Tutorial # 1

CHAPTER 1

1. Agency Problems of MNCs.

a. Explain the agency problem of MNCs.

b. Why might agency costs be larger for an MNC than for a purely domestic firm?

2. Comparative Advantage.

a. Explain how the theory of comparative advantage relates to the need for international
business.
b. Explain how the product cycle theory relates to the growth of an MNC.

3. Imperfect Markets.

a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries
in foreign markets.
b. If perfect markets existed, would wages, prices, and interest rates among countries be more
similar or less similar than under conditions of imperfect markets? Why?
4. Methods Used to Conduct International Business.

Duve, Inc., desires to penetrate a foreign market with either a licensing agreement with a
foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and return
between a licensing agreement with a foreign firm, and the acquisition of a foreign firm.

CHAPTER 2

1. Government Restrictions. How can government restrictions affect international payments

among countries?

2. Free Trade. There has been considerable momentum to reduce or remove trade barriers in an
effort to achieve “free trade.” Yet, one disgruntled executive of an exporting firm stated, “Free
trade is not conceivable; we are always at the mercy of the exchange rate. Any country can use
this mechanism to impose trade barriers.” What does this statement mean?

3. International Investments. U.S.-based MNCs commonly invest in foreign securities.

a. Assume that the dollar is presently weak and is expected to strengthen over time. How will
these expectations affect the tendency of U.S. investors to invest in foreign securities?
b. Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest
abroad.

c. In general terms, what is the attraction of foreign investments to U.S. investors?

Tutorial #2

CHAPTER 3

1. Exchange Rate Effects on Borrowing. Explain how the appreciation of the Japanese yen against
the U.S. dollar would affect the return to a U.S. firm that borrowed Japanese yen and used the
proceeds for a U.S. project.

2. Bid/ask Spread. Compute the bid/ask percentage spread for Mexican peso retail transactions in
which the ask rate is $.11 and the bid rate is $.10.

3. Forward Contract. The Wolfpack Corporation is a U.S. exporter that invoices its exports to the
United Kingdom in British pounds. If it expects that the pound will appreciate against the dollar
in the future, should it hedge its exports with a forward contract? Explain.

4. Cross Exchange Rate. Assume Poland’s currency (the zloty) is worth $.17 and the Japanese yen is
worth $.008. What is the cross rate of the zloty with respect to yen? That is, how many yen
equal a zloty?

5. Foreign Exchange. You just came back from Canada, where the Canadian dollar was worth $.70.
You still have C$200 from your trip and could exchange them for dollars at the airport, but the
airport foreign exchange desk will only buy them for $.60. Next week, you will be going to
Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for $.10 per
peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is
willing to buy your C$200 for 1,300 pesos. Should you accept the offer or cash the Canadian
dollars in at the airport? Explain.

Chapter 4

1. Speculation. Blue Demon Bank expects that the Mexican peso will depreciate against the dollar
from its spot rate of $.15 to $.14 in 10 days. The following interbank lending and borrowing rates
exist:

the value of the mexican peso will decrease relative to the US dollar.
when one currency depreciates another appreciates
US is now more expensive. Therefore, it will take more Mexican Peso to buy US.

Therefore, in this case the US dollar will be weak now and stronger later
 Lending Rate Borrowing Rate

U.S. dollar 8.0% 8.3%

Mexican peso 8.5% 8.7%

Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 70 million pesos
in the interbank market, depending on which currency it wants to borrow.

a. How could Blue Demon Bank attempt to capitalize on its expectations without using
deposited funds? Estimate the profits that could be generated from this strategy.

b. Assume all the preceding information with this exception: Blue Demon Bank expects the
peso to appreciate from its present spot rate of $.15 to $.17 in 30 days. How could it
attempt to capitalize on its expectations without using deposited funds? Estimate the profits
that could be generated from this strategy.
1b voice memo and photo

2. Speculation. Diamond Bank expects that the Singapore dollar will depreciate against the dollar
from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates
exist:

Lending Rate Borrowing Rate

U.S. dollar 7.0% 7.2%

Singapore dollar 22.0% 24.0%

Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market and
investing the funds in dollars for 60 days. Estimate the profits (or losses) that could be earned
from this strategy. Should Diamond Bank pursue this strategy

one unit of the base buys x amount of the price currency

current spot 1 USD = 0.43 SGD
future spot 1 US= 0.42 SGD

the SGD will depreciate relative to the USD

USD is the base currency

Tutorial #3

CHAPTER 5

1. Forward Premium. Compute the forward discount or premium for the Mexican peso whose 90-
day forward rate is $.102 and spot rate is $.10. State whether your answer is a discount or
premium.

2. Speculating with Currency Call Options. Randy Rudecki purchased a call option on British
pounds for $.02 per unit. The strike price was $1.45 and the spot rate at the time the option was
exercised was $1.46. Assume there are 31,250 units in a British pound option. What was Randy’s
net profit on this option?

