TUT IFI

TUT 1 – CHAP 1
Ques 7: Limitations of Comparative Advantage: The key to understanding most theories is
what they say and what they don’t. Name four or five key limitations to the theory of
comparative advantage.
Ques 11: Market Conditions: The decisions of MNEs to move to new markets invariably take
advantage of both market imperfections and market efficiencies. Explain.
Ques 12: Why Go: Why do firms become multinational?
Prob 2: Pokémon GO: Crystal Gomez, who lives in Mexico City (as noted in Global Finance
in Practice 1.2 in the chapter), bought 100 Pokécoins for 17 Mexican pesos (Ps or MXN).
Nintendo of Japan, one of the owners of Pokémon GO, will need to convert the Mexican
pesos (Ps or MXN) into its home currency, the Japanese yen, in order to record the financial
proceeds. The current spot exchange rate between the Mexican peso and the U.S. dollar is
18.00 (MXN = 1.00 USD), and the current spot rate between the dollar and the Japanese yen
(¥ or JPY) is 100.00. What are the yen proceeds of Crystal Gomez’s purchase?
Prob 3: Isaac Díez Peris lives in Rio de Janeiro, Brazil. While attending school in Spain, he
meets Juan Carlos Cordero from Guatemala. Over the summer holiday, Isaac decides to visit
Juan Carlos in Guatemala City for a couple of weeks. Isaac’s parents give him some spending
money, 4,500 Brazilian reais (BRL). Isaac wants to exchange his Brazilian reais for
Guatemalan quetzals (GTQ). He collects the following rates:
Spot rate on the GTQ/EUR: GTQ10.5799 = EUR1.00
Spot rate on the EUR/BRL: EUR0.4462 = BRL1.00
a. What is the Brazilian reais/Guatemalan quetzal cross rate?
b. How many Guatemalan quetzals will Isaac get for his Brazilian reais?
Prob 4: For your post-graduation celebratory trip, you decide to travel from Munich,
Germany, to Moscow, Russia. You leave Munich with 15,000 euros (EUR) in your wallet.
Wanting to exchange all of them for Russian rubles (RUB), you obtain the following quotes:
Spot rate on the dollar/euro cross rate: USD1.0644/EUR
Spot rate on the ruble/dollar cross rate: RUB59.468/USD
a. What is the Russian ruble/euro cross rate?
b. How many Russian rubles will you obtain for your euros?
Prob 9: Comparison of prices or costs across different countries and currency environments
requires translation of the local currency into a single common currency. This is most
meaningful when the comparison is for an identical or near-identical product or service across
countries. Deutsche Bank has recently started publishing a comparison of cheap dates—an
evening on the town for two to eat at McDonald’s, see a movie, and drink a beer. Once all
costs are converted to a common currency, the U.S. dollar in this case, the cost of the date can
be compared across cities relative to the base case of a cheap date in USD in New York City.
After completing the table below and on the next page, answer the following questions.

a. Which city in the table truly offers the cheapest date?

b. Which city in the table offers the most expensive cheap date?
c. If the exchange rate in Moscow on the Russian ruble (RUB) was 0.04200, instead of
0.0283, what would be the USD price?
d. If the exchange rate in Shanghai was CNY 6.66 = 1 USD, what would be its cost in
USD and relative to a cheap date in New York City?
 TUT 2 – CHAP 3
Q3: Importance of BOP: Business managers and investors need BOP data to anticipate
changes in host country economic policies that might be driven by
BOP events. From the perspective of business managers and investors, list three specific
signals that a country’s BOP data can provide
Q6: Balance. If the BOP always “balances,” then how do countries run a BOP deficit or
surplus?
Q8: Current Account Surpluses. Explain the main causes behind the current account surpluses
that Asian emerging economies have maintained during the last two decades.
Q18: BOP Transactions. Identify the correct BOP account for each of the following
transactions:
a. A German-based pension fund buys U.S. government 30-year bonds for its
investment portfolio.
b. Scandinavian Airlines System (SAS) buys jet fuel at Newark Airport for its flight to
Copenhagen.
c. Hong Kong students pay tuition to the University of California, Berkeley.
d. The U.S. Air Force buys food in South Korea to supply its aircrews.
e. A Japanese auto company pays the salaries of its executives working for its U.S.
subsidiaries.
f. A U.S. tourist pays for a restaurant meal in Bangkok.
g. A Colombian citizen smuggles cocaine into the United States, receives cash, and
smuggles the dollars back into Colombia.
h. A U.K. corporation purchases a euro-denominated bond from an Italian MNE.
P1+2+3+4
3.1 What is Australia’s balance on goods?
3.2 What is Australia’s balance on services?
3.3 What is Australia’s balance on goods and services?
3.4 What is Australia’s current account balance?
P10+11+12+13+14:

