tutorial questions mf

UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCE

ACADEMIC YEAR 2011/2012JAN 2012 TRIMESTER

BACHELOR OF FINANCE (HONS)YEAR 3 TRIMESTER 3

BACHELOR OF INTERNATIONAL BUSINESS (HONS)YEAR 3 TRIMESTER 3

UKFF4024 MULTINATIONAL FINANCEUKFF4024 MULTINATIONAL FINANCETUTORIAL (Question)TUTORIAL (Question)

Tutorial 1

Refer to Unit Plan, brief the students on learning objectives and learning outcomes of this unit.

Refer to Unit Plan, remind students on coursework assessment (mid-term test and group assignment). Mid-Term Test will be held in Week 7 covering Topic 1 to 6 (50 multiple choice questions). .

Arrange the students into assignment groups (minimum 4 and maximum 5 in a group). Register their groupings on a list. Assignment groups within the same course cannot choose the same MNCs for analysis.

Brief the students on what are expected from them in assignment. Assessment criteria are stated on mark sheet attached to the assignment handout. Remind the students about the required format and must attach the mark sheet after the cover page of their assignment. Presentation of group assignment will be held in Week 9. Students need to submit both hardcopy and softcopy.

Inform the students that they need to prepare and answer all the tutorial questions before they attend tutorial class. Students are required to present their answers to tutorial questions. Poor presentation and insufficient efforts in preparation will result in penalty marks deducted from group assignment at the discretion of lecturer and tutor. [Note: Tutors are prohibited from giving any softcopy, hardcopy, or amended copy of tutorial answers and instructor manual CDs to students. If there is any complaint from other tutorial groups’ students, the tutor concerned will have to explain to management.]

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 2 (Topic 1)Multinational Financial Goals

Question 1Explain the assumptions and objectives of the shareholder wealth maximization model.

Question 2Explain the assumptions and objectives of the corporate wealth maximization model.

Question 3Conglomerates are firms that have diversified into unrelated fields. How would a policy of conglomeration be viewed by the shareholder wealth maximization model compared to the corporate wealth maximization model?

Question 4(a) Explain the agency problem of MNCs. (b) Why might agency costs be larger for an MNC than for a purely domestic

firm?

Question 5How is domestic financial management different from multinational financial management?

Question 6Refer to Chapter 1 Mini Case in Eun & Resnick (2009) International Financial Management (5th ed.) given below:Nike, a U.S.-based company with a globally recognized brand name, manufactures athletic shoes in such Asian developing countries as China, Indonesia, and Vietnam using subcontractors, and sells the products in the U.S. and foreign markets. The company has no production facilities in the United States. In each of those Asian countries where Nike has production facilities, the rates of unemployment and underemployment are quite high. The wage rate is very low in those countries by the U.S. standard; hourly wage rate in the manufacturing sector is less than one dollar in each of those countries, which is compared with about $18 in the U.S. In

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCEaddition, workers in those countries often are operating in poor and unhealthy environments and their rights are not well protected. Understandably, Asian host countries are eager to attract foreign investments like Nike’s to develop their economies and raise the living standards of their citizens. Recently, however, Nike came under a world-wide criticism for its practice of hiring workers for such a low pay, “next to nothing” in the words of critics, and condoning poor working conditions in host countries.Evaluate and discuss various ‘ethical’ as well as economic ramifications of Nike’s decision to invest in those Asian countries.

Question 7Refer to Chapter 1 Problem 10 Trident’s Earnings and Global Taxation (page 33) in Moffett et al (2006) Essentials of Global Finance (2nd ed.).

Question 8How would a high degree of leverage (debt/assets) be viewed by the shareholder wealth maximization model compared to the corporate wealth maximization model?

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 3 (Topic 2)The Balance of Payments

Question 1What is the balance of payments report? Identify each section of the report and the information each section provides. How do you interpret this statement? Does exchange rate policy have any effect on its interpretation? Explain.

Question 2 (a) Why is the current account deficit watched closely by economists and

governments alike?(b) ‘Exchange controls are very common in developing countries to help

correcting Balance of Trade deficit’ Explain.

Question 3(a) It is sometimes suggested that a floating exchange rate will adjust to reduce

or eliminate any current account deficit. Explain why this adjustment would occur.

(b) Why does the exchange rate not always adjust to a current account deficit?

Question 4Business 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.

Question 5Use the following data extracted from the balance of payments of Singapore to answer the following questions.

Singapore’s Current Account (S$million)

2000 2001 2002

Goods exports 241 115 222 967 229 865Goods imports 219 914 196 507 196 651

Services exports 50 165 51 701 53 183Services imports 46 440 48 173 48 879Income receipts 28 085 27 891 25 726

Income payments 28 185 26 913 27 775

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Current transfers (net) -1 932 -2 053 -1 978Calculate Singapore’s balance of trade, balance on services, balance on goods and services and current account balance.

Question 6Refer to Chapter 3 Question 15 BOP Transactions (page 85) in Moffett et al (2006) Essentials of Global Finance (2nd ed.).

Question 7How would you record the following transactions in Australia’s balance of payments?(a) The Australian government airlifts $500 000 worth of food aid to Papua New

Guinea.(b) An Australian immigrant sends $250 as marriage gift to his cousin living in

Malaysia.(c) An Australian firm borrows 5 million yens from a Japanese bank and uses it

to build a plant in Osaka.

