount of the ZAR against the CHF requires comparison of the spot selling exchange rate to the forward selling price of CHF forZAR.Spot rate = 1.5343 CHF/6.2681 ZAR = 0.24477912030 day forward ask rate 1.5285 CHF/6.2538 ZAR = 0.244411398The premium/discount formula is:[(forward rate – spot rate) / spot rate] x (360 / # day contract) =[(0.244411398 – 0.24477912) / 0.24477912] x (360 / 30) =-1.8027126 % = -1.80% discount ZAR to CHFMINI CASE: SHREWSBURY HERBAL PRODUCTS, LTD.Shrewsbury Herbal Products, located in central England close to the Welsh border, is an old-line producer of herbal teas, seasonings, and medicines. Its products are marketed all over the United Kingdom and in many parts of continental Europe as well.Shrewsbury Herbal generally invoices in British pound sterling when it sells to foreign customers in order to guard against adverse exchange rate changes. Nevertheless, it has just received an order from a large wholesaler in central France for £320,000 of its products, conditional upon delivery being made in three months’ time and the order invoiced in euros.Shrewsbury’s controller, Elton Peters, is concerned with whether the pound will appreciate versus the euro over the next three months, thus eliminating all or most of the profit when the euro receivable is paid. He thinks this is an unlikely possibility, but he decides to contact the firm’s banker for suggestions about hedging the exchange rate exposure.Mr. Peters learns from the banker that the current spot exchange rate is €/£ is €1.4537, thus the invoice amount should be €465,184. Mr. Peters also learns that the three-month forward rates for the pound and the euro versus the U.S. dollar are $1.8990/£1.00 and $1.3154/€1.00, respectively. The banker offers to set up a forward hedge for selling the euro receivable for pound sterling based on the €/£ forward cross-exchange rate implicit in the forward rates against the dollar.What would you do if you were Mr. Peters?Suggested Solution to Shrewsbury Herbal Products, Ltd.Note to Instructor: This elementary case provides an intuitive look at hedging exchange rate exposure. Students should not have difficulty with it even though hedging will not be formally discussed until Chapter 8. The case is consistent with the discussion that accompanies Exhibit 5.9 of the text. Professor of Finance, Banikanta Mishra, of Xavier Institute of Management – Bhubaneswar, India contributed to this solution.Suppose Shrewsbury sells at a twenty percent markup. Thus the cost to the firm of the £320,000 order is £256,000. Thus, the pound could appreciate to €465,184/£256,000 = €1.8171/1.00 before all profit was eliminated. This seems rather unlikely. Nevertheless, a ten percent appreciation of the pound (€1.4537 x 1.10) to €1.5991/£1.00 would only yield a profit of £34,904 (= €465,184/1.5991 - £256,000). Shrewsbury can hedge the exposure by selling the euros forward for British pounds at F3(€/£) = F3($/£) ÷ F3($/€) = 1.8990 ÷ 1.3154 = 1.4437. At this forward exchange rate, Shrewsbury can “lock-in” a price of £322,217 (= €465,184/1.4437) for the sale. The forward exchange rate indicates that the euro is trading at a premium to the British pound in the forward market. Thus, the forward hedge allows Shrewsbury to lock-in a greater amount (£2,217) than if the euro receivable was converted into pounds at the current spotIf the euro was trading at a forward discount, Shrewsbury would end up locking-in an amount less than £320,000. Whether that would lead to a loss for the company would depend upon the extent of the discount and the amount of profit built into the price of £320,000. Only if the forward exchange rate is even with the spot rate will Shrewsbury receive exactly £320,000.Obviously, Shrewsbury could ensure that it receives exactly £320,000 at the end of three-month accounts receivable period if it could invoice in £. That, however, is not acceptable to the French wholesaler. When invoicing in euros, Shrewsbury could establish the euro invoice amount by use of the forward exchange rate instead of the current spot rate. The invoice amount in that case would be €461,984 = £320,000 x 1.4437. Shrewsbury can now lock-in a receipt of £320,000 if it simultaneously hedges its euro exposure by selling €461,984 at the forward rate of 1.4437. That is, £320,000 =€461,984/1.4437.。

尤恩版《国际财务管理》第七版教师习题册及答案TBChap004

尤恩版《国际财务管理》第七版教师习题册及答案TBChap004Chapter 04Corporate Governance Around the World True / False Questions1.Countries with strong shareholder protection tend to have more valuable stock markets and morecompanies listed on stock exchanges per capita than countries with weak protection.True FalseMultiple Choice Questions2.Corporate governance can be defined asA. t he economic, legal, and institutional framework in which corporate control and cash flow rightsare distributed among shareholders, managers and other stakeholders of the company.B. t he general framework in which company management is selected and monitored.C. t he rules and regulations adopted by boards of directors specifying how to managecompanies.D. t he government-imposed rules and regulations affecting corporate management.3.When managerial self-dealings are excessive and left unchecked,A. t hey can have serious negative effects on share values.B. t hey can impede the proper functions of capital markets.C. t hey can impede such measures as GDP growth.D. a ll of the above4.Corporate governance structureA. v aries a great deal across countries.B. h as become homogenized following the integration of capital markets.C. h as become homogenized due to cross-listing of shares of many public corporations.D. n one of the above5.The genius of public corporations stems from their capacity to allow efficient sharing or spreadingof risk among many investors, who can buy and sell their ownership shares on liquid stockexchanges and let professional managers run the company on behalf of shareholders. This risk sharing stems fromA. t he liquidity of the shares.B. t he limited liability of