FINANCE 6644: Global Financial Strategy
Krishnan Dandapani January 2011
Final Exam Review Questions
A. Please be concise and precise in your answers.
B. Practice answers for closed book, class room setting.
C. Suggested length: minimum one page; maximum two pages per question.
D. You would answer 5 questions or Problems in two hours in final exam.
1. Ethical Standards
a. Can a multinational firm adopt varying ethical standards [such as with regard to
product safety (Pinto), employee benefits (Nike) and “kickbacks” to win business] in its
global operations? Why or Why Not? Discuss in depth based on the goals of
multinational corporations? (Be sure to identify the merits and demerits/pitfalls for both
b. How do corporate governance and financial management differ for US based
corporations and global multinational corporations?
(Read: Class notes and discussions)
2. Global Pricing Strategy
With the emergence of the Internet as a dominant influence in global markets, many
anticipated that the “Law of One Price” for all products would evolve.
However that did not materialize.
What is “Law of One Price”? When would that exist globally?
Identify the major pricing strategies/ methodologies of corporations in pricing products
How is “internet pricing” different from ‘brick and mortar’ pricing?
Discuss the impact of the Internet on “Global Pricing Strategies” of firms with specific
reference to ‘Internet Pricing’ and ‘Brick and Mortar pricing’.
Class presentation, notes, and presentation by Professor)
3. Triangular Arbitrage Strategy:
A. Is the foreign exchange market inefficient? Discuss.
The following Quotations are available to you. (You may either buy or sell at the stated rates)
Singapore Bank: Singapore dollar quote for Korean Won Won 714.00/S$
Hong Kong Bank: HK$ quote for Singapore dollars HK$ 4.70/S$
Korean Bank: Korean won quote for Hong Kong dollars Won 150.00/HK$
a. Assume you have an initial HK$1,000,000. Is triangular Arbitrage possible? If so, explain the
Steps, and compute your profit?
b. What are the implications of trading spreads and commission costs for this profit? Is
commission costs are $3,000 per transactions, is artbitrage still possible and profitable?
(Read: Class notes, and problem presented in class)
4. Financial Institutions Muti-goal Optimization Strategy:
a. Identify the major ‘objectives’ and ‘problems’ in the management of financial institutions
globally. What strategies do institutions use to meet these challenges?
b. How do regulators evaluate the financial institutions?
c. Why did ‘Virtual Banks’ fail? Discuss in depth. Based on this, What are the prospects for
Mobile Banking worldwide in the forthcoming decade?
d. How do Central Banks promote Monetary Stability? Explain with reference to the recent ‘sub-
(Read: Class Notes)
5. Theoretical Relationship 1: Relationship between Money Supply and Inflation;
a. What Causes Inflation? Discuss.
b. What is the ‘Monetary Equation’? Why is it important to the financial manager?
c. What are the implications of this for the ‘foreign exchange market’?
(Read: presentation in class and class notes)
6. Global Crisis and Securitization
What does Securitization of assets mean? What are its costs and benefits for financial
institutions? Why has this market experienced such a tremendous growth in the United States
over the last decade? Why was it a major concern for financial markets in the summer of 2007?
Why did it cause a global crisis?
(Read: Class Notes)
7. Trade Policy and Offshoring Strategy:
a. Why do nations trade with one another? Explain in your own words.
(Ricardo’s theory of Comparative advantage: Economics and Efficiency)
b. What is Dynamic Comparative Advantage? What are the implications of this for the current
debate on “Outsourcing” and “Off-shoring?”
c. What strategies should corporations adopt to minimize the impact of off-shoring on its
(Read: Article presented in class, and class hand outs)
8. Theoretical Relationship 2 : Relationship between Inflation and Interest Rates;
Domestic Fisher Effect
What is the ‘Domestic Fisher Effect’?
What is the relationship between Inflation and interest rates?
Why is it important for the Global Financial manager?