Question 8Refer to Chapter 3 Problems 1 to 4 (page 86) in Moffett et al (2006) Essentials of Global Finance (2nd ed.).

Question 9Refer to Chapter 3 Problems 5 to 9 (page 86) in Moffett et al (2006) Essentials of Global Finance (2nd ed.).

Question 10Since the early 1980s, foreign portfolio investors have purchased a significant portion of U.S. Treasury bond issues (especially China government lately). Discuss the short-term and long-term effects of foreigners’ portfolio investment on the U.S. balance of payments.

Question 11In contrast to the U.S., Japan has realized continuous current account surpluses. What could be the main causes for these surpluses? Is it desirable to have continuous current account surpluses?

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 4 (Topic 3)International Monetary System

Question 1(a) Why do you think a country suddenly decides to peg its currency to the

dollar or some other currency? When a currency is unable to maintain the peg, what do you think are the typical forces that break the peg?

(b) The Hong Kong dollar’s value is tied to the U.S. dollar. Explain how the following trade patterns would be affected by the appreciation of the Japanese yen against the dollar: (i) Hong Kong exports to Japan and (ii) Hong Kong exports to the United States (assume Hong Kong and Japan exports are substitute goods).

Question 2Explain the difference between sterilized and nonsterilized intervention.

Question 3Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be the disadvantages?

Question 4On January 4, 1999, 11 member states of the European Union initiated the European Monetary Union (EMU) and established a single currency, the euro, which replaced the individual currencies of participating member states. Describe three of the main ways that the euro affects the members of the EMU.

Question 5What are the advantages and disadvantages of fixed exchange rates?

Question 6(a) How can a central bank use indirect intervention to change the value of a

currency?(b) Assume there is concern that the United States may experience a recession.

How should the Federal Reserve influence the dollar to prevent a recession?

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How might U.S. exporters react to this policy (favorably or unfavorably)? What about U.S. importing firms?

Question 7Refer to Chapter 2 Problem 9 Saudi Import (page 61) in Moffett et al (2006) Essentials of Global Finance (2nd ed.).

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 5 (Topic 4)The Foreign Exchange Market

Question 1(a) What are the three major functions of the foreign exchange market?(b) For each of the foreign exchange market participants identify their motive

for buying or selling foreign exchange.i) Foreign exchange dealersii) Foreign exchange brokersiii) Individuals and firmsiv) Speculators and arbitragersv) Central banks and Treasuries

(c) Define and give an example of each of the following quotes:i) Bid quote and ii) Ask quote

Question 2(a) Kiwi Bank’s bid price for New Zealand dollars is $0.5354 and its ask price is

$0.5678. What is the bid/ask percentage spread of New Zealand dollar?(b) The USD/MYR exchange rate is quoted as 0.3030–0.3268. What is the bid-

offer spread of Ringgit in points and in percentage terms? What is the monetary value of the point in this case?

Question 3Dealer A quotes 3.6800–3.6833 for the SRI/USD exchange rate to Dealer B. What are the following:(a) The price at which A is willing to buy the US dollar?(b) The price at which A is willing to buy the Saudi Arabian riyal?(c) The price at which B can buy the US dollar?(d) The price at which B can buy the Saudi Arabian riyal?(e) The price at which A is willing to sell the US dollar?(f) The price at which A is willing to sell the Saudi Arabian riyal?(g) The price at which B can sell the US dollar?(h) The price at which B can sell the Saudi Arabian riyal?

Question 4At 9:30a.m., MAD Berhad calls Northernbank and asks for a quote on RM/$ exchange rate. Northernbank responds by quoting 3.6565-3.6580. MAD Berhad decides to buy $3,000,000 at the quoted rate. At 3:30p.m., Northernbank quotes 75-

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCE85. Will MAD Berhad make a profit or loss by selling the dollars at 3:30p.m.? State the profit or loss in RM.

Question 5The exchange rate between the Australian dollar and the euro, expressed in direct quotation from an Australian perspective, rises from 1.62020 to 1.63888. Calculate:(a) The appreciation or depreciation of the euro in points, pips and percentage.(b) The appreciation or depreciation of the Australian dollar in points, pips and

percentage.

Question 6On the basis of the following exchange rates, construct a cross exchange rate matrix that does not include the Australian dollar. All exchange rates must be expressed in bid-offer terms.

GBP/AUD 0.3820–0.3900EUR/AUD 0.6020–0.6080CHF/AUD 0.8800–0.8860

Question 7Using the following data, calculate the 30-day, 90-day, and 180-day forward premiums for the British pound.

Spot: £1 = $1.448730-day forward: £1 = $1.449890-day forward: £1 = $1.4511180-day forward: £1 = $1.4529

Question 8Suppose EON Bank, a bank in Kuala Lumpur, quotes spot and 180-day forward exchange rates of RM/£ 6.8280-6.8900 and 100-130.(a) What are the outright 180-day forward rates that EON Bank is quoting?(b) What is the forward discount or premium associated to a firm that sells 180-

day Pound Sterling?(c) Compute the percentage bid-ask spreads for spot and forward Pound

Sterling.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCEQuestion 9Assume the following quotes:

Citibank quote: US$/pound 1.5400 National Westminster quote: euros/pound 1.6000 Deutschebank quote: US$/euro 0.9700

Calculate how a market trader at Citibank with $1 million can make an intermarket arbitrage profit.

