ch21

Chapter 21International Financial Management

Learning Objectives

1. Discuss how the basic principles of finance apply to international financial

transactions.

The basic principles of managerial finance remain the same whether a transaction is

domestic or international. For example, the time value of money calculations remain the

same, as do the models used to calculate asset values. What does change, however, are

some of the input variables. These variables may be affected by cultural or procedural

differences between countries, such as a country’s unique currency, or differences in tax

and accounting standards.

2. Differentiate among the spot rate, the forward rate, and the cross rate in the foreign

exchange markets; make foreign exchange and cross rate calculations; and be able

to hedge an asset purchase where payment is made in a foreign currency.

The spot rate is the exchange rate at which one currency can be converted to another

immediately, whereas the forward rate is a rate agreed on today for an exchange to take

place at a specified point in the future. Forward rates are usually different from spot rates

and are the market’s best estimate of what a future spot rate will be. The cross rate is

simply the exchange rate between two currencies. Learning by Doing Applications 21.1

through 21.3 are foreign exchange rate problems that you should be able to solve.

3. Identify the major factors that distinguish international from domestic capital

budgeting, explain how the capital budgeting process can be adjusted to account for

these factors, and compute the NPV for a typical international capital project.

One issue that distinguishes international from domestic capital budgeting is the

difficulty in estimating the incremental cash flows from an international project. These

difficulties can stem from differences in operating, accounting, and legal practices, as

well as from the variety of ways in which a multinational firm can transfer profits and

funds from the subsidiary to the parent corporation. Furthermore, firms engaged in

international capital budgeting face two risks that domestic firms do not have to deal

with: foreign exchange rate risk and country risk. The Barcelona example in Section 21.3

and Learning by Doing Application 21.4 illustrate capital budgeting calculations.

4. Discuss the importance of the Euromarkets to large U.S. multinational firms, and

calculate the cost of borrowing in the Eurobond market.

The Eurocurrency markets are important to large multinational corporations around the

world. These corporations hold Eurocurrency time deposits as investments and finance

much of their business activity by borrowing in the Eurocredit market and selling debt in

the Eurobond market. The Euromarkets are popular with large multinational firms

because they are largely unregulated; thus, they offer more attractive borrowing and

lending rates and greater flexibility in conducting transactions. Learning by Doing

Application 21.5 illustrates the cost of issuing bonds in the domestic and Eurobond

markets.

5. Explain how large U.S. money center banks make and price Eurocredit loans to

their customers, and compute the cost of a Eurocredit bank loan.

Eurocredit loans are made by large multinational banks. Eurocredits typically have fixed

maturities and variable, or floating, rates of interest. The loan rate is tied to a base interest

rate (BR), such as LIBOR. Thus, the rate charged on a Eurocredit is BR + X, where X is

the lending margin, which consists of risk premiums (credit, country, and currency risks)

and the lender’s profit margin. The Citibank example in Section 21.5 and Learning by

Doing Application 21.6 illustrate how loan costs are computed.

I. True or False Questions

1. Globalization refers to the removal of barriers to free trade and the closer integration of

national economies.

a. True

b. False

2. While production of goods has been moved overseas, American consumers only purchase

domestic goods.

a. True

b. False

3. The production of goods and services has also become highly globalized.

a. True

b. False

4. Integration of the financial system globally is a result of deregulation of foreign exchange

markets, money and capital markets, and banking systems.

a. True

b. False

5. A transnational corporation is a business firm that operates in more than one country but

is headquartered or based in its home country.

a. True

b. False

6. Wal-Mart is a transnational corporation.

a. True

b. False

7. Differences in legal systems and tax codes have no impact on the way firms operate in

foreign countries.

a. True

b. False

8. Legal systems can vary on simple matters, such as opening a business, selecting a site

location, and hiring employees.

a. True

b. False

9. English is the world’s social language.

a. True

b. False

10. English is the official business language, but not the world’s social language.

a. True

b. False

11. Cultural views shape business practices and people’s attitudes toward business.

a. True

b. False

12. Both China and the nations that formerly made up the Soviet Union are currently moving

toward centrally planned economies.