3. Speculating with Currency Put Options. Alice Duever purchased a put option on British pounds
for $.04 per unit. The strike price was $1.80 and the spot rate at the time the pound option was
exercised was $1.59. Assume there are 31,250 units in a British pound option. What was Alice’s
net profit on the option?

4. Selling Currency Put Options. Brian Tull sold a put option on Canadian dollars for $.03 per unit.
The strike price was $.75, and the spot rate at the time the option was exercised was $.72.
Assume Brian immediately sold off the Canadian dollars received when the option was
exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Brian’s
net profit on the put option?

5. Currency Strangles. (See Appendix B in this chapter.) Assume the following options are currently
available for British pounds (₤):

Call option premium on British pounds = $.04 per unit

Put option premium on British pounds = $.03 per unit
Call option strike price = $1.56
Put option strike price = $1.53
One option contract represents ₤31,250.

a. Construct a worksheet for a long strangle using these options.

b. Determine the break-even point(s) for a strangle.
c. If the spot price of the pound at option expiration is $1.55, what is the total profit or loss to
the strangle buyer?
d. If the spot price of the pound at option expiration is $1.50, what is the total profit or loss to
the strangle writer?
CHAPTER 6

1. Indirect Intervention. Why would the Fed’s indirect intervention have a stronger impact on
some currencies than others? Why would a central bank’s indirect intervention have a stronger
impact than its direct intervention?

2. Freely Floating Exchange Rates. Should 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?
Tutorial #4
Wednesday 6th march
CHAPTER 7

1. Covered Interest Arbitrage in Both Directions. Assume that the existing U.S. one-year
interest rate is 10 percent and the Canadian one-year interest rate is 11 percent. Also
assume that interest rate parity exists. Should the forward rate of the Canadian dollar
exhibit a discount or a premium? If U.S. investors attempt covered interest arbitrage, what
will be their return? If Canadian investors attempt covered interest arbitrage, what will be
their return?
2. Covered Interest Arbitrage in Both Directions. Assume that the annual U.S. interest rate is
currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s
one-year forward rate currently exhibits a discount of 2 percent.

a. Does interest rate parity exist?

b. Can a U.S. firm benefit from investing funds in Germany using covered interest arbitrage?

c. Can a German subsidiary of a U.S. firm benefit by investing funds in the United States
through covered interest arbitrage?

3. Covered Interest Arbitrage. Assume the following information:

Quoted Price

Spot rate of Canadian dollar $.80

90-day forward rate of Canadian dollar $.79

90-day Canadian interest rate 4%

90-day U.S. interest rate 2.5%

Given this information, what would be the yield (percentage return) to a U.S. investor who
used covered interest arbitrage? (Assume the investor invests $1,000,000.) What market forces
would occur to eliminate any further possibilities of covered interest arbitrage?

4. Triangular Arbitrage. Assume the following information:

Quoted Price

Value of Canadian dollar in U.S. dollars $.90

Value of New Zealand dollar in U.S. dollars $.30

Value of Canadian dollar in New Zealand dollars NZ$3.02

 Given this information, is triangular arbitrage possible? If so, explain the steps that would
reflect triangular arbitrage, and compute the profit from this strategy if you had $1,000,000 to
use. What market forces would occur to eliminate any further possibilities of triangular
arbitrage?

5. Locational Arbitrage. Assume the following information:

Beal Bank Yardley Bank

Bid price of New Zealand dollar $.401 $.398

Ask price of New Zealand dollar $.404 $.400

Given this information, is locational arbitrage possible? If so, explain the steps involved in
locational arbitrage, and compute the profit from this arbitrage if you had $1,000,000 to use.
What market forces would occur to eliminate any further possibilities of locational arbitrage?

CHAPTER 8

1. IFE. Assume that the nominal interest rate in Mexico is 48 percent and the interest rate in
the United States is 8 percent for one-year securities that are free from default risk. What
does the IFE suggest about the differential in expected inflation in these two countries?
Using this information and the PPP theory, describe the expected nominal return to U.S.
investors who invest in Mexico.

2. IFE. Shouldn’t the IFE discourage investors from attempting to capitalize on higher foreign
interest rates? Why do some investors continue to invest overseas, even when they have no
other transactions overseas?

3. Deriving Forecasts of the Future Spot Rate. As of today, assume the following information is
available:

U.S. Mexico

Real rate of interest required

by investors 2% 2%

Nominal interest rate 11% 15%

Spot rate — $.20

One-year forward rate — $.19

a. Use the forward rate to forecast the percentage change in the Mexican peso over the next
year.
b. Use the differential in expected inflation to forecast the percentage change in the Mexican
peso over the next year.

c. Use the spot rate to forecast the percentage change in the Mexican peso over the next year.
Tutorial #5

CHAPTER 9

1. Limitations of a Fundamental Forecast. Syracuse Corp. believes that future real interest rate
movements will affect exchange rates, and it has applied regression analysis to historical
data to assess the relationship. It will use regression coefficients derived from this analysis,
along with forecasted real interest rate movements, to predict exchange rates in the future.
Explain at least three limitations of this method.