3.10 Is China experiencing a net capital inflow or outflow?

3.11 What is China’s total for Groups A and B?
3.12 What is China’s total for Groups A through C?
3.13 What is China’s total for Groups A through D?
3.14 Does China’s BOP balance?
 TUT 3 – CHAP 5
Q4: Market Participants. For each of the foreign exchange market participants, identify their
motive for buying or selling foreign exchange.
Q5: Foreign Exchange Transaction. Define each of the following types of foreign exchange
transactions:
a. Spot b. Outright forward c. Forward-forward swaps
Q9: Foreign Exchange Rate Quotations. Define and give an example of each of the following:
a. Bid rate quote b. Ask rate quote
P3: Use the following spot and forward bid-ask rates for the Japanese yen/U.S. dollar (¥/$)
exchange rate from September 16, 2010, to answer the following questions:

a. What is the mid-rate for each maturity?

b. What is the annual forward premium for all maturities?
c. Which maturities have the smallest and largest forward premiums?
P4: Andreas Broszio just started his job as an analyst for Credit Suisse in Geneva,
Switzerland. He receives the following quotes for Swiss francs against the dollar for spot, 1
month forward, 3 months forward, and 6 months forward.

a. Calculate outright quotes for bid and ask and the number of points spread between each.
b. What do you notice about the spread as quotes evolve from spot toward 6 months?
c. What is the 6-month Swiss bill rate?
P5: On your summer study abroad program in Europe, you stay an extra two weeks to travel
from Paris to Moscow. You leave Paris with 2,000 euros (€ or EUR) in your belt pack.
Wanting to exchange all of these for Russian rubles ( or RUB), you obtain the following
quotes: Spot rate rubles per dollar (or RUB/USD) 1.1280 Spot rate Rupee per dollar (or INR
= 1.00 USD) 62.40 a. What is the Russian ruble to euro cross rate? b. How many Russian
rubles will you obtain for your euros?
P8: Use the table from Bloomberg below to calculate each of the following:
a. Japanese yen per U.S. dollar b. U.S. dollars per Japanese yen
c. U.S. dollars per euro d. Euros per U.S. dollar
e. Japanese yen per euro f. Euros per Japanese yen
g. Canadian dollars per U.S. dollar h. U.S. dollars per Canadian dollar
i. Australian dollars per U.S. dollar j. U.S. dollars per Australian dollar
k. British pounds per U.S. dollar l. U.S. dollars per British pound
m. U.S. dollars per Swiss franc n. Swiss francs per U.S. dollar

P9: Use the following spot and forward bid-ask rates for the Swiss franc/euro (CHF/€) from
October 28, 2019, to answer the following questions:
a. What is the mid-rate for each maturity?
b. What is the annual forward premium for all maturities?
c. Which maturities have the smallest and largest forward premiums?