shareholders.C. t he limited liability of bondholders.D. t he limited ability of shareholders.6.In a public company with diffused ownership, the board of directors is entrusted withA. m onitoring the auditors and safeguarding the interests of shareholders.B. m onitoring the shareholders and safeguarding the interests of management.C. m onitoring the management and safeguarding the interests of shareholders.D. n one of the above7.The key weakness of the public corporation isA. t oo many shareholders, which makes it difficult to make corporate decision.B. r elatively high corporate income tax rates.C. c onflicts of interest between managers and shareholders.D. c onflicts of interests between shareholders and bondholders.8.When company ownership is diffuse,A. a "free rider" problem discourages shareholder activism.B. t he large number of shareholders ensures strong monitoring of managerial behavior because with a large enough group, there's almost always someone who will to incur the costs of monitoring management.C. f ew shareholders have a strong enough incentive to incur the costs of monitoring management.D. b oth a and c are correct9.In many countries with concentrated ownershipA. t he conflicts of interest between shareholders and managers are worse than in countries with diffuse ownership of firms.B. t he conflicts of interest are greater between large controlling shareholders and small outside shareholders than between managers and shareholders.C. t he conflicts of interest are greater between managers and shareholders than between large controlling shareholders and small outside shareholders.D. c orporate forms of business organization with concentrated ownership are rare.10.In what country do the three largest shareholders control, on average, about 60 percent of the shares of a public company?A. U nited StatesB. C anadaC. G reat BritainD. I taly11.The public corporationA. i s jointly owned by a (potentially) large number of shareholders.B. o ffers shareholders limited liability.C. s eparates the ownership and control of a firms assets.D. a ll of the above12.The key strengths of the public corporation is/areA. t heir capacity to allow efficient risk sharing among many investors.B. t heir capacity to raise large amounts of funds at relatively low cost.C. t heir capacity to consolidate decision-making.D. a ll of the above13.The central issue of corporate governance isA. h ow to protect creditors from managers and controlling shareholders.B. h ow to protect outside investors from the controlling insiders.C. h ow to alleviate the conflicts of interest between managers and shareholders.D. h ow to alleviate the conflicts of interest between shareholders and bondholders.14.In theory,A. m anagers are hired by the shareholders at the annual stockholders meeting. If the managersturn in a bad year, new ones get hired.B. s hareholders hire the managers to oversee the board of directors.C. m anagers are hired by the board of directors; the board is accountable to the shareholders.D. n one of the above15.In the reality of corporate governance at the turn of this century,A. b oards of directors are often dominated by management-friendly insiders.B. a typical board of directors often has relatively few outside directors who can independentlyand objectively monitor the management.C. m anagers of one firm often sit on the boards of other firms, whose managers are on the boardof the first firm. Due to the interlocking nature of these boards, there can exist a culture of "I'll overlook your problems if you overlook mine."D. a ll of the above have been true to a greater or lesser extent in the recent past.16.The strongest protection for investors is provided byA. E nglish common law countries, such as Canada, the United States, and the U.K.B. F rench civil law countries, such as Belgium, Italy, and Mexico.C. a weak board of directors.D. s ocialized firms.17.The public corporation has a key weakness:A. t he conflicts of interest between bondholders and shareholders.B. t he conflicts of interest between managers and bondholders.C. t he conflicts of interest between stakeholders and shareholders.D. t he conflicts of interest between managers and shareholders.18.The separation of the company's ownership and control,A. i s especially prevalent in such countries as the United States and the United Kingdom, wherecorporate ownership is highly diffused.B. i s especially prevalent in such countries as the Italy and Mexico, where corporate ownership is highly concentrated.C. i s a rational response to the agency problem.D. n one of the above19.In the United States, managers are legally bound by the "duty of loyalty" toA. t he board of directors.B. t he shareholders.C. t he bondholders.D. t he government.20.In the United States, managers are bound by the "duty of loyalty" to serve the shareholders.A. T his is an ethical, not legal, obligation.B. T his is a legal obligation.C. T his is only a moral obligation; there are no penalties.21.Outside the United States and the United Kingdom,A. c oncentrated ownership of the company is more the exception than the rule.B. d iffused ownership of the company is more the exception than the rule.C. p artnerships are more important than corporations.D. n one of the above22.A complete contract between shareholders and managersA. w ould specify exactly what the manager will do under each of all possible future contingencies.B. w ould be an expensive contract to write and a very expensive contract to monitor.C. w ould eliminate any conflicts of interest (and managerial discretion).D. a ll of the above23.Why is it rational to make shareholders "weak" by giving control to the managers of the firm?A. T his may be rational when shareholders may be neither qualified nor interested in making business decisions.B. T his may be rational since many shareholders find it easier to sell their shares in an underperforming firm than to monitor the management.C. T his may be rational to the extent that managers are answerable to the