a. True

b. False

13. Country risk has no effect on a firm’s cash flows.

a. True

b. False

14. Stockholder wealth maximization is the accepted goal for firms in all countries around

the world.

a. True

b. False

15. The European manager’s goal is to earn as much wealth as possible for the firm while

considering the overall welfare of all stakeholders.

a. True

b. False

16. European firms focus on maximizing market share rather than stockholder wealth.

a. True

b. False

17. Japanese managers focus on maximizing market share rather than stockholder wealth.

a. True

b. False

18. The foreign exchange market is a group of international markets connected electronically

where currencies are bought and sold in wholesale amounts.

a. True

b. False

19. Tokyo is the largest foreign exchange trading center.

a. True

b. False

20. When a U.S. bank in Chicago gives a quote of £0.5089/$, it is a direct quote.

a. True

b. False

21. If the exchange rate is the price in foreign currency for a dollar, the quote is called direct

quote.

a. True

b. False

22. The bid quote is the rate at which the dealer will sell foreign currency.

a. True

b. False

23. The decision to accept international projects with a positive NPV increases the value of

the firm and is consistent with maximizing stockholder wealth.

a. True

b. False

24. Most companies find it easier to estimate the incremental cash flows for foreign projects

than for domestic projects.

a. True

b. False

25. To convert the project’s future cash flows into another currency, we need to come up

with projected or forecast exchange rates.

a. True

b. False

26. To convert the project’s future cash flows into another currency, we need to use today’s

spot exchange rates.

a. True

b. False

27. If a firm is located in a country with a relatively unstable political environment,

management will require a lower rate of return on capital projects.

a. True

b. False

28. A Eurodollar is defined as a U.S. dollar deposited in a bank outside the United States.

a. True

b. False

29. Long-term loans of a Eurocurrency made to multinational corporations and governments

of poor credit quality are called Eurocredits.

a. True

b. False

30. Eurodollar and other Eurocurrency bonds have all characteristics identical to similar U.S

corporate bonds.

a. True

b. False

II. Multiple-Choice Questions and Problems

31. Evidence of globalization include

a. Consumers in many countries buy goods that are purchased from a number of

countries, other than just their own.

b. Goods and services are produced around the world.

c. The financial system has also become highly integrated.

d. All of the above.

32. Which one of the following statements about multinational firms is NOT true?

a. A multinational corporation is a business firm that operates in more than one

country but is headquartered or based in its home country.

b. Multinational corporations are owned by domestic stockholders only.

c. Multinational corporations may purchase raw materials from one country, obtain

financing from a capital market in another country, and produce finished goods

with labor and capital equipment from a third country.

d. All of the above

33. Factors that can cause international business transactions to differ from domestic deals

include all EXCEPT:

a. Exchange rate risk, legal systems, and country risk.

b. Legal systems, cultural factors, and economic systems.

c. Exchange rate risk, country risk, and size of market.

d. Economic systems, cultural factors, and country risk

34. Which ONE of the following statements about the goal of the firm is true?

a. Stockholder value maximization is the accepted goal for firms in India.

b. Firms in Germany focus on maximizing corporate wealth.

c. The goal of the Japanese business manager is to increase the wealth and growth of

the keiretsu.

d. All of the above

35. Which ONE of the following statements about the goal of the firm is true?

a. Corporate wealth maximization is the accepted goal for firms in India.

b. Firms in Australia focus on maximizing corporate wealth.

c. The goal of the Japanese business manager is to increase the wealth and growth of

the keiretsu.

d. Private-sector firms in China focus on providing full employment in the economy.

36. The three economic benefits provided by the foreign exchange markets include:

a. A mechanism to transfer purchasing power from individuals who deal in one

currency to people who deal in a different currency.

b. A way for corporations to pass the risk associated with foreign exchange price

fluctuations to professional risk-takers.

c. A channel for importers and exporters to acquire credit for international business

transactions.

d. All of the above

37. The three largest foreign exchange markets based on daily volume are

a. London, New York, and Tokyo.

b. New York, Tokyo, and Zurich.

c. London, Tokyo, and Zurich.

d. London, New York, and Singapore.