P10: The following exchange rates are available to you. (You can buy or sell at the stated
rates.) Assume you have an initial SF12,000,000. Can you make a profit via triangular
arbitrage? If so, show the steps and calculate the amount of profit in Swiss francs (Swissies).
Mt. Fuji Bank :¥ 92.00/$ Mt. Rushmore Bank: SF1.02/$ Mt. Blanc Bank: ¥ 90.00/SF
P12: A corporate treasury working out of Vienna with operations in New York
simultaneously calls Citibank in New York City and Barclays in London. The banks give the
following quotes on the euro simultaneously:

Using $1 million or its euro equivalent, show how the corporate treasury could make
geographic arbitrage profit with the two different exchange rate quotes.
P20: Inspired by his recent trip to the Great Pyramids, Citibank trader Ruminder Dhillon
wonders if he can make an intermarket arbitrage profit using Libyan dinars (LYD) and Saudi
riyals (SAR). He has USD1,000,000 to work with so he gathers the following quotes. Is there
an opportunity for an arbitrage profit?
 TUT 4+5 – CHAP 6+9
Q2: Purchasing Power Parity. Define the two forms of purchasing power parity, absolute and
relative.
Q3: Big Mac Index. How close does the Big Mac Index conform to the theoretical
requirements for a law of one price measurement of purchasing power parity?
Q4: Undervaluation and Purchasing Power Parity. According to the theory of purchasing
power parity, what should happen to a currency that is undervalued?
Q12: The International Fisher Effect. Define the international Fisher effect. Would it
discourage local investors from capitalizing on higher foreign interest rates?
Q13: Interest Rate Parity. Define interest rate parity. What would it say about interest rates if
spot rates and forward rates were the same?
Q14: Covered Interest Arbitrage. Ignoring transaction costs, under what conditions will
covered interest arbitrage be plausible?
P1: Theresa Nunn is planning a 30-day vacation on Pulau Penang, Malaysia, one year from
now. The present charge for a luxury suite plus meals in Malaysian ringgit (RM) is
RM1,045/day. The Malaysian ringgit presently trades at RM3.1350/$. She determines that the
dollar cost today for a 30-day stay would be $10,000. The hotel informs her that any increase
in its room charges will be limited to any increase in the Malaysian cost of living. Malaysian
inflation is expected to be 2.75% per annum, while U.S. inflation is expected to be 1.25%.
a. How many dollars might Theresa expect to need one year hence to pay for her 30-
day vacation?
b. By what percent will the dollar cost have gone up? Why?
P2: The Argentine peso was fixed through a currency board at Ps1.00/$ throughout the 1990s.
In January 2002, the Argentine peso was floated. On January 29, 2003, it was trading at
Ps3.20/$. During that one-year period, Argentina’s inflation rate was 20% on an annualized
basis. Inflation in the United States during that same period was 2.2% annualized.
a. What should have been the exchange rate in January 2003 if PPP held?
b. By what percentage was the Argentine peso undervalued on an annualized basis?
c. What were the probable causes of undervaluation?
P3: Derek Tosh is attempting to determine whether U.S./Japanese financial conditions are at
parity. The current spot rate is a flat ¥89.00/$, while the 360-day forward rate is ¥84.90/$.
Forecast inflation is 1.100% for Japan, and 5.900% for the United States. The 360- day
euroyen deposit rate is 4.700%, and the 360-day eurodollar deposit rate is 9.500%.
 a. Diagram and calculate whether international parity conditions hold between Japan
and the United States.
b. Find the forecasted change in the Japanese yen/ U.S. dollar (¥/$) exchange rate one
year from now.
P4: Albert Chan owns homes in Toronto, Canada and Hong Kong, China. He travels between
the two cities at least four times a year. Because of his frequent trips, he wants to buy some
high-quality luggage. He has done some research and has decided to purchase a Samsonite
three-piece luggage set. There are retail stores in Toronto and Hong Kong that carry the
luggage set he intends to purchase. Albert was a finance major and wants to use purchasing
power parity to determine if he is paying the same price regardless of where he makes his
purchase.
a. If the price of the three-piece luggage set in Toronto is C$950 and the price of the
same three-piece set is HK$5,650, using purchasing power parity, is the price of the
luggage truly equal if the spot rate is HK$6.0000/C$?
b. If the price of the luggage remains the same in Toronto one year from now,
determine the price of the luggage in Hong Kong in one year’s time if PPP holds true.
The Canadian inflation rate is 2.0% and the Hong Kong inflation rate is 3.5%.
P7: Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring
covered interest arbitrage possibilities. He wants to invest $5,000,000 or its yen equivalent in
a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following
exchange rate and interest rate quotes. Is CIA profit possible? If so, how?
Arbitrage funds available $5,000,000
Spot rate (¥/$) 118.60
180-day forward rate (¥/$) 117.80
180-day U.S. dollar interest rate 4.800%
180-day Japanese yen interest rate 3.400%
P12: Casper Landsten is a foreign exchange trader for a bank in New York. He has $1 million
(or its Swiss franc equivalent) for a short-term money market investment and wonders
whether he should invest in U.S. dollars for three months or make a CIA investment in the
Swiss franc. He faces the following quotes:
Arbitrage funds available $1,000,000
Spot exchange rate (SFr/$) 1.2810
3-month forward rate (SFr/$) 1.2740
U.S. dollar 3-month interest rate 4.800%
Swiss franc 3-month interest rate 3.200%
P13: Casper Landsten, using the same values and assumptions as in Problem 6.12, decides to
seek the full 4.800% return available in U.S. dollars by not covering his forward dollar
receipts—an uncovered interest arbitrage (UIA) transaction. Assess this decision.
 TUT 6 – CHAP 7
Q1: Foreign Currency Futures. What is a foreign currency future?
Q2: Futures Terminology. Explain the meaning and probable significance for international
business of the following contract specifications:
a. notional principal b. margin c. marked-to-market
Q3: Long and a Short. How can foreign currency futures be used to speculate on the
exchange rate movements, and what role do long and short positions play in that speculation?
Q4: Futures and Forwards. How do foreign currency futures and foreign currency forwards
compare?
P1: Mariko Fujimoto, a currency trader for Tokyo-based Sakura Bank, uses the following
futures quotes on the British pound (£) to speculate on the value of the pound.
a. If Mariko buys 5 March pound futures, and the spot rate at maturity is ¥139.95/£,
what is the value of her position?
b. If Mariko sells 12 December pound futures, and the spot rate at maturity is
¥138.90/£, what is the value of her position?
c. If Mariko buys 3 December pound futures, and the spot rate at maturity is
¥138.90/£, what is the value of her position?
d. If Mariko sells 12 March pound futures, and the spot rate at maturity is ¥139.95/£,
what is the value of her position?