board of directors.D. A ll of the above are explanations for the separation of ownership and control.24.Free cash flow refers toA. a firm's cash reserve in excess of tax obligation.B. a firm's funds in excess of what's needed for undertaking all profitable projects.C. a firm's cash reserve in excess of interest and tax payments.D. a firm's income tax refund that is due to interest payments on borrowing.25.The investors supply funds to the company but are not involved in the company's daily decisionmaking. As a result, many public companies come to haveA. s trong shareholders and weak managers.B. s trong managers and weak shareholders.C. s trong managers and strong shareholders.D. w eak managers and weak shareholders.26.The agency problem refers to the possible conflicts of interest betweenA. s elf-interested managers as principals and shareholders of the firm who are the agents.B. a ltruistic managers as agents and shareholders of the firm who are the principals.C. s elf-interested managers as agents and shareholders of the firm who are the principals.D. d utiful managers as principals and shareholders of the firm who are the agents.27.Self-interested managers may be tempted toA. i ndulge in expensive perquisites at company expense.B. a dopt anti-takeover measures for their company to ensure their personal job security.C. w aste company funds by undertaking unprofitable projects that benefit themselves but notshareholders.D. a ll of the above are potential abuses that self-interested managers may be tempted to visitupon shareholders.28.Suppose in order to defraud the shareholders, a manager sets up an independent company thathe owns sells the main company's output to this company. He would be tempted to set the transfer priceA. b elow market prices.B. a bove market prices.C. a t the market price.D. i n accordance with GAAP.29.Suppose in order to defraud the shareholders, a manager sets up an independent company thathe owns buys one of the main company's inputs of production from this company. He would be tempted to set the transfer priceA. b elow market prices.B. a bove market prices.C. a t the market price.D. i n accordance with GAAP.30.Why do managers tend to retain free cash flow?A. M anagers are in the best position to decide the best use of those funds.B. T hese funds are needed for undertaking profitable projects and the issue costs are less thannew issues of stocks or bonds.C. M anagers may not be acting in the shareholders best interest, and for a variety of reasons, want to use the free cash flow.D. N one of the above31.Managerial entrenchment efforts are clear signs of the agency problem. They includeA. a nti-takeover defenses.B. p oison pills.C. c hanges in the voting procedures to make it more difficult for the firm to be taken over.D. a ll of the above32.In high-growth industries where companies' internally generated funds fall short of profitable investment opportunities,A. m anagers are less likely to waste funds in unprofitable projects.B. m anagers are more likely to waste funds in unprofitable projects.33.The agency problem tendsA. t o be more serious in firms with free cash flows.B. t o be more serious in firms with excessive amounts of excess cash.C. t o be less serious in firms with few numbers of shareholders.D. a ll of the above34.In the graph at right, X, Y, and Z representA. e ntrenchment, alignment, entrenchment.B. a lignment, entrenchment, alignment.C. m isalignment and alignment.D. a gency costs of debt and equity.35.In the graph at right, for Fortune 500 companies, X, Y areA. 5% and 25%.B. 15% and 50%.C. 50% and 75%.D. N one of the above36.Which of the following is true regarding leveraged buy-outs (LBOs)?A. L BOs involve managers or buyout partners acquiring controlling interests in public companies, usually financed by heavy borrowing.B. C oncentrated ownership and high level of debt associated with LBOs are the mechanism for solving the agency problem.C. L BOs improve a company's free cash flow and this is the mechanism by which they can solvethe agency problem.D. B oth a and b37.Tobin's Q isA. t he ratio of the market value of company assets to the replacement costs of the assets.B. a means to find overvalued stocks: if Q is high it means that the cost to replace a firm's assets is greater than the value of its stock.C. t he same as the price-to-book ratio.D. B oth a and b are correct38.It is important for society as a whole to solve the agency problem, since the agency problemA. l eads to waste of scarce resources.B. h ampers capital market functions.C. r etards economic growth.D. a ll of the above39.In the U.S., the chief role of the board of directors isA. t o hire the management team.B. t o decide on the annual capital budget.C. t o design an effective incentive compatible compensation scheme for themselves.D. n one of the above40.In the United Kingdom, the majority of public companiesA. v oluntarily abide by the Code of Best Practice on corporate governance.B. a re compelled by law to abide by the Code of Best Practice on corporate governance.C. d o not abide by the Code of Best Practice on corporate governance.41.In Germany the corporate board isA. l egally charged with representing the interests of shareholders exclusively.B. l egally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in general, not just shareholders.C. l egally charged as a supervisory board only.D. l egally charged as a management board only.42.In the United StatesA. b oards of directors are legally responsible for representing the interests of the shareholders.B. d ue to the diffused ownership structure of the public company, management often gets to choose board members who are likely to be friendly to management.C. t here is a correlation between underperforming firms and boards of directors who are not fully independent.D. a ll of the above are true, in the United States.43.In the United States, it is not uncommon for the same person to serve as both CEO and chairman of the board.A. T his situation must not