Question 10Omni Advisors, an international pension fund manager, plans to sell equities denominated in Swiss Francs (CHF) and purchase an equivalent amount of equities denominated in South African Rands (ZAR).Omni will realize net proceeds of 3 million CHF at the end of 30 days and wants to eliminate the risk that the ZAR will appreciate relative to the CHF during this 30-day period. The following exhibit shows current exchange rates between the ZAR, CHF, and the U.S. dollar (USD).

Currency Exchange RatesZAR/USD ZAR/USD CHF/USD CHF/USD

Maturity

Bid Ask Bid Ask

Spot 6.2681 6.2789 1.5282 1.534330-day 6.2538 6.2641 1.5226 1.528590-day 6.2104 6.2200 1.5058 1.5115

(a) Describe the currency transaction that Omni should undertake to eliminate currency risk over the 30-day period.

(b) Calculate the following:(i) The CHF/ZAR cross-currency rate Omni would use in valuing the

Swiss equity portfolio.(ii) The current value of Omni’s Swiss equity portfolio in ZAR.(iii) The annualized forward premium or discount at which the ZAR is

trading versus the CHF.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 6 (Topic 5 & 6)International Parity Conditions & Exchange Rate Determination

Question 1(a) Define interest rate parity. What is the relationship between interest

rate parity and forward rates?(b) Define the terms covered interest arbitrage and uncovered interest arbitrage.

What is the difference between these two transactions?(c) Assume that Mexico’s economy has expanded significantly, causing a high

demand for loanable funds there by local firms. How might these conditions affect the forward discount of the Mexican peso?

Question 2Peter Solskjaer is a foreign exchange dealer for a bank in Manchester. He has £2,000,000 (or its Singapore dollar equivalent) for a short-term money market in-vestment. He wonders if he should invest in pounds sterling or make a covered in-terest arbitrage investment in the Singapore dollar. He faces the following rates.

Spot exchange rate S$ 2.9880/£3-month forward rate S$ 3.0000/£3-month UK interest rate 3% p.a.3-month Singapore interest rate 5% p.a.

Which country’s money market do you recommend Solskjaer to invest? Why? Calculate the arbitrage profit or loss in £?

Question 3Mary Smith is a foreign exchange dealer for a bank in New York City. She has $1,000,000 (or its Swiss franc equivalent) for a short-term money market investment and wonder if she should invest in U.S. dollars or make a covered interest arbitrage investment in the Swiss franc. She faces the following rates.

Spot exchange rate SF 1.6000/$3-month forward rate SF 1.5800/$3-month US interest rate 8% p.a.3-month Swiss interest rate 6% p.a.

(a) Where do you recommend Ms Smith to invest? Why? Calculate the arbitrage profit/loss?

(b) Mary Smith decides to seek the full 8% return available in US dollars by not covering her forward dollar receipts – an uncovered interest arbitrage. Assess the decision.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCEQuestion 4Walcott Ltd, a Belgian company with subsidiaries all over Southeast Asia, has been funding its Kuala Lumpur subsidiary primarily with euros debt because of the cost and availability of euros capital as opposed to Ringgit Malaysia (RM) funds. The Finance Director of Walcott (Malaysia) Sdn. Bhd. is considering a one-year bank loan for €1,800,000. The current spot exchange rate is RM 4.1000/€, and the euro-based interest is 6.80% for the one year period.(a) Assume expected inflation rates of 5% and 2% in Malaysia and Europe for

the coming year respectively. According to purchasing power parity, what would the effective cost of funds be in RM terms?

(b) If Walcott (Malaysia) Sdn. Bhd. could borrow from Public Bank Berhad at 8.30% per annum, is this option more cost effective than part (i) above?

Question 5(a) When will an opportunity for locational arbitrage profits arise? (b) Podolski Swiensteiger holds NZ$ 500,000. Given the following quotes, what is

the amount of locational arbitrage profits in NZ$ terms that he could earn?Bid Ask

Kiwi Bank NZ$1.3530/$ NZ$1.3580/$Auckland Bank NZ$1.3400/$ NZ$1.3450/$

Question 6Refer to Chapter 4 Problem 12 Beer Standard (page 115) in Moffett et al (2006) Essentials of Global Finance (2nd ed.).

Question 7Suppose that the current spot exchange rate is €1.06/$ and the three-month forward exchange rate is €1.02/$. The three-month interest rate is 5.6 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €1,060,000.(a) Show how to realize a certain profit via covered interest arbitrage, assuming

that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit.

(b) Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit in euros.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCEQuestion 8(a) Assume that Malaysia income level rises at a much lower rate than does

Singapore income level. Other things being equal, how should this affect the (i) Malaysia demand for Singapore dollars, (ii) supply of Singapore dollars for sale, and (iii) equilibrium value of the Singapore dollar? Use diagram to illustrate.

(b) Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect the (a) U.S. demand for Japanese yen, (b) supply of yen for sale, and (c) equilibrium value of the yen? Use diagram to illustrate.

Question 9(a) Explain why the value of the British pound against the dollar will not always

move in tandem with the value of the euro against the dollar.(b) Why do you think most crises in countries (such as the Asian crisis) cause the

local currency to weaken abruptly?

Question 10Assume 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.(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.

(c) The U.S. income level increased substantially, while Country K’s income level has remained unchanged.

(d) The U.S. is expected to impose a small tariff on goods imported from Country K.

