Chapter 21 International 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 countrys 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 markets 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 lenders profit margin. The Citibank example in Section 21.5 and Learning by Doing Application 21.6 illustrate how loan costs are computed.

I.
1.

True or False Questions

Globalization refers to the removal of barriers to free trade and the closer integration of national economies. a. b. True False

2.

While production of goods has been moved overseas, American consumers only purchase domestic goods. a. b. True False

3.

The production of goods and services has also become highly globalized. a. b. True 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. b. True 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. b. True False

6.

Wal-Mart is a transnational corporation. a. b. True False

7.

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

a. b.

True False

8.

Legal systems can vary on simple matters, such as opening a business, selecting a site location, and hiring employees. a. b. True False

9.

English is the worlds social language. a. b. True False

10.

English is the official business language, but not the worlds social language. a. b. True False

11.

Cultural views shape business practices and peoples attitudes toward business. a. b. True False

12.

Both China and the nations that formerly made up the Soviet Union are currently moving toward centrally planned economies. a. b. True False

13.

Country risk has no effect on a firms cash flows. a. b. True False

14.

Stockholder wealth maximization is the accepted goal for firms in all countries around the world. a. b. True False

15.

The European managers goal is to earn as much wealth as possible for the firm while considering the overall welfare of all stakeholders. a. b. True False

16.

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

a. b.

True False

17.

Japanese managers focus on maximizing market share rather than stockholder wealth. a. b. True False

18.

The foreign exchange market is a group of international markets connected electronically where currencies are bought and sold in wholesale amounts. a. b. True False

19.

Tokyo is the largest foreign exchange trading center. a. b. True False

20.

When a U.S. bank in Chicago gives a quote of 0.5089/$, it is a direct quote. a. b. True False

21.

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

22.

The bid quote is the rate at which the dealer will sell foreign currency. a. b. True 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. b. True False

24.

Most companies find it easier to estimate the incremental cash flows for foreign projects than for domestic projects. a. b. True False

25.

To convert the projects future cash flows into another currency, we need to come up with projected or forecast exchange rates.

a. b.

True False

26.

To convert the projects future cash flows into another currency, we need to use todays spot exchange rates. a. b. True 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. b. True False

28.

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

29.

Long-term loans of a Eurocurrency made to multinational corporations and governments of poor credit quality are called Eurocredits. a. b. True False

30.

Eurodollar and other Eurocurrency bonds have all characteristics identical to similar U.S corporate bonds. a. b. True 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. c. d. Goods and services are produced around the world. The financial system has also become highly integrated. 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. c. Multinational corporations are owned by domestic stockholders only. 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. c. d.

Legal systems, cultural factors, and economic systems. Exchange rate risk, country risk, and size of market. Economic systems, cultural factors, and country risk

34.

Which ONE of the following statements about the goal of the firm is true? a. b. c. Stockholder value maximization is the accepted goal for firms in India. Firms in Germany focus on maximizing corporate wealth. 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. b. c. Corporate wealth maximization is the accepted goal for firms in India. Firms in Australia focus on maximizing corporate wealth. 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. b. c. d. London, New York, and Tokyo. New York, Tokyo, and Zurich. London, Tokyo, and Zurich. 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. c. multinational commercial banks, local banks and domestic firms. 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. b. c. d. an American quote. an indirect quote. a direct quote. a cross quote.

41.

A European quote is the same as a. b. c. d. an American quote. an indirect quote. a direct quote. a cross quote.

42.

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

a. b. c. d.

0.5125/$ $0.006900/ $1.5637/ 115.23/

43.

The bid quote represents the rate at which a. b. c. d. the dealer will buy foreign currency from you. the dealer will sell foreign currency to you. you can buy the foreign currency from the dealer. None of the above.

44.

The ask quote represents the rate at which a. b. c. d. the dealer will buy foreign currency from you. the dealer will sell foreign currency to you. you can sell the foreign currency to the dealer. None of the above.

45.

The difference between the forward rate and the spot rate is called the a. b. c. d. cross exchange rate. forward premium or forward discount. indirect quote. None of the above.

46.

When performing capital budgeting analysis on international projects, managers a. b. c. find it more difficult to estimate the incremental cash flows for foreign projects have to deal with foreign exchange rate risk on international capital investments. must incorporate a country risk premium when evaluating foreign business activities. d. All of the above.

47.

The ways that a foreign government can affect the risk of a foreign project include: a. b. Change tax laws in a way that adversely impacts the firm. 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. d. All of the above.

48.

The ways that a foreign government can adversely affect the risk of a foreign project include all EXCEPT: a. b. Change tax laws in a way that adversely impacts the firm. 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. b. c. d. adjusting the firms discount rate for the additional risk. increasing cash flow estimates from the project. doing nothing. None of the above.

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. d. None of the above.

51.

The Eurocurrency market is the a. b. c. medium-term portion of the Euromarket. short-term portion of the Euromarket. long-term portion of the Euromarket.

d.

None of the above.

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. d. All of the above.

53.

Long-term debt sold by a foreign firm to investors in a foreign country and denominated in that countrys currency is called a a. b. c. d. Eurobond. municipal bond. foreign bond. 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. c. d.