have much conflict of interest since it is common.B. T his situation has a built-in conflict of interest.C. T his is only legal if that individual owns a controlling number of shares in the firm.D. N one of the above44.Suppose you are the CEO of company A, and you serve on the board of company B, while the CEO of B is on your board.A. T his is a potential conflict of interest for both parties.B. T his is normal and even a desirable situation since it allows for efficient information sharing between the firms.C. T here is a potential conflict for the shareholders of the two firms.D. A ll of the above are true.45.In the United States, it is well documented thatA. b oards dominated by their chief executives are prone to trouble.B. p ublic scrutiny can help improve corporate governance.C. a s public firms improve their corporate governance, the stock price goes up.D. a ll of the above46.The board of directors may grant stock options to managers. These areA. c all options.B. p ut options.C. n one of the above47.If an incentive contract specifies certain accounting performanceA. t hat accounting number will likely be the focus of managers.B. m anagers will set aside the accounting goal if it conflicts with the goal of maximizing shareholder wealth.C. m anagers will be unable to manipulate the GAAP, so shareholders can be confident of having their wealth maximized.48.The board of directors may grant stock options to managers in order toA. s ave executive compensation costs.B. u se as a substitute for bonus.C. a lign the interest of managers with that of shareholders.D. n one of the above49.When designing an incentive contract,A. i t is important for the board of directors to set up an independent compensation committee thatcan carefully design the contract and diligently monitor manager's actions.B. s enior executives can be trusted to not abuse incentive contracts by artificially manipulating accounting numbers since the auditors should look in to that.C. t he presence of any incentive is enough, whether it is accounting based or stock-price based.D. t he board of directors should always give the managers a "heads I win, tails you lose" type of option.50.Concentrated ownership of a public companyA. i s normal in the United States, following the well-publicized scandals of recent years.B. i s relatively rare in the United States and common in many other parts of the world.C. l eads to a free-rider problem with the minority shareholders relying on the majority shareholders to assume an undue burden in monitoring the management.D. i s the norm in Great Britain.51.Concentrated ownership of a public companyA. c an be an effective way to alleviate the agency problem between shareholders and managers.B. i s the norm in Great Britain.C. t ends to be an ineffective way to alleviate conflicts of interest between groups of shareholders.D. n one of the above52.The goal of a greater accounting transparencyA. i s to impose more rules and harsher penalties for their violation.B. i s to reduce the information asymmetry between corporate insiders and the public.C. i s to discourage managerial self-dealings.D. a nswers b and c53.Accounting TransparencyA. c an only be achieved when managers commit to serving on their own audit committee.B. o ccurs when the accounting department has translucent cubicles for their workers.C. p romises to reduce the information asymmetry between corporate insiders and the public.D. n one of the above54.While debt can reduce agency costs between shareholders and management,A. d ebt can create its own agency costs.B. t his only happens at extreme levels of debt.C. t his does not work for firms in mature industries with large cash reserves.D. n one of the above is true55.While debt can reduce agency costs between shareholders and management,A. e xcessive debt may also induce the risk-averse managers to forgo profitable but risky investment projects, causing an underinvestment problem.B. w ith debt financing companies can misuse debt to finance corporate empire building.C. b oth a and bD. n one of the above。

国际财务管理(第四版)习题答案

最大的获利水平：1美元兑换人民币8.28元，在中国境内存款投资，1年后换回美元获利：（1+1.98%）-1=1.98%与在美国存款投资收益率1.3%相比，获利更多。

随着美元汇率接近利率平价，这个收益率会向1.3%靠近，最终与美元利率相同。

（2）由于美元存款利率低于人民币存款利率，中国投资者没有套利获利机会。

（3）投资者套利交易面临美元升值的风险，如果必要，可以采用抛补套利防范。

（6）如果目前不存在利率平价，是否抛补套利，取决于投资者对未来美元升值可能性和可能幅度的判断，以及投资者的风险承受能力。

4、公司到期收回人民币：5000×81.21/100=4060（万元）5、如果掉期交易，则卖掉美元得到的人民币: 50×6.79=339.5(万元)美元掉期交易下支付美元的人民币价格：50×6.78=339(万)买卖价差人民币收入净额=339.5-339=0.5(万元)如果不做掉期交易,则美元两周的存款利息收入为50×0.4%×14/365=0.00767(万美元)折合人民币利息收入:0.00767×6.782=0.052(万元)两者相比,掉期交易比较合适.6、201X年11月16日合约执行价格1澳元=1.02美元即期汇率1澳元=1.024美元合约价格低于即期汇率，企业应该履行该合约，企业履约支付的澳元加上期权费：1澳元=1．02+（2.6834/100）=1.0468（美元）与即期交易相比，企业亏损：50×100×（1.0468-1.024）=114（美元）8、远期汇率低于及其汇率，故远期贴水为：远期汇率-即期汇率=0.188-0.190=-0.0029、行权，因为行权价低于实施期权时的即期汇率。

国际财务管理答案

Solutions for International Corporate FinanceChapter 1 (2)Chapter 2 (4)Chapter 3 (6)Chapter 4 (8)Chapter 5 (12)Chapter 6 (14)Chapter 7 (16)Chapter 8 (18)Chapter 9 (21)Chapter 10 (23)Chapter 11 (26)Chapter 12 (29)Chapter 15. International Business Methods. Snyder Golf Co., a U.S. firm that sells high-quality golf clubs in the U.S., wants to expand internationally by selling the same golf clubs in Brazil.a. Describe the tradeoffs that are involved for each method (such as exporting, direct foreign investment, etc.) that Snyder could use to achieve its goal.ANSWER: Snyder can export the clubs, but the transportation expenses may be high. If could establish a subsidiary in Brazil to produce and sell the clubs, but this may require a large investment of funds. It could use licensing, in which it specifies to a Brazilian firm how to produce the clubs. In this way, it does not have to establish its own subsidiary there.b. Which method would you recommend for this firm? Justify your recommendation. ANSWER: If the amount of golf clubs to be sold in Brazil is small, it may decide to export. However, if the expected sales level is high, it may benefit from licensing. If it is confident that the