(e) Combine all expected impacts to develop an overall forecast.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 7 (Topic 7)Foreign Currency Derivatives

Question 1Carrick Hargreaves Junior works in the currency-trading unit of Barclays Bank in Manchester, England. His latest speculative move is to profit from his expectation that the Hong Kong dollar will rise significantly against the Taiwanese dollar in the next 90 days. The current sport rate is TWD3.7788/HKD. Based on his expectation, he would like to long a call option contract on Hong Kong dollar and short a put option contract on Hong Kong dollar. Details on the 90-day options are as follows:

Options Contract size

Premium Strike Price

Call on HKD

HKD 500,000

TWD0.0500/HKD TWD3.8200/HKD

Put on HKD

HKD 500,000

TWD0.0750/HKD TWD3.8200/HKD

Calculate the net pay off (in Taiwanese dollar) on the long call, the short put and the combined position if the spot exchange rates at the end of 90 days turn out to be (i) TWD3.9300/HKD, (ii) TWD3.8300/HKD and (iii) TWD3.7300/HKD respectively. [Note: you are required to present your answer in organised tabular form.]

Question 2A trader has written a call and a put on the Canadian dollar. The following information is available:Size of option contract = CAD400,000Price of call AUD0.01/CADPrice of put AUD0.01/CADExercise exchange rate of call AUD0.96/CADExercise exchange rate of put AUD0.94/CADCalculate the net pay-off on the short call, the short put and the combined position at the following spot exchange rates (AUD/CAD): (a) 0.99, (b) 0.97, (c) 0.95 and (d) 0.93.

Question 3Hans believes the Swiss franc will appreciate versus the U.S. dollar in the coming three-month period. He has $100,000 to invest. The current spot rate is $0.5820/SF, the three-month forward rate is $0.5640/SF, and he expects the spot rate to reach $0.6250/SF in three months.

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a) Calculate Han’s expected profit assuming a pure spot market speculation strategy.

b) Calculate Hans’s expected profit assuming he buys or sells SF three months forward.

Question 4Hagi Stoichkov works in the currency-trading unit of La Caxia Bank in Barcelona, Spain. Contrary to most forecasters, he believes that the Australian dollar (A$) will depreciate versus the U.S. dollar over the coming 30 days although the Federal Reserves is likely to reduce interest rates in the U.S. The current spot exchange rate is $0.7000/A$. Hagi may choose between the following options on the Australian dollar (A$):

Option Strike Price PremiumCall on A$ $0.7250/A$ $0.0075/A$Put on A$ $0.7250/A$ $0.0025/A$

i) Should Hagi purchase call option on the Australian dollar or put option on the Australian dollar? Explain.

ii) What is Hagi’s net profit per unit of Australian dollar if the spot exchange rate at the end of the 30 days is $0.6900/A$?

Question 5Katya Berezovsky works in the currency-trading unit of Sumara Workers Bank in Togliatti, Russia. Her latest speculative position is to profit from her expectation that the U.S dollar will rise significantly against the Japanese yen. The current sport rate is ¥120.00/$. She must choose between the following 90-day options on Japanese yen:

Option Strike price PremiumPut on yen ¥125/$ $0.00003/¥Call on yen ¥125/$ $0.00046/¥

a) Should Katya buy a put on yen or a call on yen?b) Using your answer to part (a), what is Katya’s break-even price?c) Using your answer to part (a), what is Katya’s gross profit and net profit

(including the premium) if the spot rate at the end of the 90 days is ¥140/$?

Question 6Explain the difference between foreign currency options and futures and when either might bemost appropriately used?

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCEQuestion 7Why would anyone write an option, knowing that the gain from receiving the option premium is fixed but the loss if the underlying price goes in wrong direction could be extremely large?

Question 8A trader holds a call and a put on the British pound. The following information is available:Size of option contract = GBP200,000Price of call AUD0.01/GBPPrice of put AUD0.008/GBPExercise exchange rate of call AUD2.50/GBPExercise exchange rate of put AUD2.50/GBPCalculate the net pay-off on the call, the put and the combined position at the following spot exchange rates (AUD/GBP): (a) 2.505, (b) 2.540, (c) 2.495 and (d) 2.480.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 8 (Topic 8 Part 1)Measuring and Managing Exposure

Question 1a) Compare and contrast transaction exposure and economic exposure. Why

would an MNC consider examining only its “net” cash flows in each currency when assessing its transaction exposure?

b) Is there a difference between translation exposure and transaction exposure?c) What factors affect a firm’s degree of translation exposure? Explain how

each factor influences translation exposure.d) Why are the cash flows of a purely domestic firm exposed to exchange rate

fluctuations?

Question 2a) How may cash inflows and outflows be affected by foreign currency

exposure?b) Why may lead-lag payment timing be a difficult strategy to implement?

Question 3a) Vegas Corp. is a U.S. firm that exports most of its products to Canada. It

historically invoiced its products in Canadian dollars to accommodate the importers. However, it was adversely affected when the Canadian dollar weakened against the U.S. dollar. Since Vegas did not hedge, its Canadian dollar receivables were converted into a relatively small amount of U.S. dollars. After a few more years of continual concern about possible exchange rate movements, Vegas called its customers and requested that they pay for future orders with U.S. dollars instead of Canadian dollars. At this time, the Canadian dollar was valued at $.81. The customers decided to oblige, since the number of Canadian dollars to be converted into U.S. dollars when importing the goods from Vegas was still slightly smaller than the number of Canadian dollars that would be needed to buy the product from a Canadian manufacturer. Based on this situation, has transaction exposure changed for Vegas Corp.? Has economic exposure changed? Explain.

b) When an MNC restructures its operations to reduce its economic exposure, it may sometimes forgo economies of scale. Explain.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCEQuestion 4Walt Disney World built an amusement park in France that opened in 1992. How do you think this project has affected Disney’s economic exposure to exchange rate movements? Think carefully before you give your final answer. There is more than one way in which Disney’s cash flows may be affected. Explain.