2. Forecasting with a Forward Rate. Assume that the four-year annualized interest rate in the
United States is 9 percent and the four-year annualized interest rate in Singapore is 6
percent. Assume interest rate parity holds for a four-year horizon. Assume that the spot rate
of the Singapore dollar is $.60. If the forward rate is used to forecast exchange rates, what
will be the forecast for the Singapore dollar’s spot rate in four years? What percentage
appreciation or depreciation does this forecast imply over the four-year period?

3. Forward Rate Forecast. Assume that you obtain a quote for a one-year forward rate on the
Mexican peso. Assume that Mexico’s one-year interest rate is 40 percent, while the U.S.
one-year interest rate is 7 percent. Over the next year, the peso depreciates by 12 percent.
Do you think the forward rate overestimated the spot rate one year ahead in this case?
Explain.

CHAPTER 10 transaction exposure- conducting business in foreign currency in denominated transactions

exposes a firm to transaction exposure since it may suffer exchange losses or get exchange
gains from fluctuations.

1. Transaction versus Economic Exposure. 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?
economic exposure- when the cashflows of a firm even if it is purely domestic can be affected by
externalities brought about from foreign exchange rates. Such that foreign competition can impact the
firms cash flows. this is a form of economic exposure. The cash flow can be affected but it does not
change the value of the ongoing transaction.
2. Economic Exposure. Lubbock, Inc., produces furniture and has no international business. Its
major competitors import most of their furniture from Brazil and then sell it out of retail
stores in the United States. How will Lubbock, Inc., be affected if Brazil’s currency (the real)
strengthens over time?

3. PPP and Economic Exposure. Boulder, Inc., exports chairs to Europe (invoiced in U.S. dollars)
and competes against local European companies. If purchasing power parity exists, why
would Boulder not benefit from a stronger euro?
the major competitors could see higher prices in their purchases if the Brazilian real appreciates. as a
result these cost will reflect in price adjustments to their furniture and if material enough could cause a
shift in demand from the major competitors to Lubbock. thus Lubbock cash flows could be positively
impact while the competitors experience transaction and economic exposure. Lubbock only experiences
economic exposure note that transaction exposure is a subset of economic exposure
if ppp exist the euro will be stronger because the US experiences higher inflation relative to eur. so that
European demand for what would be inflated prices of US made chairs would be offset by Europeans
ability to obtain cheaper dollar.
Tutorial #6

CHAPTER 11

1. Money Market Hedge on Receivables. Assume that Stevens Point Co. has net receivables of
100,000 Singapore dollars in 90 days. The spot rate of the S$ is $.50, and the Singapore interest
rate is 2% over 90 days. Suggest how the U.S. firm could implement a money market hedge. Be
precise.

2. Money Market Hedge on Payables. Assume that Vermont Co. has net payables of 200,000
Mexican pesos in 180 days. The Mexican interest rate is 7% over 180 days, and the spot rate of
the Mexican peso is $.10. Suggest how the U.S. firm could implement a money market hedge. Be
precise.

3. Invoicing Strategy. Assume that Citadel Co. purchases some goods in Chile that are
denominated in Chilean pesos. It also sells goods denominated in U.S. dollars to some firms in
Chile. At the end of each month, it has a large net payables position in Chilean pesos. How can it
use an invoicing strategy to reduce this transaction exposure? List any limitations on the effec-
tiveness of this strategy.

4. Real Cost of Hedging Payables. Assume that Suffolk Co. negotiated a forward contract to
purchase 200,000 British pounds in 90 days. The 90-day forward rate was $1.40 per British
pound. The pounds to be purchased were to be used to purchase British supplies. On the day the
pounds were delivered in accordance with the forward contract, the spot rate of the British
pound was $1.44. What was the real cost of hedging the payables for this U.S. firm?

5. Forward versus Money Market Hedge on Receivables. Assume the following information:

180-day U.S. interest rate = 8%

180-day British interest rate = 9%

180-day forward rate of British pound = $1.50

Spot rate of British pound = $1.48

Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days.
Would it be better off using a forward hedge or a money market hedge? Substantiate your
answer with estimated revenue for each type of hedge.
6. Comparison of Techniques for Hedging Receivables.