38. The major participants in the foreign exchange markets are

a. multinational commercial banks, large investment banking firms, and domestic

firms.

b. multinational commercial banks, local banks and domestic firms.

c. multinational commercial banks, large investment banking firms, and small

currency boutiques that specialize in foreign exchange transactions.

d. None of the above

39. Which ONE of the following statements is true?

a. Equilibrium occurs at the price at which the quantity of the currency demanded

exactly equals the quantity supplied.

b. Whatever causes U.S. residents to buy more or fewer foreign goods shifts the

demand curve for the foreign currency.

c. Whatever causes foreigners to buy more or fewer U.S. goods shifts the supply

curve for the foreign currency.

d. All of the above

40. If the foreign exchange rate is the price in foreign currency for a dollar, then the

exchange rate quote is called

a. an American quote.

b. an indirect quote.

c. a direct quote.

d. a cross quote.

41. A European quote is the same as

a. an American quote.

b. an indirect quote.

c. a direct quote.

d. a cross quote.

42. Which ONE of the following is an indirect quote from an American perspective?

a. £0.5125/$

b. $0.006900/¥

c. $1.5637/€

d. ¥115.23/€

43. The bid quote represents the rate at which

a. the dealer will buy foreign currency from you.

b. the dealer will sell foreign currency to you.

c. you can buy the foreign currency from the dealer.

d. None of the above.

44. The ask quote represents the rate at which

a. the dealer will buy foreign currency from you.

b. the dealer will sell foreign currency to you.

c. you can sell the foreign currency to the dealer.


45. The difference between the forward rate and the spot rate is called the

a. cross exchange rate.

b. forward premium or forward discount.

c. indirect quote.


46. When performing capital budgeting analysis on international projects, managers

a. find it more difficult to estimate the incremental cash flows for foreign projects

b. have to deal with foreign exchange rate risk on international capital investments.

c. must incorporate a country risk premium when evaluating foreign business

activities.


47. The ways that a foreign government can affect the risk of a foreign project include:

a. Change tax laws in a way that adversely impacts the firm.

b. Impose laws related to labor, wages, and prices that are more restrictive than

those applicable for domestic firms.

c. Disallow any remittance of funds from the subsidiary to the parent firm for either

a limited period of time or the duration of the project.


48. The ways that a foreign government can adversely affect the risk of a foreign project

include all EXCEPT:

a. Change tax laws in a way that adversely impacts the firm.

b. Impose laws related to labor, wages, and prices that are more restrictive than

those applicable for domestic firms.

c. Remove tariffs and quotas on any imports.

d. Disallow any remittance of funds from the subsidiary to the parent firm for either

a limited period of time or the duration of the project.

49. Country risk should be incorporated into the international capital budgeting analysis by

a. adjusting the firm’s discount rate for the additional risk.

b. increasing cash flow estimates from the project.

c. doing nothing.


50. The Euromarkets are

a. vast, largely unregulated money and capital markets with major financial centers

in Tokyo, Hong Kong, and Singapore.

b. vast, regulated money and capital markets with major financial centers in the

United Kingdom.

c. vast, regulated money and capital markets with major financial centers in the euro

zone.


51. The Eurocurrency market is the

a. medium-term portion of the Euromarket.

b. short-term portion of the Euromarket.

c. long-term portion of the Euromarket.


52. Which ONE of the following statements about Eurocredits is true?

a. The international banking system gathers funds from businesses and governments

in the Eurocurrency market and then allocates funds to banks that have the most

profitable lending opportunities.

b. Eurocredits are denominated in all major Eurocurrencies, although the dollar is

the overwhelming favorite.

c. Eurocredits are short- to medium-term loans made to multinational corporations

and governments of medium to high credit quality.


53. Long-term debt sold by a foreign firm to investors in a foreign country and denominated

in that country’s currency is called a

a. Eurobond.

b. municipal bond.

c. foreign bond.

d. currency bond.