Question 5Decko Co. is a U.S. firm with a Chinese subsidiary that produces cell phones in China and sells them in Japan. This subsidiary pays its wages and its rent in Chinese yuan, which is presently tied to the dollar. The cell phones sold to Japan are denominated in Japanese yen. Assume that Decko Co. expects that the Chinese yuan will continue to stay fixed against the dollar. The subsidiary’s main goal is to generate profits for itself and it reinvests the profits. It does not plan to remit any funds to the U.S. parent.a) Assume that the Japanese yen strengthens against the U.S. dollar over time.

How would this be expected to affect the profits earned by the Chinese subsidiary?

b) If Decko Co. had established its subsidiary in Tokyo, Japan instead of China, would its subsidiary’s profits be more exposed or less exposed to exchange rate risk?

c) Why do you think that Decko Co. established the subsidiary in China instead of Japan? Assume no major country risk barriers.

d) If the Chinese subsidiary needs to borrow money to finance its expansion and wants to reduce its exchange rate risk, should it borrow U.S. dollars, Chinese yuan, or Japanese yen?

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 9 (Topic 8 Part 2)Measuring and Managing Exposure

Question 1Pallister Ltd is a British importer of chips. The company has contracted to purchase 5,000 units of chips at a unit price of 30 Swiss Franc from one Swiss company. Three month’s credit is allowed to Pallister Ltd before payment is due. Pallister Ltd currently has no cash surplus, but can borrow short term at 2% above bank base rate or invest short term at base rate in either the United Kingdom or Switzerland.

Exchange ratesSwiss franc/Pound

Spot 2.990-3.0201 month forward 2.975-3.0053 months forward 2.945-2.965

Current Bank Base ratesSwitzerland 6% per annumUnited Kingdom 10% per annum

Pallister Ltd has a 3-month call option on Swiss Franc at an exercise price of 2.930 Swiss Franc per Pound with 1% premium and a 3-month put option on Swiss Franc at an exercise price of 2.930 Swiss Franc per Pound with a 2.5% premium. Assume Pallister’s cost of capital is 10%.Calculate the cost of hedging using:a) Forward market hedge

b) Money market hedgec) Option hedged) Which is the best alternative?e) If the future spot rate moves in a favourable direction for Pallister Ltd,

which hedging alternative still allow Pallister Ltd to benefit from it? Use break-even point calculation to illustrate.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCEQuestion 2Walcott Limited is a British importer of Asian cars, which will then be distributed all over England, Scotland and Wales. This company has contracted to purchase 350 units of HK2007 car at a unit price of KRW 20,000,000 from Hyunkia Motors Corporation, a leading Korean automobile manufacturer. Six month’s credit is allowed to Walcott Limited before payment is due. Walcott Limited currently has no cash surplus and its debt-to-equity ratio is still below its optimal capital structure. It has a weighted average cost of capital of 9 percent.

Assume the following rates are available in the foreign exchange markets and money markets:

KRW/GBPSpot exchange rate 1,750 – 1,77030-day forward rate 1,783 – 1,80390-day forward rate 1,820 – 1,850180-day forward rate 1,848 – 1,880180-day Korean Won interest rate (annualised) 10%-12%180-day British Pound interest rate (annualised) 5%-6%

Besides, assume that 180-day put options on British pound are available, with an exercise price of KRW1,825/GBP and a premium of 1 percent. 180-day call options on British pound are available with an exercise price of KRW1,825/GBP and a premium of 2 percent.

In order to predict future spot rate between Korean won and British pound in six-month time, Walcott Limited has sought forecasting service from Yorke Forex Forecast Limited and Cole Investment Forecast Limited, in addition to the forecast by its in-house team of financial analysts. Based on back tests, forecasting model adopted by Yorke Forex Forecast Limited has a Mean Absolute Percentage Error of 10.18 percent, while the model adopted by Cole Investment Forecast Limited has a Mean Absolute Percentage Error of 9.88 percent. Walcott Limited plans to develop a probability distribution for KRW/GBP future spot rate. Firstly, it assigns a 30 percent probability to the forecast of future spot rate by its in-house team. Subsequently, it assigns a 45 percent probability to the forecast of future spot rate based on the more accurate model among the two forecasting service providers and a 25 percent probability to the forecast of future spot rate based on the less accurate model among the two forecasting service providers. Forecasts of KRW/GBP future spot rate at the end of six months are as follows:

Forecasting Model KRW/GBP future spot rateIn-house 1,845 – 1,865Yorke Forex Forecast Limited 1,800 – 1,820Cole Investment Forecast Limited 1,900 – 1,930

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i) Calculate the total payment in GBP if Walcott Limited implements forward market hedge.

ii) Calculate the total payment in GBP if Walcott Limited implements money market hedge.

iii) Calculate possible total payments in GBP if Walcott Limited implements option market hedge?

iv) Based on your answers from part (i) to part (iii) above, what is the optimal hedge?

v) Assuming that Walcott Limited does not hedge, calculate the total amount of GBP it needs to pay for its imports at the end of six months under each of the three possible forecasted future spot rates.

vi) Compare the optimal hedging strategy to unhedged strategy, what will you recommend Walcott Limited? Explain.