P2: Laura Cervantes, the currency speculator we met in this chapter, sells eight June futures
contracts for 500,000 pesos at the closing price quoted in Exhibit 7.1.
a. What is the value of her position at maturity if the ending spot rate is $0.12000/Ps?
b. What is the value of her position at maturity if the ending spot rate is $0.09800/Ps?
c. What is the value of her position at maturity if the ending spot rate is $0.11000/Ps?
P4: Stefan Boerig trades currency for the Hoffman Bank in Basel, Switzerland. Stefan has 10
million Swiss francs (SF) to begin with, and he must state all profits at the end of any
speculation while the 30-day forward rate is SF1.1027/€.
a. If Stefan believes the euro will continue to rise in value against the Swiss franc and
expects the spot rate to be SF1.1375/€ at the end of 30 days, what should he do?
 b. If Stefan believes the euro will depreciate in value against the Swiss franc and
expect the spot rate to be SF1.0925/€ at the end of 30 days, what should he do?
P5: Stefan Boerig of Hoffman Bank now believes that the Swiss franc will appreciate against
the British pound in the coming 3-month period. He has £250,000 to invest. The current spot
rate is £0.7829/SF, the 3-month forward rate is £0.7640/SF, and he expects the spot rates to
reach £0.7995/SF in three months.
a. Calculate Stefan’s expected profit, assuming a pure spot market speculation
strategy.
b. Calculate Stefan’s expected profit, assuming he buys or sells Swiss francs three
months forward.
 TUT 7 – CHAP 7
Q7: Put Contract Elements. The CME exchange-traded American put option has a contract
size of €125,000; the December puts with a strike price of 1.2900 are now quoted at 0.0297.
Explain what these figures mean for a put buyer.
Q8: Premiums, Prices, and Costs. What is the difference between the price of an option, the
value of an option, the premium on an option, and the cost of a foreign currency option?
Q9: Three Prices. What are the three different prices or “rates” integral to every foreign
currency option contract?
P3: Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her
time and attention on the U.S. dollar/Singapore dollar ($/S$) cross-rate. The current spot rate
is $0.6000/S$. After considerable study, she has concluded that the Singapore dollar will
appreciate versus the U.S. dollar in the coming 90 days, probably to about $0.7000/S$. She
has the following options on the Singapore dollar to choose from:

a. Should Cece buy a put on Singapore dollars or a call on Singapore dollars?

b. What is Cece’s break-even price on the option purchased in part (a)?
c. Using your answer from part (a), what is Cece’s gross profit and net profit
(including premium) if the spot rate at the end of 90 days is indeed $0.7000/S$?
d. Using your answer from part (a), what is Cece’s gross profit and net profit
(including premium) if the spot rate at the end of 90 days is $0.8000/S$?
P6: Kiko Peleh writes a put option on Japanese yen with a strike price of $0.008000/¥
(¥125.00/$) at a premium of 0.0080¢ per yen and with an expiration date six months from
now. The option is for ¥12,500,000. What is Kiko’s profit or loss at maturity if the ending
spot rates are ¥110/$, ¥115/$, ¥120/$, ¥125/$, ¥130/$, ¥135/$, and ¥140/$?
P8: Baradan Kuppusamy works as a currency speculator for Valdor Capital headquartered in
Kuala Lumpur. His most recent speculative position is to profit from his expectation that the
Thai baht will rise significantly against the Malaysian ringgit. The current spot rate is
RM0.1382/ . He must choose between the following 9-day options on the Malaysian ringgit.

a. Should Baradan buy a put on Malaysian ringgit or a call on Malaysian ringgit?