Assume that Carbondale Co. expects to receive S$500,000 in one year. The existing
spot rate of the Singapore dollar is $.60. The one-year forward rate of the Singapore
dollar is $.62. Carbondale created a probability distribution for the future spot rate in
one year as follows:
Future Spot Rate Probability

$.61 20%

.63 50

.67 30

Assume that one-year put options on Singapore dollars are available, with an exercise price of
$.63 and a premium of $.04 per unit. One-year call options on Singapore dollars are available
with an exercise price of $.60 and a premium of $.03 per unit. Assume the following money
market rates:

U.S. Singapore

Deposit rate 8% 5%
Borrowing rate 9 6

Given this information, determine whether a forward hedge, money market hedge, or a
currency options hedge would be most appropriate. Then compare the most appropriate hedge
to an unhedged strategy, and decide whether Carbondale should hedge its receivables
position.

CHAPTER 12

1. Hedging Translation Exposure. Explain how a firm can hedge its translation exposure.

2. Limitations of Hedging Translation Exposure. Bartunek Co. is a U.S.-based MNC that has
European subsidiaries and wants to hedge its translation exposure to fluctuations in the euro’s
value. Explain some limitations when it hedges translation exposure.

3. Effective Hedging of Translation Exposure. Would a more established MNC or a less established
MNC be better able to effectively hedge its given level of translation exposure? Why?

no perfect ans
no-
yes- the more established, the longer it has been in business.
Tutorial #7

1. Motives for DFI. Describe some potential benefits to an MNC as a result of direct foreign
investment (DFI). Elaborate on each type of benefit. Which motives for DFI do you think
encouraged Nike to expand its footwear production in Latin America?

2. Capitalizing on Low-Cost Labor. Some MNCs establish a manufacturing facility where there is a
relatively low cost of labor. Yet, they sometimes close the facility later because the cost
advantage dissipates. Why do you think the relative cost advantage of these countries is reduced
over time? (Ignore possible exchange rate effects.)

3. Opportunities in Less Developed Countries. Offer your opinion on why economies of some less
developed countries with strict restrictions on international trade and DFI are somewhat
independent from economies of other countries. Why would MNCs desire to enter such
countries? If these countries relaxed their restrictions, would their economies continue to be
independent of other economies? Explain.

4. Risk Resulting from International Business. This chapter concentrates on possible benefits to a
firm that increases its international business.

a. What are some risks of international business that may not exist for local business?

b. What does this chapter reveal about the relationship between an MNC’s degree of
international business and its risk?

CHAPTER 14

1. Capital Budgeting Example. Brower, Inc. just constructed a manufacturing plant in Ghana. The
construction cost 9 billion Ghanian cedi. Brower intends to leave the plant open for three years.
During the three years of operation, cedi cash flows are expected to be 3 billion cedi, 3 billion
cedi, and 2 billion cedi, respectively. Operating cash flows will begin one year from today and are
remitted back to the parent at the end of each year. At the end of the third year, Brower expects
to sell the plant for 5 billion cedi. Brower has a required rate of return of 17 percent. It currently
takes 8,700 cedi to buy one U.S. dollar, and the cedi is expected to depreciate by 5 percent per
year.
 a. Determine the NPV for this project. Should Brower build the plant?

b. How would your answer change if the value of the cedi was expected to remain unchanged
from its current value of 8,700 cedis per U.S. dollar over the course of the three years?
Should Brower construct the plant then?

2. 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?

b. Repeat the question, except assume that the value of the won is expected to be 1,200 won
per U.S. dollar after two years. Further assume that the funds are blocked and that the
parent company will only be able to remit them back to the U.S. in two years. How does this
affect the NPV of the project?
Tutorial #8:

1. Valuing a Foreign Target. Blore Inc., a U.S.-based MNC, has screened several targets. Based on
economic and political considerations, only one eligible target remains in Malaysia. Blore would
like you to value this target and has provided you with the following information:

Blore expects to keep the target for three years, at which time it expects to sell the firm for
300 million Malaysian ringgit (MYR) after any taxes.

Blore expects a strong Malaysian economy. The estimates for revenue for the next year are
MYR200 million. Revenues are expected to increase by 8% in each of the following two
years.

Cost of goods sold are expected to be 50% of revenue.

Selling and administrative expenses are expected to be MYR30 million in each of the next
three years.

The Malaysian tax rate on the target’s earnings is expected to be 35 percent.

Depreciation expenses are expected to be MYR20 million per year for each of the next three
years.

The target will need MYR7 million in cash each year to support existing operations.

The target’s stock price is currently MYR30 per share. The target has 9 million shares
outstanding.
Any remaining cash flows will be remitted by the target to Blore Inc. Blore uses the
prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next
three years. This exchange rate is currently $.25.

Blore’s required rate of return on similar projects is 20 percent.

a. Prepare a worksheet to estimate the value of the Malaysian target based on the
information provided.
b. Will Blore Inc. be able to acquire the Malaysian target for a price lower than its
valuation of the target?