MULTINATIONAL FINANCIAL MANAGEMENT 1
U.S. Firms Look Overseas to Enhance Shareholder Value
What is a multinational corporation?
Why do companies “go global”?
Identify and briefly discuss five major factors that complicate financial management in multinational firms
What is an international monetary system?
What is the difference between spot and forward exchange rates?
What is the difference between floating- and fixed-exchange rates?
Differentiate between devaluation/revaluation of a currency and
depreciation/appreciation of a currency.
What is meant by a soft or weak currency? A hard or strong currency?
What are the two broad categories of the various currency regimes?
What are the subgroups of these two broad categories?
Explain the difference between direct and indirect quotations.
What is a cross rate?
Assume that today 1 Canadian dollar is worth 0.75 U.S. dollar.
How many Canadian dollars would you receive for 1 U.S. dollar? (1.333)
Assume that 1 U.S. dollar can either be exchanged for 105 Japan-
ese yen or for 0.80 euro.
What is the Euro/yen exchange rate? (€0.007619/¥
Explain what it means for a forward currency to sell at a discount
and at a premium.
Suppose a U.S. firm must pay 200 million Swiss francs to a Swiss
firm in 90 days.
Briefly explain how the firm would use forward exchange rates to “lock in” the price of the payable due in 90 days.
What is interest rate parity?
Assume interest rate parity holds.
When a currency trades at a forward premium, what does that imply about domestic rates relative to foreign interest rates?
When a currency trades at a forward discount?
Assume that 90-day U.S. securities have a 3.5 percent annualized
interest rate, whereas 90-day Canadian securities have a 4 percent
annualized interest rate.
In the spot market, 1 U.S. dollar can be exchanged for 1.4 Canadian dollars. If interest rate parity holds,what is the 90-day forward exchange rate between U.S. and Canadian dollars? ($0.7134/C$ or C$1.40173/$)
On the basis of your answer to the previous question, is the Canadian dollar selling at a premium or discount on the forward rate? (Discount)
What is purchasing power parity?
A television set sells for $1,000 U.S. dollars. In the spot market,
$1 110 Japanese yen.
If purchasing power parity holds, what should be the price (in yen) of the same television set in Japan? (¥110,000)
Price differences in “similar” products in different countries often
exist. What can explain these differences?
What effects do relative inflation rates have on relative interest
rates?
What happens over time to the currencies of countries with higher
inflation rates than that of the United States? To those with lower
inflation rates?
Why might a multinational corporation decide to borrow in a coun-
try such as Brazil, where interest rates are high, rather than in a
country like Switzerland, where interest rates are low?
What are the three major types of international credit markets?
What is LIBOR?
What are ADRs?
List some key differences in capital budgeting as applied to foreign
versus domestic operations.
What are the relevant cash flows for an international investment
the cash flows produced by the subsidiary in the country where it
operates or the cash flows in dollars that it sends to its parent
company?
Why might the cost of capital for a foreign project differ from that of
an equivalent domestic project? Could it be lower?
What adjustments might be made to the domestic cost of capital for
a foreign investment due to exchange rate risk, political risk, and
country risk?
Do international differences in financial leverage exist? Explain.
What are some factors that make cash management especially complicated in a multinational corporation?
Why is granting credit especially risky in an international context?
Why is inventory management especially important for a multinational firm?