(Read: class notes and hand outs)
9. Theoretical Relationship # 3: Relationship between Inflation and Exchange Rates;
Purchasing Power Parity
Explain the concept of ‘purchasing power parity’ (PPP) in your own words.
What are the requisite conditions for PPP to exist?
What is the relationship between PPP and exchange rates ?
(Read: class notes and Instructor Notes on PPP)
10. Theoretical Relationship # 4: Relationship between Interest Rates and Exchange
Rates; Interest Rate Parity
Illustrate the concept of ‘Interst Rate Parity’ and ‘Covered Interest Arbitrage’ with a numerical
example. What are the implications of this for Foreign Exchange Market.?
(Read: class notes and Instructor Notes on IRP)
11. Global Financial Crisis:
Briefly Explain these crisis in your own words, what these are about, what caused it, how it was
resolved and what are the lessons learnt from it.
- Debt Crisis: Russia, Iceland
- Foreign Exchange Crisis: Mexico, Thailand
- Banking Crisis: Japan, USA Subprime
12. Risk Management and Hedging Strategy Using Forwards
You have been hired by Amerikan Airlines. Your primary task is to keep the Airline in Business
and to ensure that you have to accomplish these two goals.
Keep airfares low and at a comparable steady price throughout the year
Protect the airline from fluctuating fuel costs
With these objectives you need to develop Hedging strategies in the Forward Market. An
historical Review reveals that the Airline consumes 1 million barrels of fuel during the planned
horizon and the price of fuel has fluctuated in the previous 5 years from $30.00 to $145.00. Fuel
cost represents about 40% of the cost of operation and is next in importance to salaries and
Identify the steps you would initiate to protect the company from fluctuating fuel costs and
achieve your above two objectives.
(Read Presentations in class)
13. Risk Management and Hedging Strategy Using Futures
You have been hired as a Financial Analyst at “Burger Donalds” and scheduled to begin on July
1, 2011. Your first Assignment involves the Futures Markets. The Burger Production Manager
informs that he wants 5 million bushels of wheat on December 1, 2011 of the year to ensure
continued and uninterrupted production of Super Burgers. You glance through the Wall Street
Journal on July 1 and observe these prices.
Spot Price of Wheat on July 1 (Per Bushel) $7.52
July Wheat futures price (Delivery on July 31) $7.54
August Wheat futures price (Delivery on Aug 31) $7.55
October Wheat futures price (Delivery on Oct 31) $7.56
November Wheat futures price (Delivery on Nov 30) $7.58
From Historical company records you know that if you buy the wheat ahead of the required time
you can store it at a cost of 2 cents per bushel per month. Outline all your strategies (at least six!)
and their implications.
(Read Presentations in class)
14. Risk Management and Hedging Strategy Using Swaps:Debt for Equity Swaps:
A few years back the Government of Japan made the offer to the Government of Brazil:
The Brazilian government will give the “Exclusive rights to all the Minerals/ Metals/ and Mining
opportunities in Brazil to a consortium of Japanese Corporations for one hundred years to mine,
manufacture, extract and sell the commodities. After the one hundred years the Japanese
corporations will vacate and the properties will be transferred to the Brazilian government or its
designee. In return for this privilege the Japanese Consortium will retire the “entire external debt”
of the Brazilian Government (This was estimated to be $250 billion dollars).
Identify from the perspectives of the Japanese and Brazilian Governments what are the
advantages and disadvantages of this proposal. Could this Debt for Equity Swap Work?
Why or Why Not? What are the potential problems?
As a global manager, what strategies should you adopt to make this work?
(Read Presentations in class)
15. Foreign Exchange Hedging using Foreign Currency Derivatives: Problem
Scout Finch is the Chief Financial Officer [CFO] of Dayton Manufacturing, a U.S. based
manufacturer of gas turbine equipment. She has just concluded negotiations for the sale of a
turbine generator to Crown, a British firm for One million pounds. This single sale is quite large
in relation to Dayton’s present business. Dayton has no other current foreign customers, so the
currency risk of this sale is of particular concern. The sale is made in March with payment due
three months later in June. Scout Finch has collected the following financial market information
for the analysis of her currency exposure problem:
Spot Exchange rate: $1.7640 per British pound.
