国际财务管理期末考B卷参考答案 by xiuliliaofz

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									1. Effective Yield.
Fort Collins, Inc., has $1 million in cash available for 30 days. It can earn 1%
on a 30 day investment in the U.S. Alternatively, if it converts the dollars to
Mexican pesos, it can earn 1 1/2% on a Mexican deposit. The spot rate of the
Mexican peso is $.12. The spot rate 30 days from now is expected to be $.10.
Should Ft. Collins invest its cash in the U.S. or in Mexico? Substantiate your
answer.
     ANSWER: If Fort Collins Inc. invests in a Mexican deposit, it will convert $1
million to 8,333,333 pesos, which will accumulate to 8,458,333 pesos after one
month (due to the 1 1/2% interest rate). If the spot rate of the peso is $.10 after one
month, the pesos will be converted to $845,833, which is less than the amount of
dollars the firm started with. Thus, the Fort Collins Inc. should invest its cash in the
U.S.

2. Direct Intervention.
How can a central bank use direct intervention to change the value of a
currency? Explain why a central bank may desire to smooth exchange rate
movements of its currency.
ANSWER: Central banks can use their currency reserves to buy up a specific
currency in the foreign exchange market in order to place upward pressure on that
currency. Central banks can also attempt to force currency depreciation by flooding
the market with that specific currency (selling that currency in the foreign exchange
market in exchange for other currencies).
Abrupt movements in a currency’s value may cause more volatile business cycles,
and may cause more concern in financial markets (and therefore more volatility in
these markets). Central bank intervention used to smooth exchange rate movements
may stabilize the economy and financial markets.

3. Capital Budgeting Analysis.
A project in South Korea requires an initial investment of 2 billion South
Korean won. The project is expected to generate net cash flows to the
subsidiary of 3 billion and 4 billion won in the two years of operation,
respectively. The project has no salvage value. The current value of the won is
1,100 won per U.S. dollar, and the value of the won is expected to remain
constant over the next two years.
a. What is the NPV of this project if the required rate of return is 13 percent?

                             3           4
ANSWER: NPV  2                                 3.79 billion South Korean won
                         1  13% (( 1  13%   2



                                               or 3.44 million U.S.dollars
b. Repeat the question, expect assume that the value of the won is expected
to be 1,200 won per U.S. dollar after two years. Future assume that the funds
are blocked and that the parent company will only be able to remit them back
to the United States in two years. How does this affect the NPV of the project?
ANSWER:The NPV valued in South Korean won will not change, but the NPV
valued in U.S. dollars will decrease to 3.79/1200=0.00316 billion U.S. dollars, i.e.
3.16 million U.S. dollars.

4. DFI Strategy.
J.C. Penney has recognized numerous opportunities to expand in foreign
countries and has assessed many foreign markets, including Brazil, Greece,
Mexico, Portugal, Singapore, and Thailand. It has opened new stores in Europe,
Asia, and Latin America. In each case, the firm was aware that it did not have
sufficient understanding of the culture of each country that it had targeted.
Consequently, it engaged in joint ventures with local partners who knew the
preference of the local customers.
     a. What comparative advantage does J.C. Penney have when establishing
a store in a foreign country, relative to an independent variety store?
     ANSWER: J.C. Penney has name recognition, which could result in customer
trust, and therefore a stronger demand for its products. It also has marketing
expertise that it applies to each store. It also has economies of scale, because it
could buy its products in bulk and distribute the products to the stores that need
those products.

     b. Why might the overall risk of J.C. Penney decrease or increase as a
result of its recent global expansion?
     ANSWER: Its risk may decrease because it has a strategy that allows it to utilize
its expertise, while relying on foreign expertise for part of the business that requires
knowledge about foreign cultures.           Also, it has created more international
diversification by spreading its store throughout more foreign markets, so that its
overall performance is not as heavily influenced by U.S. economic conditions.
     Its risk could have increased if it selected local partners in the foreign countries
that do not properly apply their knowledge of the local culture when making decisions
about the types of products that the store should carry.

     c. J.C. Penney has been more cautious about entering China. Explain the
potential obstacles associated with entering China.
     ANSWER: Obstacles include high inflation in China, difficulties in converting
foreign currency, difficulties in efficiently distributing products across stores, and the
lack of disposable income for many China residents.