b. What is Baradan’s break-even price on the option purchased in part (a)?
c. Using your answer from part (a), what are Baradan’s gross profit and net profit
(including premium) if the spot rate at the end of 90 days is RM0.2000/ ?
P9: Assume Henrik writes a call option on euros with a strike price of $1.2500/€ at a
premium of 3.80 cents per euro ($0.0380/€) and with an expiration date three months from
now. The option is for 100,000 euros. Calculate Henrik’s profit or loss should he exercise
before maturity at a time when the euro is traded spot at strike prices beginning at $1.10/€,
rising to $1.40/€ in increments of $0.05.
 TUT 8 – CHAP 10
Q1: Foreign Exchange Exposure. Define the three types of foreign exchange exposure.
Q2: Currency Exposure and Contracting. Which of the three currency exposures relate to cash
flows already contracted for, and which of the exposures do not?
Q3: Currency Risk. Define currency risk.
Q9: Hedging versus Speculating. What is the difference between hedging and speculating?
P1: Brent Bush, CFO of a medical device distributor, BioTron Medical, Inc., was approached
by a Japanese customer, Numata, with a proposal to pay cash (in yen) for its typical orders of
¥12,500,000 every other month if it were given a 4.5% discount. Numata’s current terms are
30 days with no discounts. Using the following quotes and estimated cost of capital for
Numata, Bush will compare the proposal with covering yen payments with forward contracts.
Should Brent Bush accept Numata’s proposal?
Spot rate: ¥111.40/$
30-day forward rate: ¥111.00/$
90-day forward rate: ¥110.40/$
180-day forward rate: ¥109.20/$
Numata’s WACC 8.850%
BioTron’s WACC 9.200%
P2: Bobcat Company, a U.S.-based manufacturer of industrial equipment, just purchased a
Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price
was 7,500 million. 1,000 million has already been paid, and the remaining 6,500 million is
due in six months. The current spot rate is 1,110/$, and the 6-month forward rate is 1,175/$.
The 6-month Korean won interest rate is 16% per annum, the 6-month U.S. dollar rate is 4%
per annum. Bobcat can invest at these interest rates, or borrow at 2% per annum above those
rates. A 6-month call option on won with a 1,200/$ strike rate has a 3.0% premium, while the
6-month put option at the same strike rate has a 2.4% premium. Bobcat can invest at the rates
given previously, or borrow at 2% per annum above those rates. Bobcat’s weighted average
cost of capital is 10%. Compare alternate ways that Bobcat might deal with its foreign
exchange exposure. What do you recommend and why?
P4: Procter & Gamble’s affiliate in India, P&G India, procures much of its toiletries product
line from a Japanese company. Because of the shortage of working capital in India, payment
terms by Indian importers are typically 180 days or longer. P&G India wishes to hedge an 8.5
million Japanese yen payable. Although options are not available on the Indian rupee ( ),
forward rates are available against the yen. Additionally, a common practice in India is for
companies like P&G India to work with a currency agent who will, in this case, lock in the
current spot exchange rate in exchange for a 4.85% fee. Using the following exchange rate
and interest rate data, recommend a hedging strategy.
Spot rate: ¥120.60/$
180-day forward rate ¥2.400/
Expected spot, 180 days ¥2.6000
180-day Indian rupee investing rate 8.000%
180-day Japanese yen investing rate 1.500%
Currency agent’s exchange rate 4.850%
P&G India's cost of capital 12.000%
 TUT 9 – CHAP 12
Q2: Operating Exposure versus Transaction Exposure. What are the main differences and
similarities between operating exposure and transaction exposure? Which of the two
exposures is more relevant for long-term planning?
Q12: Currency Switching. Explain how currency switching can offset long-term exposure to
a foreign currency.
Q13: Currency Risk Sharing. Explain why suppliers are ready to get into currency risk-
sharing deals with MNEs. How do such deals impact the financial position of both parties?.
Q14: Back-to-Back Loans. Back-to-back loans have caused many of the banking crises in
emerging economies in the 1990s. What guarantees can firms obtain in order to use this type
of foreign exchange hedge?
Q15: Currency Swaps. Do currency swaps always hedge against foreign exchange exposure?
What other precautions are needed for effective hedging?
P1: Mauna Loa Macadamia, a macadamia nut subsidiary of Hershey’s with plantations on the
slopes of its namesake volcano in Hilo, Hawaii, exports macadamia nuts worldwide. The
Japanese market is its biggest export market, with average annual sales invoiced in yen to