54. Long-term debt instruments sold by firms to investors in countries other than the country

in whose currency the bonds are denominated

a. Samurai bonds.

b. Eurobonds.

c. foreign bonds.

d. currency bonds.

55. Which one of the following statements about Eurobonds is NOT true?

a. Multinational firms can use Eurobonds to finance international or domestic

projects.

b. Eurobonds are bearer bonds and do not have to be registered.

c. Eurobonds are bonds that have to be registered.

d. Eurobonds also pay interest annually.

56. Spot rate: Venkat Ram purchased a pair of dress shoes in Italy for €131.25. If the spot

exchange rate is $1.5621/€, what is the dollar cost of the shoes?

a. $205.03

b. $84.02

c. €131.25

d. €84.02

57. Spot rate: Starling Corporation purchased some components from a Mexican

manufacturer. They have to pay 110 million Mexican pesos for the goods today. The spot

rate today is MP10.3540/$. What is the dollar cost of this payable? Round to the nearest

dollar.

a. $110,000,000

b. $10,623,913

c. $11,110,235

d. $1,138,940,000

58. Spot rate: Tantrix, Inc., purchased its inventory from an Indian manufacturer at a cost of

Rs.5,325,000. The dollar cost of this payable is $125,634.07 at today’s spot rate. What is

the spot rate today?

a. $4.2385/Rs.

b. $42.3850/Rs.

c. Rs.42.3850/$

d. Rs. 4.2385/$

59. Spot rate: Suppose a Tata Nano car is priced at Rs. 100,000 in New Delhi and $3,129 in

New York. In which place is the car more expensive if the spot rate is $0.0242/Rs.?

a. In New Delhi

b. In New York

c. It is same in both places.

d. It cannot be determined.

60. Spot rate: If the spot rate is quoted as $0.009369/¥, what is the exchange rate in terms of

yen per dollar?

a. ¥0.009369/$

b. ¥0.936900/$

c. ¥106.7350/$

d. ¥16.7350/$

61. Spot rate: Given that the spot rate is $1.5136/€ and the 90-day forward quote is

$1.4974/€, we can say that

a. the U.S. dollar is at a forward premium against the euro.

b. the U.S. dollar is at a forward discount against the euro.

c. the euro is at a forward premium against the U.S. dollar.

d. the dollar is at neither a premium nor a discount against the euro.

62. Spot rate: Given that the spot rate is ¥106.74/$ and the 180-day forward quote is

¥100.37/$, we can say that

a. the U.S. dollar is at a forward premium against the yen.

b. the yen is at a forward premium against the U.S. dollar.

c. the yen is at a forward discount against the U.S. dollar.

d. the dollar is at neither a premium nor a discount against the yen.

63. Forward rate: Celio, Inc., sold equipment to an French firm and will receive €1,249,425

in 30 days. If the company entered a forward contract to sell the euros at the 30-day

forward rate of $1.5512/€, what is the dollar revenue received?

a. $1,249,425

b. $805,457

c. $1,938,108

d. $1,312,224

64. Forward rate: Baljit, Inc., purchased machinery from a Japanese firm and will have to

pay ¥278.45 million in 90 days. The bank quotes a forward rate of ¥105.46/$ to buy the

required yen. What is the cost to Baljit in U.S. dollars?

a. $2,640,338

b. $2,784,500

c. $2,936,534

d. $2,714,300

65. Forward rate: John Travers is planning a holiday to Thailand but is concerned that the

U.S. dollar will decline in value before he makes his trip. His travel agent has planned a

trip for him for a total cost of 41,250 Thai baht. John plans to purchase the bahts forward

and is given a dollar estimate of $1,247.17 based on the 30-day forward quote. What is

the forward rate?

a. THB41.2500/$

b. THB33.0785/$

c. $0.0242/THB

d. $1.2471/THB

66. Bid-ask spread: A local bank has requested foreign exchange quotes for the Swedish

krona from Citibank. Citibank quotes a bid rate of $0.1652/SK and an ask rate of

$0.1667/SK. What is the bid-ask spread?