Three month forward rate: $1.7549 per pound (a 2.2676% p. a. discount on the pound)
Dayton’s cost of capital: 12%
U.K. three month borrowing interest rate: 10.0% (or 2.5% per quarter)
U.K. three month investment interest rate: 8.0% (or 2% per quarter)
U.S. three month borrowing interest rate: 8.0% ( or 2.0% per quarter)
U.S. three month investment interest rate: 6.0% (or 1.5% per quarter)
June put option in the over-the-counter (bank) market for 1,000,000 British pounds;
Strike price $1.75 (nearly at-the money) 1.5% premium
June put option in the over-the counter (bank) market for 1,000,000 British pounds:
Strike price $1.71 (out-of-the money) 1.0% premium
Dayton’s foreign exchange advisory service forecasts that the spot rate in there months will be
$1.76 per British pound.
Like many manufacturing firms, Dayton operates on relatively narrow margins. Although Ms.
Finch and Dayton would be very happy if the pound appreciated versus the dollars, concerns
center on the possibility that the pound will fall. When Ms. Finch budgeted this specific contract,
she determined that the minimum acceptable margin was at a sale price of $1,700,000. The
budget rate, the lowest acceptable dollar per pound exchange rate, was therefore established at
$1.70 per British pound. Any exchange rate below would result in Dayton actually losing money
on the transaction.
Four alternatives are available to Dayton to manage the exposure:
1. Remain un-hedged.
2. Hedge in the forward market.
3. Hedge in the money market.
4. Hedge in the options market. What should Dayton do?
16. Country Risk and Global Capital Budgeting Strategy:
Your corporation has an opportunity to make a major investment in China of $100 million to
develop an offshore manufacturing facility. When this plant is fully developed and becomes
operational in two years the corporation can close down its current manufacturing facility in the
United States and shift operations to China. At present, the expected annual savings in labor and
benefit cost is expected to be $20 million. You are asked to develop a proposal to identify the
potential risk of this proposal and ‘advantages’ and ‘problems’ of this opportunity. Explain how
you would proceed.
i. What are the inherent risks in this opportunity?
ii. What economic data would you need for your analysis? Why (How would you use them)?
iii. What potential factors that affect exchange rates between China and US? How would you
protect against that risk?
iv. What other strategies do you recommend before your corporation implements this proposal?
17. Theoretical Relationship 6: Relationship between Spot and Forward Prices
Illustrate the concept of “Spot-Forward pricing parity” relationship with a numerical example.
What are the implications of this for Foreign Exchange Market?
18. Bond Market Indexation Strategy
Illustrate the need for, motivation, and concept of Indexation with an example to protect against
Inflation in the Global Debt Markets.
19. Global Markets Investment Strategy:
a. Why should investors consider investing overseas?
b. What are the potential advantages and perils?
c. What is Market Efficiency? What are the implications of Market Efficiency, in a global capital
market, for a manager for the pricing of securities and investing corporations’ money?
d. Why is psychology important in global setting?
20. Current Hot Topic: European Sovereign Debt Crisis
Currently PIIGS [Portuagal, Ireland, Italy, Greece and Spain] countries have a Soveriegn Debt
What are the ultimate causes for the current crisis?
What are the potential implications of this problem for Euro-Currency and European
What should Europe do to address this problem now and what are the potential perils?
What are the Implications of this problem for USA?
22. Auctions Market Strategy:
Are auctions the optimal method to sell a security or service?
Explain the advantages, and disadvantages of the Auction method of Selling for the buyer and
seller, using a specific example.
Explain why corporations do not sell “all” their products by auctions?
What are the reasons for the success of Internet auction companies such as e-bay and
(Read Presentations in class)