Japanese customers of ¥1,200,000,000. At the present exchange rate of ¥125/$, this is
equivalent to $9,600,000. Sales are relatively equally distributed throughout the year. They
show up as a ¥250,00,000 account receivable on Mauna Loa’s balance sheet. Credit terms to
each customer allow for 60 days before payment is due. Monthly cash collections are
typically ¥100,000,000. Mauna Loa would like to hedge its yen receipts, but it has too many
customers and transactions to make it practical to sell each receivable forward. It does not
want to use options because they are considered to be too expensive for this particular
purpose. Therefore, they have decided to use a “matching” hedge by borrowing yen.
a. How much should Mauna Loa borrow in yen?
b. What should be the terms of payment on the yen loan?
P2: DeMagistris Fashion Company, based in New York City, imports leather coats from
Acuña Leather Goods, a reliable and longtime supplier, based in Buenos Aires, Argentina.
Payment is in Argentine pesos. When the peso lost its parity with the U.S. dollar in January
2002, it collapsed in value to Ps4.0/$ by October 2002. The outlook was for a further decline
in the peso’s value. Since both DeMagistris and Acuña wanted to continue their longtime
relationship, they agreed on a risk-sharing arrangement. As long as the spot rate on the date of
an invoice is between Ps3.5/$ and Ps4.5/$, DeMagistris will pay based on the spot rate. If the
exchange rate falls outside this range, DeMagistris will share the difference equally with
Acuña Leather Goods. The risk-sharing agreement will last for six months, at which time the
exchange rate limits will be reevaluated. DeMagistris contracts to import leather coats from
Acuña for Ps8,000,000 or $2,000,000 at the current spot rate of Ps4.0/$ during the next six
months.
a. If the exchange rate changes immediately to Ps6.00/$, what will be the dollar cost of
six months of imports to DeMagistris?
b. At Ps6.00/$, what will be the peso export sales of Acuña Leather Goods to
DeMagistris Fashion Company?
P5: MacLoren Automotive manufactures British sports cars, a number of which are exported
to New Zealand for payment in pounds sterling. The distributor sells the sports cars in New
Zealand for New Zealand dollars. The New Zealand distributor is unable to carry all of the
foreign exchange risk, and would not sell MacLoren models unless MacLoren shared some of
the foreign exchange risk. MacLoren has agreed that sales for a given model year will initially
be priced at a “base” spot rate between the New Zealand dollar and pound sterling set to be
the spot mid-rate at the beginning of that model year. As long as the actual exchange rate is
within ±5% of that base rate, payment will be made in pounds sterling. That is, the New
Zealand distributor assumes all foreign exchange risk. However, if the spot rate at time of
shipment falls outside of this range, MacLoren will share equally (i.e., 50/50) the difference
between the actual spot rate and the base rate. For the current model year, the base rate is
NZ$1.6400/£.
a. What are the outside ranges within which the New Zealand importer must pay at the
then current spot rate?
b. If MacLoren ships 10 sports cars to the New Zealand distributor at a time when the
spot exchange rate is NZ$1.7000/£, and each car has an invoice cost £32,000, what
will be the cost to the distributor in New Zealand dollars? How many pounds will
MacLoren receive, and how does this compare with MacLoren’s expected sales
receipt of £32,000 per car?
c. If MacLoren Automotive ships the same 10 cars to New Zealand at a time when the
spot exchange rate is NZ$1.6500/£, how many New Zealand dollars will the
distributor pay? How many pounds will MacLoren Automotive receive?
d. Does a risk-sharing agreement such as this shift the currency exposure from one
party of the transaction to the other?
 TUT 10 – CHAP 13+14
CHAP 13:
Q1: Segmented Markets. What are the strategies that MNEs can adopt in order to access
capital in segmented markets
Q3: MNEs’ Capital. When compared to domestic firms, why do MNEs enjoy more capital
availability and lower capital costs?
Q11: Market Segmentation. What is market segmentation, and what are its main causes?
P1: Kristian Thalen has just joined the corporate treasury group at Electrolux of Sweden, a
multinational Swedish appliance maker. Electrolux is considering making an offer for GE’s
appliance business, and wants to revise its weighted average cost of capital for its analysis in
its home currency, the Swedish kroner (SEK). Kristian has been assigned the task. Using the
following assumptions, he goes step by step through the following questions.

