1. Foreign Currency Risk
What is the difference between operating and transaction exposure? In your opinion, which one of the two is more important to manage for the competitiveness of a multinational enterprise?
2. Foreign Currency Risk
Please describe "translation exposure." Would a U.S. multinational enterprise would have any translation exposure if all of its subsidiaries uses U.S. dollar as their functional currencies?
3. Managing Operating Exposure
a. Please describe the following proactive policies for managing operating exposure.
(i) Risk-sharing agreements
(ii) Cross-currency swaps
(iii) Matching currency cash flows
b. Which one of the above policies would work better to manage the operating exposure of a firm that has only recently expanded to international markets?
4. Transfer Pricing
Please describe transfer pricing, and how it can be used to increase the consolidated net income of a multinational enterprise.
5. International Cost of Capital
Why do some critics say the CAPM model is not appropriate in an international setting? Please explain a way that the CAPM model could be adapted for international applications.
6. Letter of Credit
Please explain what a letter of credit (L/C) is, and how the L/C facilitates international trade.
7. Transactions Exposure
A U. S. exporter has agreed to sell machinery to British firm for £1,000,000 and will receive payment 90 days. The current spot price of the British pound is $1.68 and the forward price of the British Pound for delivery in 90 days is $1.70.
(a) If the U. S. exporter hedges its pound exposure 100% with a forward contract, and the spot price of the British pound in 90 days is $1.65, how much will the exporter receive from this sale, assuming the British firm pays in 90 days.
(b) What is the foreign exchange gain / loss?
(c) Compare the result to the case when the U.S. exporter does not do any hedging.
8. Multinational Taxation
MetroCity Designs Inc., located in Northern California, has two international subsidiaries, one located in the Ukraine, the other in Korea, with the following financial information:
|
|
Ukraine
|
Korea
|
United States
|
|
Earnings Before Taxes
|
$2,000,000
|
$2,500,000
|
|
|
Corporate Income Tax Rate
|
40%
|
26%
|
35%
|
|
Dividend Withholding Tax Rate
|
10%
|
5%
|
0%
|
If MetroCity remits 50% of the earnings from each subsidiary as dividend payments, what are the additional U.S. taxes, or excess tax credits on the foreign sourced income from the Ukraine and Korea respectively?
9. Multinational Cash Management
GeoTech Agriculture, Inc. (U.S.) manufactures basic farm equipment in China, Spain and Iowa in the United States. Each subsidiary has monthly unsettled balances due to or from other subsidiaries. At the end of December, unsettled intracompany debts in U.S. dollars are as follows:
GeoTech, Spain Owes $8 million to GeoTech, China
Owes $9 million to GeoTech, Iowa
GeoTech, China Owes $5 million to Geotech, Spain
Owes $6 million to GeoTech, Iowa
GeoTech, Iowa Owes $4 million to GeoTech, Spain
Owes $10 million to GeoTech, China
a. How could GeoTech Agriculture Inc. net these intracompany debts?
b. How much would be saved in foreign exchange transaction expenses as a result of netting? Please assume that the foreign exchange transaction costs is 0.5% of funds transferred.
10. Balance Sheet Translation
Please use the following information to solve the problem:
• The functional currency of the subsidiary is the euro
• The currency of the parent is U.S. dollars
• Exchange rates: December 31, 2002: $1.200/€ ; January 2, 2003: $1.000/€
• PP&E, common stock, and long-term debt were acquired at a past rate of $1.2760/€
• Inventory on hand was purchased or manufactured during the immediately prior quarter when the average exchange rate was $1.2180/€
Balance Sheet of the Subsidiary on December 31, 2002
|
Assets
|
In Euros
|
|
Cash
|
1,600,000
|
|
Accounts Receivable
|
3,200,000
|
|
Inventory
|
2,400,000
|
|
Net Plant and Equipment
|
4,800,000
|
|
Liabilities
|
|
|
Accounts Payable
|
1,000,000
|
|
Long-term Debt
|
6,000,000
|
|
Common Stock
|
5,000,000
|
a) Please translate the balance sheet using the current rate method.
b) Please discuss what would the impact of the "translation exposure" be using this example.