Question 3Refer to Chapter 9 Problem 7 Autocars Ltd. (page 261) in Moffett M, Stonehill A & Eiteman D (2006), Essentials of Global Finance (2nd Ed.), Boston, Pearson: Addison Wesley.

Question 4Refer to Chapter 9 Problem 8 High Profile Printers (page 262) in Moffett M, Stonehill A & Eiteman D (2006), Essentials of Global Finance (2nd Ed.), Boston, Pearson: Addison Wesley.

Question 5a) If hedging is expected to be more costly than not hedging, why would a firm

even consider hedging?b) How can a firm hedge long-term currency positions? Elaborate on each

method.

Self Study Question 1Saturn Corporation a U.S car company acquired a Korean company that produces plastic nuts and bolts for automobile manufacturers. The purchase prices were 7,030 million Won. Won 1,000 million has already been paid, and the remaining Won 6,030 million is due in six months. The current spot rate is Won 1200/$, and the 6-manth forward rate is Won 1260/$. Additional data:

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6-month Korean interest rate 16.00% p.a.6-month U.S. interest rate 4.00% p.a.6-month call option on Korean won at W1200/$ 3.0% premium6-month put option Korean won at W1200/$ 2.4% premium

Saturn Corporation can invest at the rate given above, or borrow at 2% per annum above those rates. Saturn Corporation weighted average cost of capital is 25%. Calculate the cost of hedging using:-

a) Remain Unhedgeb) Forward market hedgec) Money market hedged) Option hedgee) Which is the best alternative?

Self Study Question 2YSL, the U.S. apparel design firm, owes Mex$ 7 million in 30 days for a recent shipment of textiles from Mexico. YSL’s treasurer is considering hedging the company’s peso exposure on this shipment and looking for some help in figuring out what her different hedging option might cost and which option is preferable. It faces the following interest and exchange rates:

Spot rate Mex13.00/$ - Mex13.08/$Forward rate (30 days) Mex13.10/$ - Mex13.18/$30-day put option on dollars at Mex$ 12.9/$ 1% premium30-day call option on dollars at Mex$ 13.1/$ 3% premiumU.S. dollar 30-day interest rate (annualized): 7.5%Peso 30-day interest rate (annualized): 15%

Calculate the cost of hedging using:-a) Forward market hedgeb) Money market hedgec) Option hedge (not required to compound premium)d) Which is the best alternative?e) Suppose that YSL expects the 30-day spot rate to be Mex$ 13.4/$. Should it

hedge this payable?

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 10 (Topic 9)Currency and Interest Rate Swap

Question 1a) How can a business firm that borrowed on a floating rate basis use a forward

rate agreement to reduce interest rate risk?b) Why would one company with interest payments due in pounds sterling

wants to swap these payments for interest payments due in U.S. dollars?

Question 2Refer to Chapter 14 Problem 2 Rankine Corporation (page 385) in Moffett M, Stonehill A & Eiteman D (2006), Essentials of Global Finance (2nd Ed.), Boston, Pearson: Addison Wesley.

Question 3Refer to Chapter 14 Problem 7 Xavier and Zulu (page 386) in Moffett M, Stonehill A & Eiteman D (2006), Essentials of Global Finance (2nd Ed.), Boston, Pearson: Addison Wesley.

Question 4Given the following swap rates, Charlton Ferguson, Chief Finance Officer of Red Devils Ltd., decides to enter into a four-year currency swap agreement to receive pounds and pay euros, on a notional principal of £33,000,000. The spot exchange rate at the time of the swap is €1.8300/£.

Swap RatesYears £ bid £ ask € bid € ask2 4.08% 4.28% 3.10% 3.30%3 4.18% 4.33% 3.25% 3.48%4 4.23% 4.48% 3.30% 3.60%

i) Calculate all principal and interest payments, in both pounds and euros, over the life of the currency swap agreement.

ii) Assuming that two years into the swap agreement, Charlton Ferguson decides to unwind the swap agreement and settle it in pounds. Assume that a two-year fixed rate of interest on pounds is 4.50%, a two-year fixed rate of interest on euros is 3.80%, and the spot rate of exchange is now €1.7788/£. Find the net settlement amount of unwinding the swap and state who pays to whom the net settlement amount (Red Devils Ltd. pays to swap dealer or swap dealer pays to Red Devils Ltd.).

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCEQuestion 5Refer to Chapter 14 Problem 9 Cross-Currency Swap: Yen for Euros (page 386) in Moffett M, Stonehill A & Eiteman D (2006), Essentials of Global Finance (2nd Ed.), Boston, Pearson: Addison Wesley.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 11 (Topic 10)Multinational Cost of Capital and Capital Structure

Question 1(a) Why might a firm use a “local” capital structure at a particular subsidiary

that differs substantially from its “global” capital structure?(b) Rose Inc., a U.S. company, needed to infuse capital into its foreign

subsidiaries to support their expansion. As of August 2001, it planned to issue stock in the U.S. However, after the September 11, 2001 terrorist attack on the U.S., it decided that long-term debt was a cheaper source of capital. Explain how the terrorist attack could have altered the capital structure decision.

