Assignment
Textbook: International Financial Management, 14th edition, Madura, Jeff
Chapter 1: Q: 1, 2, and 19
1. Agency Problems of MNCs
1. Explain the agency problem of MNCs.
2. Why might agency costs be larger for an MNC than for a purely domestic firm?
2. Comparative Advantage
1. Explain how the theory of comparative advantage relates to the need for international business.
2. Explain how the product cycle theory relates to the growth of an MNC.
19. Valuation of an MNC Birm Co., based in Alabama, is considering several international opportunities in Europe that could affect the firm's value. Its valuation depends on four factors: (1) expected cash flows in dollars, (2) expected cash flows in euros that are ultimately converted into dollars, (3) the rate at which it can convert euros to dollars, and (4) Birm's weighted average cost of capital. For each of the following opportunities, identify which factors will be affected.
1. Birm plans a licensing deal in which it will sell technology to a firm in Germany for $3 million; the payment is invoiced in dollars, and this project has the same risk level as its existing businesses.
2. Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses.
3. Birm plans to discontinue its relationship with a U.S. supplier so that it can import a small amount of supplies (denominated in euros) at
a lower cost from a Belgian supplier.
4. Birm plans to export a small amount of materials to Ireland that are denominated in euros.
Chapter 2: Q: 1, 2 and 12
1. Balance of Payments
1. What are the main components of the current account?
2. What are the main components of the capital account?
2. Inflation Effect on Trade
1. How would a relatively high domestic inflation rate affect the home country's current account, other things being equal?
2. Is a negative current account harmful to a country? Discuss.
12. International Investments U.S.-based MNCs commonly invest in foreign securities.
1. Assume that the dollar is presently weak and
is expected to strengthen over time. How will these expectations affect the tendency of U.S. investors to invest in foreign securities?
2. Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest abroad.
3. In general terms, what is the attraction of foreign investments to U.S. investors?
Chapter 3: Q: 8, 10 and 11
8. Forward Contract The Wolfpack Corp. 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.
10. Indirect Exchange Rate If the direct exchange rate of the euro is $1.25, what is the euro's indirect exchange rate? That is, what is the value of a dollar in euros?
11. Cross Exchange Rate Assume Poland's currency (the zloty) is worth $0.17 and the Japanese yen is worth $0.008. What is the cross exchange rate of the zloty with respect to yen? That is, how many yen equal one zloty?
Chapter 4: Q: 18 and 20
18. Factors Affecting Exchange Rates Mexico tends to have much higher inflation than the United States as well as much higher interest rates than the United States. Inflation and interest rates are much more volatile in Mexico than in industrialized coun- tries. 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 deprecia- tion has varied substantially. The bid/ask spread tends to be wider for the peso than for currencies of indus- trialized countries.
a. Identify the most obvious economic reason for the persistent depreciation 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 cur- rencies 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?
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?
20. Speculation Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $0.15 to $0.14 in 10 days. The fol- lowing interbank lending and borrowing rates exist:
Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 70 million pesos in the interbank market, depending on which currency it wants to borrow.
a. How could Blue Demon Bank attempt to capital- ize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.
b. Assume all the preceding information with this exception: Blue Demon Bank expects the peso to appreciate from its present spot rate of $0.15 to $0.17 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.