expected sales level will remain high, it may be willing to establish a subsidiary. The wages are lower in Brazil, and the large investment needed to establish a subsidiary may be worthwhile.8. Comparative Advantage.a. Explain how the theory of comparative advantage relates to the need for international business. ANSWER: The theory of comparative advantage implies that countries should specialize in production, thereby relying on other countries for some products. Consequently, there is a need for international business.b. Explain how the product cycle theory relates to the growth of an MNC.ANSWER: The product cycle theory 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.10. Valuation of Wal-Mart’s International Business. In addition to all of its stores in the U.S., Wal-Mart has 11 stores in Argentina, 24 stores in Brazil, 214 stores in Canada, 29 stores in China, 92 stores in Germany, 15 stores in South Korea, 611 stores in Mexico, and 261 stores in the U.K. Consider the value of Wal-Mart as being composed of two parts, a U.S. part (due to business in the U.S.) and a non-U.S. part (due to business in other countries). Explain how to determine the present value (in dollars) of the non-U.S. part assuming that you had access to all the details of Wal-Mart businesses outside the U.S.ANSWER: The non-U.S. part can be measured as the present value of future dollar cash flows resulting from the non-U.S. businesses. Based on recent earnings data for each store and applying an expected growth rate, you can estimate the remitted earnings that will come from each country in each year in the future. You can convert those cash flows to dollars using a forecasted exchange rate per year. Determine the present value of cash flows of all stores within one country. Then repeat the process for other countries. Then add up all the present values that you estimated to derive a consolidated present value of all non-U.S. subsidiaries.15. International Joint Venture. Anheuser-Busch, the producer of Budweiser and other beers, has recently expanded into Japan by engaging in a joint venture with Kirin Brewery, the largest brewery in Japan. The joint venture enables Anheuser-Busch to have its beer distributed through Kirin’s distribution channels in Japan. In addition, it can utilize Kirin’s facilities to produce beer that will be sold locally. In return, Anheuser-Busch provides information about the American beer market to Kirin.a. Explain how the joint venture can enable Anheuser-Busch to achieve its objective of maximizing shareholder wealth.ANSWER: The joint venture creates a way for Anheuser-Busch to distribute Budweiser throughout Japan. It enables Anheuser-Busch to penetrate the Japanese market without requiring a substantial investment in Japan.b. Explain how the joint venture can limit the risk of the international business.ANSWER: The joint venture has limited risk because Anheuser-Busch does not need to establish its own distribution network in Japan. Thus, Anheuser-Busch may be able to use a smaller investment for the international business, and there is a higher probability that the international business will be successful.c. Many international joint ventures are intended to circumvent barriers that normally prevent foreign competition. What barrier in Japan is Anheuser-Busch circumventing as a result of the joint venture? What barrier in the United States is Kirin circumventing as a result of the joint venture?ANSWER: Anheuser-Busch is able t o benefit from Kirin’s distribution system in Japan, which would not normally be so accessible. Kirin is able to learn more about how Anheuser-Busch expanded its product across numerous countries, and therefore breaks through an “information”barrier.d. Explain how Anheuser-Busch could lose some of its market share in countries outside Japan as a result of this particular joint venture.ANSWER: Anheuser-Busch could lose some of its market share to Kirin as a result of explaining its worldwide expansion strategies to Kirin. However, it appears that Anheuser-Busch expects the potential benefits of the joint venture to outweigh any potential adverse effects.24. Global Competition. Explain why more standardized product specifications across countries can increase global competition.ANSWER: Standardized product specifications allow firms to more easily expand their business across other countries, which increases global competition.Chapter 24. Free Trade. There has been considerable momentum to reduce or remove trade barriers in an effort to achieve “free trade.” Yet, one disgruntled executive of an exporting firm stated, “Free trade is not conceivable; we are always at the mercy of the exchange rate. Any country can use this mechanism to impose trade bar riers.” What does this statement mean?ANSWER: This statement implies that even if there were no explicit barriers, a government could attempt to manipulate exchange rates to a level that would effectively reduce foreign competition. For example, a U.S. firm may be discouraged from attempting to export to Japan if the value of the dollar is very high against the yen. The prices of the U.S. goods from the Japanese perspective are too high because of the strong dollar. The reverse situation could also be possible in which a Japanese exporting firm is priced out of the U.S. market because of a strong yen (weak dollar). [Answer is based on opinion.]8. International Investments. In recent years many U.S.-based MNCs have increased their investments in foreign securities, which are not as susceptible to negative shocks in the U.S. market. Also, when MNCs believe that U.S. securities are overvalued, they can pursue non-U.S. securities that are driven by a different market. Moreover, in periods of low U.S. interest rates, U.S. corporations tend to seek investments in foreign securities. In general, the flow of funds into foreign countries tends to decline when U.S. investors anticipate a strong dollar.a. Explain how expectations of a strong dollar can affect the tendency of U.S. investors to invest abroad.ANSWER: A weak dollar would discourage U.S. investors from investing abroad. It can cause the investors to purchase foreign currency (when investing) at a higher exchange rate than the exchange rate at which they would sell the currency (when the investment is liquidated).b. Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest abroad.ANSWER: Low U.S. interest rates can encourage U.S.-based MNCs to invest abroad, as investors seek higher returns on their investment than they can earn in the U.S.c. In general terms, what is the attraction of foreign investments to U.S. investors?ANSWER: The main attraction is potentially higher returns. The international stocks can outperform U.S. stocks, and international bonds can outperform U.S. bonds. However, there is no guarantee that the returns on international investments will be so favorable. Some investors may also pursue international investments to diversify their investment portfolio, which can possibly reduce risk.10. Exchange Rate Effects on Trade.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.ANSWER: A stronger dollar makes U.S. exports more expensive to importers and may reduceimports. It makes U.S. imports cheap and may increase U.S. imports. A weaker home currency increases the prices of imports purchased by the home country and reduces the prices paid by foreign businesses for the home country’s exports. This should cause a decrease in the home country’s demand for imports and an increase in the foreign demand for the home country’s exports, and therefore increase the current account. However, this relationship can be distorted by other factors.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.ANSWER: A current account deficit reflects a net sale of the home currency in exchange for other currencies. This places downward pressure on that home currency’s value. If the currency weakens, it will reduce the home demand for foreign goods (since goods will now be more expensive), and will increase the home export volume (since exports will appear cheaper to foreign countries).c. Why does the exchange rate not always adjust to a current account deficit?ANSWER: In some cases, the home currency will remain strong even though a current account deficit exists, since other factors (such as international capital flows) can offset the forces placed on the currency by the current account.13. Effects of Tariffs. 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.ANSWER: The U.S. wine producers benefit from the U.S. tariffs, while the French wine producers are adversely affected. The French government would likely retaliate by imposing tariffs on the U.S. beverage firms, which would adversely affect their value. The French beverage firms would benefit.15. Demand for Exports. A relatively small U.S. balance of trade deficit is commonly attributed toa strong demand for U.S. exports. What do you think is the underlying reason for the strong demand for U.S. exports?ANSWER: The strong demand for U.S. exports is commonly attributed to strong foreign economies or to a weak dollar.Chapter 35. International Financial Markets. Recently, Wal-Mart established two retail outlets in the city of Shenzhen, China, which has a population of 3.7 million. These outlets are massive and contain products purchased locally as well as imports. As Wal-Mart generates earnings beyond what it needs in Shenzhen, it may remit those earnings back to the United States. Wal-Mart is likely to build additional outlets in Shenzhen or in other Chinese cities in the future.a. Explain how the Wal-Mart outlets in China would use the spot market in foreign exchange. ANSWER: The Wal-Mart stores in China need other currencies to buy products from other countries, and must convert the Chinese currency (yuan) into the other currencies in the spot market to purchase these products. They also could use the spot market to convert excess earnings denominated in yuan into dollars, which would be remitted to the U.S. parent.b. Explain how Wal-Mart might utilize the international money market when it is establishing other Wal-Mart stores in Asia.ANSWER: Wal-Mart may need to maintain some deposits in the Eurocurrency market that can be used (when needed) to support the growth of Wal-Mart stores in various foreign markets. When some Wal-Mart stores in foreign markets need funds, they borrow from banks in the Eurocurrency market. Thus, the Eurocurrency market serves as a deposit or lending source for Wal-Mart and other MNCs on a short-term basis.c. Explain how Wal-Mart could use the international bond market to finance the establishment of new outlets in foreign markets.ANSWER: Wal-Mart could issue bonds in the Eurobond market to generate funds needed to establish new outlets. The bonds may be denominated in the currency that is needed; then, once the stores are established, some of the cash flows generated by those stores could be used to pay interest on the bonds.11. Foreign Exchange. You just came back from Canada, where the Canadian dollar was worth $.70. You still have C$200 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for $.60. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for $.10 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C$200 for 130 pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain.ANSWER: Exchange with the tourist. If you exchange the C$ for pesos at the foreign exchange desk, the cross-rate is $.60/$10 = 6. Thus, the C$200 would be exchanged for 120 pesos (computed as 200 ×6). If you exchange Canadian dollars for pesos with the tourist, you will receive 130 pesos.15. Exchange Rate Effects on Borrowing. Explain how the appreciation 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.ANSWER: If the Japanese yen appreciates over the borrowing period, this implies that the U.S. firm converted yen to U.S. dollars at a lower exchange rate than the rate at which it paid for yen at the time it would repay the loan. Thus, it is adversely affected by the appreciation. Its cost of borrowing will be higher as a result of this appreciation.20. Interest Rates. Why do interest rates vary among countries? Why are interest rates normally similar for those European countries that use the euro as their currency? Offer a reason why the government interest rate of one country could be slightly higher than that of the government interest rate of another country, even though the euro is the currency used in both countries.ANSWER: Interest rates in each country are based on the supply of funds and demand for funds for a given currency. However, the supply and demand conditions for the euro are dictated by all participating countries in aggregate, and do not vary among participating countries. Yet, the government interest rate in one country that uses the euro could be slightly higher than others that use the euro if it is subject to default risk. The higher interest rate would reflect a risk premium.21. Forward Contract. The Wolfpack Corporation 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.ANSWER: The forward contract can hedge future receivables or payables in foreign currencies to insulate the firm against exchange rate risk. Yet, in this case, the Wolfpack Corporation should not hedge because it would benefit from appreciation of the pound when it converts the pounds to dollars.Chapter 43. Inflation Effects on Exchange Rates. Assume that the U.S. inflation rate becomes high 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?ANSWER: Demand for Canadian dollars should increase, supply of Canadian dollars for sale should decrease, and the Canadian dollar’s value should increase.12. Factors Affecting Exchange Rates. Mexico tends to have much higher inflation than the United States and also much higher interest rates than the United States. Inflation and interest rates are much more volatile in Mexico than in industrialized countries. The value of the Mexican peso is typically more volatile than the currencies of industrialized countries from a U.S. perspective; it has typically depreciated from one year to the next, but the degree of depreciation has varied substantially. The bid/ask spread tends to be wider for the peso than for currencies of industrialized countries.a. Identify the most obvious economic reason for the persistent depreciation of the peso. ANSWER: The high inflation in Mexico places continual downward pressure on the value of the peso.b. High interest rates are commonly expected to strengthen a country’s currency because they can encourage foreign investment in securities in that country, which results in the exchange of other currencies for that currency. Yet, the peso’s value has declined against the dollar over most years even though Mexican interest rates are typically much higher than U.S. interest rates. Thus, it appears that the high Mexican interest rates do not attract substantial U.S. investment in Mexico’s securities. Why do you think U.S. investors do not try to capitalize on the high interest rates in Mexico?ANSWER: The high interest rates in Mexico result from expectations of high inflation. That is, the real interest rate in Mexico may not be any higher than the U.S. real interest rate. Given the high inflationary expectations, U.S. investors recognize the potential weakness of the peso, which could more than offset the high interest rate (when they convert the pesos back to dollars at the end of the investment period). Therefore, the high Mexican interest rates do not encourage U.S. investment in Mexican securities, and do not help to strengthen the value of the peso.c. Why do you think the bid/ask spread is higher for pesos than for currencies of industrialized countries? How does this affect a U.S. firm that does substantial business in Mexico?ANSWER: The bid/ask spread is wider because the banks that provide foreign exchange services are subject to more risk when they maintain currencies such as the peso that could decline abruptly at any time. A wider bid/ask spread adversely affects the U.S. firm that does business in Mexico because it increases the transactions costs associated with conversion of dollars to pesos, or pesos to dollars.14. Aggregate Effects on Exchange Rates. 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 ov erall forecast of the krank’s movement against the dollar.a. U.S. inflation has suddenly increased substantially, while Country K’s inflation remains low. ANSWER: Increased U.S. demand for the krank. Decreased supply of kranks for sale. Upward pressure in the krank’s value.b. U.S. interest rates have increased substantially, while Country K’s interest rates remain low. Investors of both countries are attracted to high interest rates.ANSWER: Decreased U.S. demand for the krank. Increased supply of kranks for sale. Downward pressure on the krank’s value.c. The U.S. income level increased substantially, while Country K’s income level has remained unchanged.ANSWER: Increased U.S. demand for the krank. Upward pressure on the krank’s value.d. The U.S. is expected to impose a small tariff on goods imported from Country K. ANSWER: The tariff will cause a decrease in the United States’ desire for Country K’s goods, and will therefore reduce the demand for kranks for sale. Downward pressure on the krank’s value.e. Combine all expected impacts to develop an overall forecast.ANSWER: Two of the scenarios described above place upward pressure on the value of the krank. However, these scenarios are related to trade, and trade flows are relatively minor between the U.S. and Country K. The interest rate scenario places downward pressure on the krank’s value. 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. Thus, when considering the importance of implications of all scenarios, the krank is expected to depreciate.22. Speculation. Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $.15 to $.14 in 10 days. The following interbank lending and borrowingin the interbank market, depending on which currency it wants to borrow.a. 