a. 1.2%

b. 2.1%

c. 0.9%

d. 0.65%

67. Bid-ask spread: A foreign exchange dealer is willing to buy the New Zealand dollar

(NZ$) at $0.7621/NZ$ and will sell it at a rate of $0.7714/NZ$. What is the bid-ask

spread on the Danish krone?

a. 0.2%

b. 2.1%

c. 0,9%

d. 1.2%

68. Bid-ask spread: Banco Herrero wants to make a bid-ask spread of 0.55 percent on its

foreign exchange transactions. If the ask rate on the Mexican peso (MP) is MP10.4192/$,

what does the bid rate have to be?

a. MP10.3619/$

b. MP10.4192/$

c. MP10.4249/$

d. MP10.2165/$

69. Cross rate: Bartman Corporation observes that the Swiss franc (SF) is being quoted at

$0.6164/SF, while the Swedish krona (SK) is quoted at $0.1981/SK. What is the SK/SF

cross rate?

a. SK0.3214/SF

b. SK3.1116/SF

c. SK0.4183/SF

d. SK2.1467/SF

70. Cross rate: Xecor Pharma just received revenues of $2,372,300 in Australian dollars

(A$). The only quotes management received are A$2.0651/£ and $1.8538/£. What is the

U.S. dollar value of the company’s revenues? Round to the nearest dollar.

a. $4,397,770

b. $4,899,037

c. $2,129,567

d. $9,081,834

71. Cross rate: Trident Corp. recently purchased machinery parts worth 23.5 million

Mexican pesos (MP). Management needs to find out the U.S. dollar cost of the payables.

It has access to two quotes for Canadian dollars (C$): C$1.0774/$ and C$0.0981/MP.

What will it cost Trident to purchase 23.5 million Mexican pesos? Round to the nearest

dollar.

a. $2,531,890

b. $2,305,350

c. $2,139,735

d. $1,987,325

72. Cross rate: Dresdner Bank has offered the following exchange rate quotes on Indian

rupees (Rs): Rs.83.7612/£ and $1.8654/£. What is the cross rate between the Indian

rupees and the U.S. dollar?

a. Rs. 44.9025/$

b. Rs. 49.9375/$

c. Rs. 51.2134/$

d. Rs. 36,7122/$

73. Forward premium: The spot rate on the London market was £0.5434/$, while the 90-

day forward rate was £0.5519/$. What is the annualized forward premium or discount on

the U.S. dollar for the period? Round to one decimal place.

a. 1.6% premium

b. 6.2% premium

c. 6.2% discount

d. 1.6% discount

74. Forward premium: Bank of America quoted the 180-day forward rate on the Japanese

yen at $0.009702/¥. The spot rate was quoted at $0.009466/¥. What is the forward

premium or discount on the Japanese yen? Round off to the nearest percent.

a. 7% premium

b. 7% discount

c. 5% premium

d. 5% discount

75. Forward premium: State Bank of India has offered a spot rate quote on Indian rupees

(Rs) of Rs. 42.47/$. The Indian rupee is quoted at a 30-day forward premium of 7.65

percent against the dollar. What is the 30-day forward quote?

a. Rs 43.5622/$

b. Rs 41.5687/$

c. Rs 45.1226/$

d. Rs 42.7404/$

76. Hedging: Tamcon Industries has purchased equipment from a Brazilian firm for a total

cost of 1,272,500 Brazilian reals (BR). The firm has to pay in 30 days. Citicorp has given

the firm a 30-day forward quote of $0.6123/real. Assume that on the day the payment is

due, the spot rate is at $0.6317/BR. How much would Tamcon save by hedging with a

forward contract? Round to the nearest dollar.

a. $24,687

b. $803,838

c. $779,152

d. $31,278

77. Hedging: Kapona Industries has purchased equipment from a Korean firm for a total cost

of 11,500,000 Korean won. The firm has to pay in 90 days. J. P. Morgan has given the

firm a 90-day forward quote of $0.0009791/won. Assume that on the day the payment is

due, the spot rate is at $0.001004/ won. How much would Kapona save by hedging with a

forward contract? Round to the nearest dollar.

