11. 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 barriers.” What does this statement mean?
12. International Investments U.S.–based MNCs commonly invest in foreign securities.
a. Assume that the dollar is presently weak and is expected to strengthen over time. How will theseexpectations affect the tendency of U.S. investors to invest in foreign securities?
b. Explain how low U.S. interest rates can affect the tendency of U. S.–based MNCs to invest abroad.
c. In general terms, what is the attraction of foreign investments to U.S. investors?
P94-95
8. Forward Contract The Wolfpack Corp. is a U.S. exporter that invoices its exports to the UnitedKingdom in British pounds. If it expects that the pound will appreciate against the dollar in thefuture, should it hedge its exports with a forward contract? Explain.
23. 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 the government interest rate of another country, even though the euro is the currency used in both countries.
25. Pricing ADRs Today, the stock price of Genevo Co. (based in Switzerland) is priced at SF80 per share. The spot rate of the Swiss franc (SF) is $.70. During the next year, you expect that the stock price of Genevo Co. will decline by 3 percent. You also expect that the Swiss franc will depreciate against the U.S. dollar by 8 percent during the next year. You own American depository receipts (ADRs) that represent Genevo stock. Each share that you own represents one share of the stock traded on the Swiss stock exchange. What is the estimated value of the ADR per share in 1 year?
P130-131
21. Speculation Diamond Bank expects that the Singapore dollar will depreciate against the U.S. dollarfrom its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist:
Currency Leading Rate Borrowing Rate
U.S. Dollar 8.0% 8.3%
Maxican Peso 8.5% 8.7%
Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market and investing the funds in U.S. dollars for 60 days. Estimate the profits (or losses) that could be earned from this strategy. Should Diamond Bank pursue this strategy?
28. Impact of Economy on Exchange Rates Assume that inflation is zero in the United States andin Europe and will remain at zero. United States interest rates are presently the same as in Europe.Assume that the economic growth for the United States is presently similar to Europe. Assume thatinternational capital flows are much larger than international trade flows. Today, there is newsthat clearly signals economic conditions in Europe will be weakening in the future, while economicconditions in the United States will remain the same. Explain why and how (which direction) theeuro’s value would change today based on this information.
29. Movements in Cross Exchange Rates Last year a dollar was equal to 7 Swedish kronor, and a Polish zloty was equal to $.40. Today, the dollar is equal to 8 Swedish kronor, and a Polish zloty is equal to $.44. By what percentage did the cross exchange rate of the Polish zloty in Swedish kronor (that is, the number of kronor that can be purchased with one zloty) change over the last year?
P159-160
4. Forward Premium Compute the forward discount or premium for the Mexican peso whose 90-day forward rate is $.102 and spot rate is $.10. State whether your answer is a discount or premium.
15. Speculating with Currency Futures Assume that the euro’s spot rate has moved in cycles over time.
How might you try to use futures contracts on euros to capitalize on this tendency? How could you determine whether such a strategy would have been profitable in previous periods?
17. Price Movements of Currency Futures Assume that on November 1, the spot rate of the
British pound was $1.58 and the price on a December futures contract was $1.59. Assume that the pound depreciated during November so that by November 30 it was worth $1.51.
a. What do you think happened to the futures price over the month of November? Why?
b. If you had known that this would occur, would you have purchased or sold a December futures contract in pounds on November 1? Explain.
P212-213
20. Impact of Intervention on Currency Option Premiums Assume that the central bank of the
countryZakow periodically intervenes in the foreign exchange market to prevent large upward or downward fluctuations in its currency (the zak) against the U.S. dollar. Today, the central bank announced that it would no longer intervene in the foreign exchange market. The spot rate of the zak against the dollar was not affected by this news. Will the news affect the premium on currency call options that are traded on the zak? Will the news affect the premium on currency put options that are traded on the zak? Explain.
24. Implications of a Revised Peg The country of Zapakar has much international trade with the United
States and other countries as it has no significant barriers on trade or capital flows. Many firms in Zapakar export common products (denominated in zaps) that serve as substitutes for products produced in the United States and many other countries. Zapakar’s currency (called the zap) has been pegged at 8 zaps. $1 for the last several years. Yesterday, the government of Zapakar reset the zap’s currency value so that it is now pegged at 7 zaps . $1.
a. How should this adjustment in the pegged rate against the dollar affect the volume of exports by
Zapakar firms to the United States?
b. Will this adjustment in the pegged rate against the dollar affect the volume of exports by Zapakar firms to non-U.S. countries? If so, explain.
c. Assume that the Federal Reserve significantly raises U.S. interest rates today. Do you think Zapakar’s interest rate would increase, decrease, or remain the same?