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.ANSWER: Blue Demon Bank can capitalize on its expectations about pesos (MXP) as follows:1. Borrow MXP70 million2. Convert the MXP70 million to dollars:MXP70,000,000 × $.15 = $10,500,0003. Lend the dollars through the interbank market at 8.0% annualized over a 10-day period. The amount accumulated in 10 days is:$10,500,000 × [1 + (8% × 10/360)] = $10,500,000 × [1.002222] = $10,523,3334. Repay the peso loan. The repayment amount on the peso loan is:MXP70,000,000 × [1 + (8.7% × 10/360)] = 70,000,000 × [1.002417]=MXP70,169,1675. Based on the expected spot rate of $.14, the amount of dollars needed to repay the peso loan is: MXP70,169,167 × $.14 = $9,823,6836. After repaying the loan, Blue Demon Bank will have a speculative profit (if its forecasted exchange rate is accurate) of:$10,523,333 – $9,823,683 = $699,650b. Assume all the preceding information with this exception: Blue Demon Bank expects the peso to appreciate from its present spot rate of $.15 to $.17 in 30 days. How could it attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.ANSWER: Blue Demon Bank can capitalize on its expectations as follows:1. Borrow $10 million2. Convert the $10 million to pesos (MXP):$10,000,000/$.15 = MXP 66, 666,6673. Lend the pesos through the interbank market at 8.5% annualized over a 30-day period. The amount accumulated in 30 days is:MXP66,666,667 × [1 + (8.5% × 30/360)] = 66,666,667 × [1.007083] = MXP67,138,8894. Repay the dollar loan. The repayment amount on the dollar loan is:$10,000,000 × [1 + (8.3% × 30/360)] = $10,000,000 × [1.006917] = $10,069,1705. Convert the pesos to dollars to repay the loan. The amount of dollars to be received in 30 days (based on the expected spot rate of $.17) is:MXP67,138,889 × $.17 = $11,413,6116. The profits are determined by estimating the dollars available after repaying the loan:$11,413,611 – $10,069,170 = $1,344,44123. SpeculationDiamond Bank expects that the Singapore dollar will depreciate against the dollar from its spotDiamond Bank considers borrowing 10 million Singapore dollars in the interbank market andinvesting the funds in dollars for 60 days. Estimate the profits(or losses) that could be earned from this strategy. Should Diamond Bank pursue this strategy?ANSWER:Borrow S$10,000,000 and convert to U.S. $:S$10,000,000 × $.43 = $4,300,000Invest funds for 60 days. The rate earned in the U.S. for 60 days is:7% × (60/360) = 1.17%Total amount accumulated in 60 days:$4,300,000 × (1 + .0117) = $4,350,310Convert U.S. $ back to S$ in 60 days:$4,350,310/$.42 = S$10,357,881The rate to be paid on loan is:.24 × (60/360) = .04Amount owed on S$ loan is:S$10,000,000 × (1 + .04) = S$10,400,000This strategy results in a loss:S$10,357,881 – S$10,400,000 = –S$42,119Diamond Bank should not pursue this strategy.Chapter 52. Risk of Currency Futures. Currency futures markets are commonly used as a means of capitalizing on shifts in currency values, because the value of a futures contract tends to move in line with the change in the corresponding currency value. Recently, many currencies appreciated against the dollar. Most speculators anticipated that these currencies would continue to strengthen and took large buy positions in currency futures. However, the Fed intervened in the foreign exchange market by immediately selling foreign currencies in exchange for dollars, causing an abrupt decline in the values of foreign currencies (as the dollar strengthened). Participants that had purchased currency futures contracts incurred large losses. One floor broker responded to the effects of the Fed's intervention by immediately selling 300 futures contracts on British pounds (with a value of about $30 million). Such actions caused even more panic in the futures market.a. Explain why the central bank s intervention caused such panic among currency futures traders with buy positions.ANSWER: Futures prices on pounds rose in tandem with the value of the pound. However, when central banks intervened to support the dollar, the value of the pound declined, and so did values of futures contracts on pounds. So traders with long (buy) positions in these contracts experienced losses because the contract values declined.b. Explain why the floor broker s willingness to sell 300 pound futures contracts at the going market rate aroused such concern. What might this action signal to other brokers?ANSWER: Normally, this order would have been sold in pieces. This action could signal a desperate situation in which many investors sell futures contracts at any price, which places more downward pressure on currency future prices, and could cause a crisis.c. Explain why speculators with short (sell) positions could benefit as a result of the central bank s intervention.ANSWER: The central bank intervention placed downward pressure on the pound and other European currencies. Thus, the values of futures contracts on these currencies declined. Traders that had short positions in futures would benefit because they could now close out their short positions by purchasing the same contracts that they had sold earlier. Since the prices of futures contracts declined, they would purchase the contracts for a lower price than the price at which they initially sold the contracts.d. Some traders with buy positions may have responded immediately to the central bank s intervention by selling futures contracts. Why would some speculators with buy positions leave their positions unchanged or even increase their positions by purchasing more futures contracts in response to the central bank s intervention?ANSWER: Central bank intervention sometimes has only a temporary effect on exchange rates. Thus, the European currencies could strengthen after a temporary effect caused by central bank intervention. Traders have to predict whether natural market forces will ultimately overwhelm any pressure induced as a result of central bank intervention. ]。

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