5. International Cash Management
Discuss the general functions involved in international cash management.
Explain how the MNC’s optimization of cash flow can distort the profits of each
subsidiary.
ANSWER: International cash management can be segmented into two functions:
optimizing cash flow movements, and investing excess cash. Cash inflows can be
optimized by techniques such as accelerating cash inflows, minimizing currency
conversion costs, managing blocked funds and managing inter subsidiary cash
transfers. Investing excess cash involves assessment of effective yield and decision
to invest funds in domestic or foreign short-term securities.
In managing blocked funds, the MNC may use transfer pricing in a manner that will
increase the expenses incurred by the subsidiary. In this way, the profit of the
subsidiary will be reduced

6. Comparing International Projects.
Savannah, Inc., a manufacturer of clothing, wants to increase its market share
by acquiring a target producing a popular clothing line in Europe. This clothing
line is well established. Forecasts indicate a relatively stable euro over the life
of the project. Marquette, Inc., wants to increase its market share in the
personal computer market by acquiring a target in Thailand that currently
produces radios and converting the operations to produce PCs. Forecasts
indicate a depreciation of the baht over the life of the project. Funds resulting
from both projects will be remitted to the respective U.S. parent on a regular
basis. Which target do you think will result in a higher net present value? Why?

ANSWER online: The European target will likely result in a higher NPV. First, the
euro has generally been more stable than the Thai baht. The Thai baht is expected to
depreciate, which would result in a reduction in dollar cash flows remitted to
Marquette, which would reduce the net present value associated with that project.
Second, Savannah will likely continue the operations of the acquired European target,
while Marquette will substantially change the target's existing operations.
Consequently, there is much greater uncertainty regarding the Thailand project,
which would result in a higher required rate of return. A higher required rate of return
will reduce the net present value associated with a project.

Answer by students:
The project of Savannah, Inc. will result in a higher net present value.
1. Exchange rate. Forecasts indicate that euro will be quite stable while baht will
depreciate against dollar during the life of projects. It can be inferred that Savannah,
Inc. will receive more cash flow in dollar than Marquette, Inc.
2. Required return. Since Savannah plans to acquire a popular clothing line which
has been successful in the Europe market, it is clear that the risk of this business will
be relatively low. As a result, the required return will be quite low. On the other hand,
the target which Marquette, Inc. wants to acquire has not established itself in
Thailand, so the risk of project is high. Therefore, the required return will be higher
than that of Savannah.
Because of these two reason, the former project has a higher net present value.

7. Aggregate Effects on Exchange Rates.
Assume that the United States invests heavily in government and corporate
securities of Country K. In addition, residents of Country K invest heavily in the
United States. Approximately $10 billion worth of investment transactions
occur between these two countries each year. The total dollar value of trade
transactions per year is about $8 million. This information is expected to also
hold in the future. Because your firm exports goods to Country K, your job as
international cash manager requires you to forecast the value of Country K’s
currency (the “krank”) with respect to the dollar. Explain how each of the
following conditions will affect the value of the krank, holding other things
equal. Then, aggregate all of these impacts to develop an overall forecast of
the krank’s movement against the dollar.
a. U.S. inflation has suddenly increased substantially, while Country K’s
inflation remains low.
ANSWER: Increased U.S. demand for the krank. Decreased supply of kranks for sale.
Upward pressure in the krank’s value.
b. U.S. interest rates have increased substantially, while Country K’s interest
rates remain low. Investors of both countries are attracted to high interest
rates.
ANSWER: Decreased U.S. demand for the krank. Increased supply of kranks for sale.
Downward pressure on the krank’s value.
c. The U.S. income level increased substantially, while Country K’s income
level has remained unchanged.
ANSWER: Increased U.S. demand for the krank. Upward pressure on the krank’s
value.
d. The U.S. is expected to impose a small tariff on goods imported from
Country K.
ANSWER: The tariff will cause a decrease in the United States’ desire for Country
K’s goods, and will therefore reduce the demand for kranks for sale. Downward
pressure on the krank’s value.
e. Combine all expected impacts to develop an overall forecast.
ANSWER: Two of the scenarios described above place upward pressure on the
value of the krank. However, these scenarios are related to trade, and trade flows are
relatively minor between the U.S. and Country K. The interest rate scenario places
downward pressure on the krank’s value. Since the interest rates affect capital flows
and capital flows dominate trade flows between the U.S. and Country K, the interest
rate scenario should overwhelm all other scenarios. Thus, when considering the
importance of implications of all scenarios, the krank is expected to depreciate.