Question 2In recent years, several U.S. firms have penetrated Mexico’s market. One of the biggest challenges is the cost of capital to finance businesses in Mexico. Mexican interest rates tend to be much higher than U.S. interest rates. In some periods, the Mexican government does not attempt to lower the interest rates because higher rates may attract foreign investment in Mexican(i) How might U.S.-based MNCs expand in Mexico without incurring the high

Mexican interest expenses when financing the expansion? Are any disadvantages associated with this strategy?

(ii) Are there any additional alternatives for the Mexican subsidiary to finance its business itself after it has been well established? How might this strategy affect the subsidiary’s capital?

Question 3(a) Pullman Inc., a U.S. firm, has been highly profitable, but prefers not to pay

out higher dividends because its shareholders want the funds to be reinvested. It plans for large growth in several less developed countries. Pullman would like to finance the growth with local debt in the host countries of concern to reduce its exposure to country risk. Explain the dilemma faced by Pullman, and offer possible solutions.

(b) Drexel Co. is a U.S.-based company that is establishing a project in a politically unstable country. It is considering two possible sources of financing. Either the parent could provide most of the financing, or the subsidiary could be supported by local loans from banks in that country. Which financing alternative is more appropriate to protect the subsidiary?

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCE(c) Veer Co. is a U.S.-based MNC that has most of its operations in Japan.

Noticing that the Japanese companies with which it competes use more financial leverage, it has decided to adjust its financial leverage to be in line with theirs. With this heavy emphasis on debt, Veer should reap more tax advantages. It believes that the market’s perception of its risk will remain unchanged, since its financial leverage will still be no higher than that of its Japanese competitors. Comment on this strategy.

Question 4Zylon Co. is a U.S. firm that provides technology software for the government of Singapore. It will be paid S$7,000,000 at the end of each of the next five years. The entire amount of the payment represents earnings since Zylon created the technology software years ago. Zylon is subject to a 30 percent corporate income tax rate in the United States. Its other cash inflows (such as revenue) are expected to be offset by its other cash outflows (due to operating expenses) each year, so its profits on the Singapore contract represent its expected annual net cash flows. Its financing costs are not considered within its estimate of cash flows. The Singapore dollar (S$) is presently worth $0.60, and Zylon uses that spot exchange rate as a forecast of future exchange rates.

The risk-free interest rate in the United States is 6 percent while the risk-free interest rate in Singapore is 14 percent. Zylon’s capital structure is 60 percent debt and 40 percent equity. Zylon is charged an interest rate of 12 percent on its debt. Zylon’s cost of equity is based on the CAPM. It expects that the U.S. annual market return will be 12 percent per year. Its beta is 1.5.

Quiso Co., a U.S. firm, wants to acquire Zylon and offers Zylon a price of $10,000,000. Zylon’s owner must decide whether to sell the business at this price and hires you to make a recommendation. Estimate the NPV to Zylon as a result of selling the business, and make a recommendation about whether Zylon’s owner should sell the business at the price offered.

Question 5Cantona Ltd, a French multinational enterprise, considers obtaining 20 percent of its one-year financing in US dollars and 80 percent in British pounds in order to finance working capital needs of its foreign subsidiaries. Forecast on the changes in spot rate of US dollar per euro and British pound per euro for the next year are as follows:

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Currency Possible % Change in Spot Rate ProbabilityBritish pound Depreciate 10% 80%British pound Appreciate 5% 20%US dollar Depreciate 8% 50%US dollar Appreciate 12% 50%

The interest rate on the US dollar is 5 percent, and the interest rate on the British pound is 7 percent. Develop the possible effective financing rates of the overall portfolio and the probability of each possibility based on the use of joint probabilities.

Question 6Ithaca Co. considers placing 30% of its excess funds in a one-year Singapore dollar deposit and the remaining 70% of its funds in a one-year Canadian dollar deposit. The Singapore one-year interest rate is 15%, while the Canadian one-year interest rate is 13%. The possible percentage changes in the two currencies for the next year are forecasted as follows:Possible % Change in Possible Percentage Probability of

Change in Spot Rate Change in SpotCurrency Over the Investment Horizon Rate Occurring Singapore dollar –2% 20%Singapore dollar 1% 60%Singapore dollar 3% 20%Canadian dollar 1% 50%Canadian dollar 4% 40%Canadian dollar 6% 10%

Given this information, determine the possible effective yields of the portfolio and the probability associated with each possible portfolio yield. Given a one-year U.S. interest rate of 8%, what is the probability that the portfolio’s effective yield will be lower than the yield achieved from investing in the U.S.?

Self Study Question 1Pepperdine, Inc., considers obtaining 40 percent of its one-year financing in Canadian dollars and 60 percent in Japanese yen. The forecasts of appreciation in the Canadian dollar and Japanese yen for the next year are as follows:

ProbabilityPossible Percentage of that PercentageChange in the Spot Change in the

Currency Rate Over the Loan Life Spot Rate Occurring Canadian dollar 4% 70%Canadian dollar 7 30

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Japanese yen 6 50Japanese yen 9 50

The interest rate on the Canadian dollar is 9 percent, and the interest rate on the Japanese yen is 7 percent. Develop the possible effective financing rates of the overall portfolio and the probability of each possibility based on the use of joint probabilities.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 12 (Topic 11)Multinational Capital Budgeting

Question 1(a) Why is capital budgeting analysis so important to the firm?(b) Relate the concept of “lost sales” to the definition of incremental cash flow.