a. $687

b. $338

c. $152

d. $286

78. Hedging: Carrington Industries sold equipment to a Mexican firm. Payment of

41,275,000 pesos will be due in 30 days. Carrington has the option of selling the pesos at

a 30-day forward rate of $0.09739/peso. If it waits 30 days to sell the pesos, the expected

spot rate is $0.09596/peso. How much additional dollar revenue will Carrington get by

selling forward the pesos? Round to the nearest dollar.

a. $24,687

b. $83,838

c. $59,023

d. $31,278

79. Hedging: Palermo Corp. sold equipment to a French firm. Payment of €4,275,000 will be

due in 90 days. Palermo has the option of selling the euros at a 90-day forward rate of

$1.5922/€. If it waits 90 days to sell the euros, the expected spot rate is $1.5645/€. How

much dollar revenue will Palermo lose by not selling forward the euros? Round to the

nearest dollar.

a. $124,687

b. $118,418

c. $159,023

d. $131,278

80. Loan pricing: Zylex Corporation’s German unit is looking to borrow €4.5 million from

Deutsche Bank. Deutsche Bank quotes a rate of three-month LIBOR plus 0.5 percent for

the 90-day loan. Currently, the three-month LIBOR is 4.175 percent. If the exchange rate

on the payoff date is €0.8334/$, what is the dollar cost of the loan?

a. $63,107.45

b. $126,214.90

c. $39,143.76

d. $56,357.99

III. Essay Questions

81. What are the six factors that can cause international business transactions to differ from

domestic deals?

Answer: The six factors are foreign exchange risk, differences in legal systems and tax

codes, the divergence of the language for communication purposes in business and

socialization, cultural differences, differences in economic systems, and country risk.

These six factors can cause international business transactions to differ from domestic

deals.

The uncertainty of future exchange rate movements is called foreign exchange

rate risk, or just exchange rate risk. Differences in legal systems and tax codes can also

impact the way firms operate in foreign countries. There are two important levels of

communication in international business deals: business communication and social

communication. Although English is the official business language, it is not the world’s

social language.

Cultural views also shape business practices and people’s attitudes toward

business. An economic system determines how a country mobilizes its resources to

produce goods and services needed by society, as well as how the production is

distributed. Country risk refers to political uncertainty associated with a particular

country and hence, its impact on a firm’s cash flows.

82. How does the goal of the firm vary across countries?

Answer: Stockholder wealth maximization is the accepted goal for firms in the United

States, as well as in some other countries that share a similar heritage, such as the United

Kingdom, Australia, India, and Canada. In Continental Europe, for example, countries

such as France and Germany focus on maximizing corporate wealth. The European

manager’s goal is to earn as much wealth as possible for the firm while considering the

overall welfare of all stakeholders. In Japan, companies form tightly knit, interlocking

business groups called keiretsu, such as Mitsubishi, Mitsui, and Sumitomo, and the goal

of the Japanese business manager is to increase the wealth and growth of the keiretsu. As

a result, they might focus on maximizing market share rather than stockholder wealth.

In China, which is making a transition from a command economy to a market-

based economy, there are sharp differences between state-owned companies and

emerging private-sector firms. The large state-owned companies have an overall goal that

can best be described as maintaining full employment in the economy while the new

private-sector firms fully embrace the Western standard of stockholder wealth

maximization.

83. Describe the global debt markets.

Answer : The international debt markets can be classified into the Eurocurrency market,

the Eurocredit market, and the long-term bond market. The Eurocurrency market is the

short-term portion of the Euromarket. The most widely quoted Eurocurrency interest rate

is the London Interbank Offer Rate, or LIBOR, which is the short-term interest rate

that major banks in London charge one another. The international banking system gathers

funds from businesses and governments in the Eurocurrency market and then allocates

funds to banks that have the most profitable lending opportunities. These loans, which are

short- to medium-term loans of a Eurocurrency to multinational corporations and

governments of medium to high credit quality, are called Eurocredits. Eurocredits are

denominated in all major Eurocurrencies, although the dollar is the overwhelming

favorite.

