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Chapter18: International aspects of financial management

Critical thinking and concepts review

18.1

  

Spot and Forward Rates. Suppose the exchange rate for the Swiss franc is quoted as SF0.8979 in the spot market and SF0.8786 in the 90-day forward market to 1 Australian dollar.

a.

 

Is the dollar selling at a premium or a discount relative to the franc?

b.

 

Does the financial market expect the franc to strengthen relative to the dollar? Explain.

c.

  What do you suspect is true about relative economic conditions in Australia and Switzerland?<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0071010319/student/pg111_4.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

18.2  Purchasing-power Parity. Suppose the rate of inflation in Russia will run about 3% higher than the Australian inflation rate over the next several years. All other things being the same, what will happen to the rouble-versus-dollar exchange rate? What relationship are you relying on in answering?<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0071010319/student/pg113_3.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

18.3

  

Exchange Rates. The exchange rate for the Indian rupee is currently Rs32.52. This exchange rate is expected to rise by 10% over the next year.

a.

 

Is the Indian rupee expected to get stronger or weaker?

b.

 

What do you think about the relative inflation rates in Australia and India?

c.

  What do you think about the relative nominal interest rates in India and Australia? Relative real rates?<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0071010319/student/pg113_3.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

18.4

  

Yankee Bonds. Which of the following most accurately describes a Yankee bond?

a.

 

A bond issued by General Motors in Japan with the interest payable in US dollars.

b.

 

A bond issued by General Motors in Japan with the interest payable in yen.

c.

 

A bond issued by Toyota in the United States with the interest payable in yen.

d.

 

A bond issued by Toyota in the United States with the interest payable in dollars.

e.

  A bond issued by Toyota worldwide with the interest payable in dollars.<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0071010319/student/pg112_1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

18.5  Exchange Rates. Are exchange-rate changes necessarily good or bad for a particular company?<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0071010319/student/pg111_4.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

18.6   International Risks. Offshore International confirmed that it was planning to open battery-manufacturing plants in China and India. Manufacturing in these countries allows Offshore to use cheap labour and raw materials, thereby reducing the cost of its product for consumers. What additional advantages might Offshore see in this proposal? What are some of the risks for Offshore?<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0071010319/student/pg113_2.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

18.7   Multinational Corporations. Given that many multinationals based in many countries have much greater sales outside their domestic markets than within them, what is the particular relevance of their domestic currency?<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0071010319/student/pg112_1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

18.8

  

Exchange-rate Movements. Are the following statements true or false? Explain why.

a.

 

If the general price index in the United Kingdom rises faster than that in Australia, we would expect the pound to appreciate relative to the dollar.

b.

 

Suppose you are a German machine-tool exporter and you invoice all of your sales in foreign currency. Further suppose that the European monetary authorities begin to undertake an expansionary monetary policy. If it is certain that the easy oney policy will result in higher inflation rates in ‘Euroland’ relative to those in other countries, then you should use the forward markets to protect yourself against future losses resulting from the deterioration in the value of the euro.

c.  If you could accurately estimate differences in the relative inflation rates of two countries over a long period, while other market participants were unable to do so, you could successfully speculate in spot currency markets.<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0071010319/student/pg113_3.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

p. 557

18.9

  

Exchange-Rate Movements. Some countries encourage movements in their exchange rate relative to those of some other country as a short-term means of addressing foreign-trade imbalances. For each of the following scenarios, evaluate the impact the announcement would have on an Australian importer and an Australian exporter doing business with the foreign country.

a.

 

The Australian Government announces that it is comfortable with a rising Thai baht relative to the dollar.

b.

 

British monetary authorities announce that they believe that currency speculators have driven the pound too low relative to the dollar.

c.  The Indonesian Government announces that it will print billions of new rupiah and inject them into the economy in an effort to reduce the country’s 40% unemployment rate.<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0071010319/student/pg113_3.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

18.10  International Investment. If financial markets are perfectly competitive and the euro interest rate is above that offered in the Australian loan market, you would immediately want to borrow money in the Australian market and invest it in euros. True or false? Explain.<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0071010319/student/pg112_1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

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