Question 2(a) Discuss the difference between performing the capital budgeting analysis

from the parent firm’s perspective as opposed to the project perspective.(b) What is the nature of a concessionary loan and how is it handled in the APV

model?

Question 3Zeda, Inc., a U.S. MNC, is considering making a fixed direct investment in Denmark. The Danish government has offered Zeda a concessionary loan of DKK15,000,000 at a rate of 4 percent per annum. The normal borrowing rate is 6 percent in dollars and 5.5 percent in Danish krone. The loan schedule calls for the principal to be repaid in three equal annual installments. What is the present value of the benefit of the concessionary loan? The current spot rate is DKK5.60/$1.00 and the expected inflation rate is 3% in the U.S. and 2.5% in Denmark.

Question 4Consider a project with the following information:The 5-year project requires equipment that costs $100,000. If undertaken, the shareholders will contribute $20,000 cash and borrow $80,000 at 6% with an interest-only loan with a maturity of 5 years and annual interest payments. The equipment will be depreciated straight-line to zero over the 5-year life of the project. There will be a pre-tax salvage value of $5,000. There are no other start-up costs at year 0. During years 1 through 5, the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs. The firm is subject to a 34% corporation tax rate.The cost of equity for unlevered (ungeared) firm Ku (rasset) is 12%.Cost of debt (rdebt) and cost of equity (requity) are 6% and 27.84% respectively.Compute base case NPV, PV of depreciation tax shield, PV of interest tax shield, and the APV of the project.

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCEQuestion 5An Italian firm is considering selling its line of coin-operated cappuccino machines in the U.K. The business risk will be identical to the firm’s existing line of business in the euro zone, the cost of capital in the euro zone is i€ = 10%. The expected inflation rate over the next two years in the U.K. is 3% per year and 2% per year in the euro zone. The spot exchange rates are $1.80 = £1.00 and $1.15 = €1.00The pound sterling denominated cash flows are as follows:

Year 0: – £100,000Year 1: £25,000Year 2: £100,000

What is the €-denominated NPV of this project?

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 13 (Topic 12)Foreign Direct Investment

Question 1(a) What do you understand by FDI?(b) As a firm evolves from purely domestic into a true multinational enterprise,

it must consider (a) its competitive advantages, (b) where it wants to locate production, (c) the type of control it wants to have over any foreign operations, and (d) how much monetary capital to invest abroad. Explain how each of these four considerations is important to the success of foreign operations.

Question 2Summarize the five main motives that drive the decision to initiate FDI. Strategic motives drive the decision to invest abroad and become a MNE. These motives can be summarized under the following five categories.

Question 3What are the advantages and disadvantages of limiting a firm’s activities to exporting compared to producing abroad?

Question 4What are the advantages and disadvantages of serving a foreign market through a Greenfield foreign direct investment compared to an acquisition of a local firm in the target market?

Question 5(a) What are the financial incentives to attract FDI?(b) What are the marketing-related incentives to attract FDI?(c) What are the production-related incentives to attract FDI?

Question 6(a) If the United States imposed long-term restrictions on imports, would the

amount of FDI by non-U.S. MNCs in the United States increase, decrease, or be unchanged? Explain.

(b) What potential benefits do you think were most important in the decision of the Walt Disney Co. to build a theme park in France?

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UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)UNIVERSITI TUNKU ABDUL RAHMAN (UTAR)FACULTY OF ACCOUNTANCY AND MANAGEMENTFACULTY OF ACCOUNTANCY AND MANAGEMENTUKFF4024 – MULTINATIONAL FINANCEUKFF4024 – MULTINATIONAL FINANCETutorial 14 (Topic 13 & 14)Multinational Cash Management & Financing International Trade

Question 1a) Every quarter, Bronx Co. ships computer chips to a firm in central Asia. It

had not used any trade financing because the importing firm always pays its bill in a timely manner upon receipt of the computer chips. After the September 11, 2001 terrorist attack on the U.S., it reconsidered whether it should use some form of trade financing that would ensure that it would be paid for its exports upon delivery. Offer a suggestion to Bronx Co. on how it could achieve its goal.

b) What is the role of a factor in international trade transactions?

Question 2a) For what reason might an exporter uses standard international trade

documentation (letter of credit, draft, order bill of lading) on an intra-firm export to its parent or sister subsidiary?

b) Explain the difference between a letter of credit (L/C) and a draft. How are they linked?

Question 3a) Identify each party to a letter of credit (L/C) and indicate its responsibility.b) Why would an exporter insist on a confirmed letter of credit?

Question 4The Sport Export Company produces footballs and exports them to a distributor in United Kingdom. It typically sends footballs in bulk and then receives payment after the distributor receives the shipment. The business relationship with the distributor is based on trust. Although the relationship has worked thus far, Jim Logan (owner of the Sports Exports Company) is concerned about the possibility that the distributor will not make its payment.a) How could Jim use a letter of credit to ensure that he will be paid for the

products he exports?b) Jim has discussed the possibility of expanding his export business through a

second sporting goods distributor in the United Kingdom, this second distributor would cover a different territory than the first distributor. This second distributor is only willing to engage in a consignment arrangement when selling footballs to retail stores. Explain the risk to Jim beyond the typical types of risk he incurs when dealing with the first distributor. Should Jim pursue this type of business?

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