International bonds fall into two generic categories: foreign bonds and Eurobonds.

Foreign bonds are long-term debt sold by a foreign firm to investors in another country

and denominated in that country’s currency. Foreign bonds may have colorful nicknames:

foreign bonds sold in the United States are called Yankee bonds, and yen-denominated

bonds sold in Japanese financial markets by non-Japanese firms are called Samurai bonds.

Firms sell foreign bonds when they need to finance projects in a particular foreign

country.

Eurobonds are long-term debt instruments sold by firms to investors in countries

other than the country in whose currency the bonds are denominated. Multinational firms

can use Eurobonds to finance international or domestic projects. Eurodollar and other

Eurocurrency bonds have a number of characteristics that differ from similar U.S

corporate bonds. Eurobonds are bearer bonds and do not have to be registered. Eurobonds

also pay interest annually. While historically almost all Eurocurrency bonds were sold

without credit ratings, today, more than half of the Eurodollar bonds sold in Europe have

credit ratings.

IV. Answers to True or False Questions

1. True

2. False

3. True

4. True

5. False

6. False

7. False

8. True

9. False

10. True

11. True

12. False

13. False

14. False

15. True

16. False

17. True

18. True

19. False

20. False

21. False

22. False

23. True

24. False

25. True

26. False

27. False

28. True

29. False

30. False

V. Answers to Multiple-Choice Questions

31. d

32. b

33. c

34. d

35. c

36. d

37. a

38. c

39. d

40. b

41. b

42. a

43. a

44. b

45. b

46. d

47. d

48. c

49. a

50. a

51. b

52. d

53. c

54. b

55. c

56. a

57. b

58. c

59. b

60. c

61. a

62. b

63. c

64. a

65. b

66. c

67. d

68. a

69. b

70. c

71. c

72. a

73. b

74. c

75. d

76. a

77. d

78. c

79. b

80. a

VI. Solutions to Multiple-Choice Problems

56. Solution:

Cost of shoes in Italy = €131.25

Spot rate = $1.5621/€

Dollar cost of shoes = €131.25 × $1.5621/€= $205.03

57. Solution :

Cost of payables = MP 110,000,000

Spot rate = MP 10.3540/$

Dollar cost of payables = MP 110,000,000 / MP 10.3540/$= $10,623,913.46

58. Solution:

Inventory cost to firm = Rs. 5,325,000

Dollar cost of purchase = $125,634.07

Spot rate at which the foreign currency revenue was converted:

This is the same as $0.0236/Rs.

59. Solution:

Cost of car in New York = $3,129

Cost of car in New Delhi = Rs. 100,000

Spot rate = $0.0242/Rs.

Dollar cost in New Delhi = Rs. 100,000 × $0.0242/Rs.? = $2,420

The cost of the car is the higher in New York based on the spot rate!

60. Solution:

Spot rate = ¥0.009369/$

Direct quote = 1/ $0.009369/¥ = ¥106.7350/$

61. Solution:

Since the forward quote of $1.4974/€ implies that fewer dollars will be needed to

purchase the euro compared to the spot rate of $1.5136/€, we can say that the U.S. dollar

is at a forward premium against the euro.

62. Solution:

Since the forward quote of ¥100.37/$ implies that fewer yen will be needed to purchase a

dollar compared to the spot rate of ¥106.74/$, we can say that the U.S. dollar is at a

forward discount against the yen, or that the yen is at a forward premium against the U.S.

dollar.

63. Solution:

Expected euro revenue = €1,249,425

30-day forward rate = $1.5512/€

Dollar revenue received = €1,249,425 × $1.5512/€= $1,938,108

64. Solution:

Cost of machinery = ¥278.45 million

Forward rate = ¥105.46/$

Cost of equipment in dollars = ¥278,450,000 / ¥105.46/$ = $2,640,337.57

65. Solution:

Cost of trip = THB 41,250

Cost of trip based on forward rate = $1,247.17

30-day forward quote = THB 41,250 / $1,247.17 = THB 33.0745/$

66. Solution:

67. Solution:

68. Solution:

The ask rate will have to be MP10.3619/$ to provide a 0.55 percent bid-ask spread.