Eurobonds. foreign bonds. 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. c. d. Eurobonds are bearer bonds and do not have to be registered. Eurobonds are bonds that have to be registered. 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. b. c. d. $205.03 $84.02 131.25 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. b. c. d.

$110,000,000 $10,623,913 $11,110,235 $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 todays spot rate. What is the spot rate today? a. b. c. d. $4.2385/Rs. $42.3850/Rs. Rs.42.3850/$ 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. b. c. d. In New Delhi In New York It is same in both places. 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. b. c. d.

0.009369/$ 0.936900/$ 106.7350/$ 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. b. c. d. the U.S. dollar is at a forward premium against the euro. the U.S. dollar is at a forward discount against the euro. the euro is at a forward premium against the U.S. dollar. 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. b. c. d. the U.S. dollar is at a forward premium against the yen. the yen is at a forward premium against the U.S. dollar. the yen is at a forward discount against the U.S. dollar. 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. b. c. d.

$1,249,425 $805,457 $1,938,108 $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. b. c. d. $2,640,338 $2,784,500 $2,936,534 $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 $1,247.17 based on the 30-day forward quote. What is the forward rate? a. b. c. d. THB41.2500/$ THB33.0785/$ $0.0242/THB $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. b. c. d. 1.2% 2.1% 0.9% 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. b. c. d. 0.2% 2.1% 0,9% 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/$, what does the bid rate have to be? a. b. MP10.3619/$ MP10.4192/$

c. d.

MP10.4249/$ 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. b. c. d. SK0.3214/SF SK3.1116/SF SK0.4183/SF 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 companys revenues? Round to the nearest dollar. a. b. c. d. $4,397,770 $4,899,037 $2,129,567 $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. b. c. d. $2,531,890 $2,305,350 $2,139,735 $1,987,325

72.

Cross rate: Dresdner Bank has offered the following exchange rate quotes on Indian rupees (Rs): Rs.83.7612/ and $1.8654/. What is the cross rate between the Indian rupees and the U.S. dollar? a. b. c. d. Rs. 44.9025/$ Rs. 49.9375/$ Rs. 51.2134/$ Rs. 36,7122/$

73.

Forward premium: The spot rate on the London market was 0.5434/$, while the 90day forward rate was 0.5519/$. What is the annualized forward premium or discount on the U.S. dollar for the period? Round to one decimal place. a. b. c. d. 1.6% premium 6.2% premium 6.2% discount 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. b. c. d. 7% premium 7% discount 5% premium 5% discount

75.

Forward premium: State Bank of India has offered a spot rate quote on Indian rupees (Rs) of Rs. 42.47/$. The Indian rupee is quoted at a 30-day forward premium of 7.65 percent against the dollar. What is the 30-day forward quote? a. b. c. d. Rs 43.5622/$ Rs 41.5687/$ Rs 45.1226/$ 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. b. c. d.

$24,687 $803,838 $779,152 $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. b. c. d. $687 $338 $152 $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. b. $24,687 $83,838

c. d.

$59,023 $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. b. c. d. $124,687 $118,418 $159,023 $131,278

80.

Loan pricing: Zylex Corporations 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. b. c. d. $63,107.45 $126,214.90 $39,143.76 $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 worlds social language. Cultural views also shape business practices and peoples 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 firms 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 managers 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 marketbased 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 countrys 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. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. True False True True False False False True False True True False False False True False True True False False False

22. 23. 24. 25. 26. 27. 28. 29. 30.

False True False True False False True False False

V.
31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

Answers to Multiple-Choice Questions

d b c d c d a c d b b a a b b d d c a a

51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73.

b d c b c a b c b c a b c a b c d a b c c a b

74. 75. 76. 77. 78. 79. 80.

c d a d c b 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: Rs.5,325,000 = Rs.42.3850 $125,634.07 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:

Bid - Ask spread =

Ask rate - Bid rate $0.1667 / SKS$0.1652 / SK = Ask rate $0.1667 / SK = 0.008998 = 0.9%

67.

Solution:

Bid - Ask spread =

Ask rate - Bid rate $0.7714 / NZ$S$0.7621 / NZ$ = Ask rate $0.7714 / NZ$ = 0.0.012056 = 1.21%

68.

Solution:

Ask rate - Bid rate Ask rate 10.4192 - Bid rate 0..0055 = 10.4192 10.4192 - Bid rate = 0.005510.4192 Bid - Ask spread = = 0.0057 Bid rate = 10.4192 - 0.0057 = MP10.3619 / $
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: Forward premium (discount) = Forward rate - Spot rate 360 100 Spot rate n 0.5519 - 0.5434 360 = = 6.26% 0.5434 90

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: Forward premium (discount) = Forward rate - Spot rate 360 100 Spot rate n $0.009702 / S 0.009466 / 360 = = 4.99% 0.009466 / 180

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%

Forward premium (discount) =

Forward rate - Spot rate 360 100 Spot rate n F S Rs42.47 / $ 360 0.0765 = 0 Rs 42.47 / $ 30 0.0765 Rs 42.47 / $30 F0 S Rs 42.47 / $ = 360 F0 = 0.2707 + 42.47 = Rs.42.7404 / $

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