P277-278
19. Forecasting the Future Spot Rate Based onIFE Assume that the spot exchange rate of the Singaporedollar is $.70. The 1-year interest rate is 11 percentin the United States and 7 percent in Singapore.What will the spot rate be in 1 year according to theIFE? What is the force that causes the spot rate tochange according to the IFE?
21. Inflation and Interest Rate Effects The openingof Russia’s market has resulted in a highly volatileRussian currency (the ruble). Russia’s inflation hascommonly exceeded 20 percent per month. Russianinterest rates commonly exceed 150 percent, but this issometimes less than the annual inflation rate in Russia.
a. Explain why the high Russian inflation has putsevere pressure on the value of the Russian ruble.
b. Does the effect of Russian inflation on the declinein the ruble’s value support the PPP theory? Howmight the relationship be distorted by political conditionsin Russia?
c. Does it appear that the prices of Russian goods willbe equal to the prices of U.S. goods from the perspectiveof Russian consumers (after considering exchangerates)? Explain.
d. Will the effects of the high Russian inflation and the decline in the ruble offset each other for U.S. importers? That is, how will U.S. importers of Russian goods be affected by the conditions?
29. Impact of Barriers on PPP and IFE Would PPP be more likely to hold between the United States and Hungary if trade barriers were completely removed and if Hungary’s currency were allowed to float without any government intervention? Would the IFE be more likely to hold between the United States and Hungary if trade barriers were completely removed and if Hungary’s currency were allowed to float without any government intervention? Explain.
P456-457
22. Decisions Based on Capital Budgeting Marathon, Inc., considers a 1-year project with the Belgian government. Its euro revenue would be guaranteed. Its consultant states that the percentage change in the euro is represented by a normal distribution and that, based on a 95 percent confidence interval, the percentage change in the euro is expected to be between 0 and 6 percent. Marathon uses this information to create three scenarios: 0, 3, and 6 percent for the euro. It derives an estimated NPV based on each scenario and then determines the mean NPV. The NPV was positive for the 3 and 6 percent scenarios, but it was slightly negative for the 0 percent scenario. This led Marathon to reject the project. Its manager stated that it did not want to pursue a project that had a one-in-three chance of having a negative NPV. Do you agree with the manager’ s interpretation of the analysis? Explain.
23. Estimating Cash Flows of a Foreign Project Assume that Nike decides to build a shoe factory in
Brazil; half the initial outlay will be funded by the parent’s equity and half by borrowing funds in Brazil. Assume that Nike wants to assess the project from its own perspective to determine whether the project’s future cash flows will provide a sufficient return to the parent to warrant the initial investment. Why will the estimated cash flows be different from the estimated cash flows of Nike’s shoe factory in New Hampshire? Why will the initial outlay be different? Explain how Nike can conduct multinational capital budgeting in a manner that will achieve its objective.
25. Capital Budgeting Analysis Zistine Co. considers a 1-year project in New Zealand so that it can capitalize on its technology. It is risk averse but is attracted to the project because of a government guarantee. The project will generate a guaranteed NZ$8 million in revenue, paid by the New Zealand government at the end of the year. The payment by the New Zealand government is also guaranteed by a credible U.S. bank. The cash flows earned on the project will be converted to U.S. dollars and remitted to the parent in 1 year. The prevailing nominal 1-year interest rate in New Zealand is 5 percent, while the nominal 1-year interest rate in the United States is 9 percent. Zistine’s chief executive officer believes that the movement in the New Zealand dollar is highly uncertain over the next year, but his best guess is that the change in its value will be in accordance with the international Fisher effect (IFE). He also believes that interest rate parity holds. He provides this information to three recent finance graduates that he just hired as managers and asks them for their input.
a. The first manager states that due to the parity conditions, the feasibility of the project will be the same whether the cash flows are hedged with a forward contract or are not hedged. Is this manager correct? Explain.
b. The second manager states that the project should not be hedged. Based on the interest rates, the IFE suggests that Zistine Co. will benefit from the future exchange rate movements, so the project will generate a higher NPV if Zistine does not hedge. Is this manager correct? Explain.
c. The third manager states that the project should be hedged because the forward rate contains a premium and, therefore, the forward rate will generate more U.S. dollar cash flows than the expected amount of dollar cash flows if the firm remains unhedged. Is this manager correct? Explain.