69. Solution:

To find the SK/SF cross rate, divide the Swiss franc quote by the Swedish krona quote.

Cross rate = $0.6164/SF / $0.1981/SK = SK3.1116/SF

70. Solution:

Revenues received by Xecor Pharma = $2,372,300

To determine the A$ /$ cross rate, you divide the A$ to £ quote by the $/£ quote.

Cross rate = A$2.0651/£ / $1.8538/£ = A$1/1140/$

U.S. dollar value of their revenue = $2,372,300 / A$1.1140/$

= $2,642,742.20

71. Solution:

Foreign currency payables = MP 23.5 million

To find the MP/$ quote, divide the C$/MP quote by the C$/$ quote.

Cross rate = C$0.0981/MP / C$1.0774/$ = $0.0910525/MP

Dollar cost of payables = MP23,500,000 × $0.0910525/MP

= $2,139,735

72. Solution:

To find the Rs./$ cross rate, divide the Rs/£ quote by the $/£ quote.

Cross rate = Rs.83.7612/£/ $1.8654/£= Rs.44.9025/$

73. Solution:

The British pound is at a forward discount of 1.6 percent against the U.S. dollar as it

takes more pounds to buy a dollar at the forward rate. Or the U.S dollar is at a 90-day

forward premium of 1.56 percent against the British pound.

74. Solution:

The Japanese yen is at a 5 percent forward premium against the dollar.

75. Solution:

Spot rate = Rs. 42.47/$

30-day forward premium on the dollar = 7.65%

The 30-day forward rate is Rs. 42.7404/$.

76. Solution:

Foreign currency payables = BR 1,272,500

Spot rate on payment date = $0.6317/BR

Dollar cost of payables = BR 1,272,500 × $0.6317/BR = $803,838.25

30-day forward rate = $0.6123/BR

Cost if hedged at forward rate = BR 1,272,500 × $0.6123/BR = $779,151.75

Cost savings = $803,838.25 − $779,151.75 = $24,686.50

77. Solution:

Foreign currency payables = 11,500,000 Korean won

Spot rate on payment date = $0.001004/ won

Dollar cost of payables = 11,500,000 won × $0.001004/ won= $11,546

30-day forward rate = $0.0009791/won

Cost if hedged at forward rate = 11,500,000 won × $0.0009791/won= $11,259.65

Cost savings = $11,546.00 − $11,259.65 = $286.35

78. Solution:

Foreign currency receivables = MP 41,275,000

Spot rate on payment date = $0.09596/peso

Dollar revenues from receivables = MP 41,275,000 x $0.09596/peso= $3,960,749

30-day forward rate = $0.09739/peso

Revenues if hedged at forward rate = MP 41,275,000 × $0.09739/peso = $ 4,019,772.25

Additional revenues received = $4,019,772.25 − $3,960,749 = $59,023.25

79. Solution:

Foreign currency receivables = €4,275,000

Spot rate on payment date = $1.5645/€

Dollar revenues from receivables = €4,275,000 × $1.5645/€ = $6,688,237.50

90-day forward rate = $1.5922/€

Revenues if hedged at forward rate = €4,275,000 × $1.5922/€ = $ 6,806,655

Additional revenues lost by not hedging = $6,688,237.50 − $ 6,806,655 = $118,417.50

80. Solution:

Amount Zylex plans to borrow = €4.5 million

Term of loan = 90 days

Interest cost = LIBOR + 0.25% = 4.175 % + 0.5% = 4.675%

Interest cost in euros = €4,500,000 × 0.04675 × (90/360) = €52,593.75

Spot rate on payoff date = €0.8334/$

Dollar interest cost = €52,593.75 / €0.8334/$ = $63,107.45

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