a. What is Electrolux’s cost of debt, after-tax, in SEK?

b. What is Electrolux’s cost of equity in SEK?
c. What is Electrolux’s market capitalization?
d. What is Electrolux’s total value of equity outstanding?
e. What proportion of Electrolux’s capital structure is debt?
f. What proportion of Electrolux’s capital structure is equity?
g. What is Electrolux’s weighted average cost of capital?
P2: McLaren, the famous high-performance automotive group, launched its initial public
offering (IPO) on October 20, 2019. Although the share price had initially risen to over 60
pounds ( ) per share, by the end of the year it had settled to 50 pounds ( ). McLaren is owned
by Able Group (Ireland) and had never calculated its own cost of capital independent of Able
before. It now needed to, and one of its first challenges was estimating its beta. With only two
months of trading to base it on, the corporate treasury group had started with what were
considered “comparable firms” which, for McLaren, meant firms in the luxury goods
industry, not automotive. Luxury goods were historically less volatile than the market, so the
initial guess on McLaren’s beta was 0.85. Using the following assumptions, answer the
questions

a. What is McLaren’s cost of debt, after-tax in pounds?

b. What is McLaren’s cost of equity in pounds?
c. What is McLaren’s market capitalization?
d. What is McLaren’s total value of equity outstanding?
e. What proportion of McLaren’s capital structure is debt?
f. What proportion of McLaren’s capital structure is equity?
g. What is McLaren’s weighted average cost of capital?
h. What is McLaren’s WACC if its beta was higher, like other automotive companies, say
1.30?
P6: Nestlé of Switzerland is revisiting its cost of equity analysis. As a result of extraordinary
actions by the Swiss Central Bank, the Swiss bond index yield (10-year maturity) has dropped
to a record low of 0.520%. The Swiss equity markets have been averaging 8.400% returns,
while the Financial Times global equity market returns, indexed back to Swiss francs, stand at
8.820%. Nestlé’s corporate treasury staff has estimated the company’s domestic beta at 0.825,
but its global beta (against the larger global equity market portfolio) at 0.515.
a. What is Nestlé’s cost of equity based on the domestic portfolio of a Swiss investor?
b. What is Nestlé’s cost of equity based on a global portfolio for a Swiss investor?
CHAP 14:
Q5: Three Keys to Global Equity. What are the three key elements related to raising equity
capital in the global marketplace?
Q6: Global Equity Alternatives. What are the alternative structures available for raising
equity capital on the global market?
Q13: Cross-Listing. What are the main benefits and disadvantages to firms that cross-list their
shares on multiple stock markets?
Q20: Eurobond Versus Foreign Bonds. What is the difference between a eurobond and a
foreign bond, and why do two types of international bonds exist?
P1: The Copper Mountain Group, a private equity firm headquartered in Boulder, Colorado
(U.S.), borrows £5,000,000 for one year at 7.375% interest.
a. What is the dollar cost of this debt if the pound depreciates from $2.0260/£ to
$1.9460/£ over the year?
b. What is the dollar cost of this debt if the pound appreciates from $2.0260/£ to
$2.1640/£ over the year?
P3: McDougan Associates, a U.S.-based investment partnership, borrows €80,000,000 at a
time when the exchange rate is $1.3460/€. The entire principal is to be repaid in three years,
and interest is 6.250% per annum, paid annually in euros. The euro is expected to depreciate
vis-à-vis the dollar at 3% per annum. What is the effective cost of this loan for McDougan?
P4: Cathay Pacific Airways, headquartered in Hong Kong, needs HK$200,000,000 for one
year to finance working capital. The airline has two alternatives for borrowing:
a. Borrow HK$200,000,000 from a major bank in Hong Kong at 5.4550% per annum.
b. Borrow €20,000,000 in London at 5.0550% and exchange these euros at a present
rate of HK10.0000/€ for Hong Kong dollars. At what ending exchange rate would
Cathay Pacific Airways be indifferent between borrowing euros and borrowing Hong
Kong dollar?
 TUT 11 – CHAP 17
Q1: Evolving into Multinationalism. As a firm evolves from purely domestic into a true
multinational enterprise, it must consider (1) its competitive advantages, (2) its production
location, (3) the type of control it wants to have over any foreign operations, and (4) how
much monetary capital to invest abroad. Explain how each of these considerations is
important to the success of foreign operations.
Q2: Market Imperfections. MNEs strive to take advantage of market imperfections in national
markets for products, factors of production, and financial assets. Large international firms are
better able to exploit such imperfections. What are their main competitive advantages?
Q3: Competitive Advantage. When firms decide to invest in foreign countries, their decision
is based on the competitive advantage of the firm as well as those of the host country. What
are some of competitive advantages enjoyed by both the firms and host nations?
Q6: OLI Paradigm. The OLI paradigm attempts to explain why MNEs choose FDI to
alternative modes of foreign market entry. Explain how the financial strategies of MNEs are
directly related to the OLI Paradigm.
Q9: Investing Abroad. What are the factors that lead a firm to expand its investment and
production operations into new foreign market?
Q10: Licensing and Management Contracts Versus Producing Abroad. What are the
advantages and disadvantages of licensing and management contracts compared to producing
abroad?
Q11: MNE Entry in a Foreign Market. What is the optimal entry mode into a foreign market
for MNEs that require tight control over technological know-how? Explain.
Q16: Common Forms. Define the following types of political risk:
a. Adverse regulatory change
b. Breach of contract
c. Expropriation