8. Risk of Currency Futures.
Currency futures markets are commonly used as a means of capitalizing on
shifts in currency values, because the value of a futures contract tends to
move in line with the change in the corresponding currency value. Recently,
many currencies appreciated against the dollar. Most speculators anticipated
that these currencies would continue to strengthen and took large buy
positions in currency futures. However, the Fed intervened in the foreign
exchange market by immediately selling foreign currencies in exchange for
dollars, causing an abrupt decline in the values of foreign currencies (as the
dollar strengthened). Participants that had purchased currency futures
contracts incurred large losses. One floor broker responded to the effects of
the Fed's intervention by immediately selling 300 futures contracts on British
pounds (with a value of about $30 million). Such actions caused even more
panic in the futures market.
a. Explain why the central bank s intervention caused such panic among
currency futures traders with buy positions.
ANSWER: Futures prices on pounds rose in tandem with the value of the pound.
However, when central banks intervened to support the dollar, the value of the pound
declined, and so did values of futures contracts on pounds. So traders with long (buy)
positions in these contracts experienced losses because the contract values declined.
b. Explain why the floor broker s willingness to sell 300 pound futures
contracts at the going market rate aroused such concern. What might this
action signal to other brokers?
ANSWER: Normally, this order would have been sold in pieces. This action could
signal a desperate situation in which many investors sell futures contracts at any
price, which places more downward pressure on currency future prices, and could
cause a crisis.
c. Explain why speculators with short (sell) positions could benefit as a result
of the central bank s intervention.
ANSWER: The central bank intervention placed downward pressure on the pound
and other European currencies. Thus, the values of futures contracts on these
currencies declined. Traders that had short positions in futures would benefit
because they could now close out their short positions by purchasing the same
contracts that they had sold earlier. Since the prices of futures contracts declined,
they would purchase the contracts for a lower price than the price at which they
initially sold the contracts.
d. Some traders with buy positions may have responded immediately to the
central bank’s intervention by selling futures contracts. Why would some
speculators with buy positions leave their positions unchanged or even
increase their positions by purchasing more futures contracts in response to
the central bank s intervention?
ANSWER: Central bank intervention sometimes has only a temporary effect on
exchange rates. Thus, the European currencies could strengthen after a temporary
effect caused by central bank intervention. Traders have to predict whether natural
market forces will ultimately overwhelm any pressure induced as a result of central
bank intervention.

9. Currency Correlations.
Kopetsky Co. has net receivables in several currencies that are highly
correlated with each other. What does this imply about the firm’s overall
degree of transaction exposure? Are currency correlations perfectly stable
over time? What does your answer imply about Kopetsky Co. or any other firm
using past data on correlations as an indicator for the future?
ANSWER: Its exposure is high since all currencies move in tandem—no offsetting
effect is likely. If one of these currencies depreciates substantially against the firm’s
local currency, all others will as well, and this reduces the value of these net
receivables. No! Thus, past correlations will not serve as perfect forecasts of future
correlations.
Firms can not presume that past correlations will be perfectly accurate forecasts of
future correlations. Yet, historical data may still be useful if the general ranking of
correlations is somewhat stable.

10. Floating-Rate Bonds.
a. What factors should be considered by a U.S. firm that plans to issue a
floating rate bond denominated in a foreign currency?
ANSWER: A U.S. firm should consider the interest rate for each possible currency
as well as forecasts of the exchange rate relative to the firm’s home currency. The
firm should also determine whether it has future cash inflows in any foreign
currencies that could denominate the bond. Finally, the firm should fore¬cast the
future path of the coupon rate.

b. Is the risk of issuing a floating rate bond higher or lower than the risk of
issuing a fixed rate Eurobond? Explain.
ANSWER: The risk from issuing a floating rate bond is that the interest rate may rise
over time. The risk from issuing a fixed rate bond is that the firm is obligated to pay
that coupon rate even if interest rates decline. Some firms may feel that a fixed rate
bond is less risky since at least they know with certainty the coupon rate they must
pay in the future. This question is somewhat open ended.

c. How would an investing firm differ from a borrowing firm in the features
(i.e., interest rate and currency’s future exchange rates) it would prefer a
floating rate foreign currency-denominated bond to exhibit?
ANSWER: An investing firm prefers a bond denominated in a cur¬rency that is
expected to appreciate and with an interest rate that is high and expected to increase.
A borrowing firm prefers a bond denominated in a currency that is expected to
depreciate and with an interest rate that is low and expected to decrease.

11. Assessing Economic Exposure.
Alaska Inc. plans to create and finance a subsidiary in Mexico that produces
computer components at a low cost and exports them to other countries. It has
no other international business. The subsidiary will produce computers and
export them to Caribbean islands and will invoice the products in U.S. dollars.
The values of the currencies in the islands are expected to remain very stable
against the dollar. The subsidiary will pay wages, rent, and other operating
costs in Mexican pesos. The subsidiary will remit earnings monthly to the
parent.
a. Would Alaska’s cash flows be favorably or unfavorably affected if the
Mexican peso depreciates over time?
ANSWER: Alaska’s cash flows would be favorably affected, because it has only cash
outflows in pesos, and can periodically convert dollars to cover its expenses in pesos.
b. Assume that Alaska considers partial financing of this subsidiary with peso
loans from Mexican banks instead of providing all the financing with its own
funds. Would this alternative form of financing increase, decrease, or have no
effect on the degree to which Alaska is exposed to exchange rate movements
of the peso?
ANSWER: Alaska’s subsidiary already has cash outflows in pesos with no cash
inflows in pesos.The partial financing with pesos would increase the cash outflows in
pesos, which results in a greater exposure to the possible appreciation of the peso.

								
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