1. International Financial Management
Final Review
International Financial Management
171207
Final Review

2. Final December 14, 2017 From 2:00 to 3:30 PM 40% of your final score
Chapter 8, 9, 13, 15, 16, 17, 18
BRING YOUR FINANCIAL CALCULATOR
Please use at least 4 decimal places (ex )
One (i) letter-sized (ii) two-sided (iii) hand-written cheat sheet is allowed
The total score is 100 points
Multiple choice: 10 problems, 40 points
Short answer question: 6 problems, 60 points
Bonus extra: 2 problems, 10 points
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Final Review

3. Problem 1
IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥250 million payable in three months. Currently, the spot exchange rate is ¥105/$ and the three-month forward rate is ¥100/$. The three-month money market interest rate is 8 percent per annum in the U.S. and 7 percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable.
Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation.
Conduct the cash flow analysis of the money market hedge.
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Final Review

4. Answer 1 Let’s first compute the PV of ¥250 million, i.e.,
So if the above yen amount is invested today at the Japanese interest rate for three months, the maturity value will be exactly equal to ¥25 million which is the amount of payable.
To buy the above yen amount today, it will cost:
$2,340, = ¥245,700,245.70/105.
The dollar cost of meeting this yen obligation is $2,340, as of today.
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5. Answer 1 (cont.) Write down all the cash flows in detail
__________________________________________________________________
Transaction CF CF1
1. Buy yens spot −$2,340,002.34
with dollars ¥245,700,245.70
2. Invest in Japan − ¥245,700, ¥250,000,000
3. Pay yens − ¥250,000,000
Net cash flow − $2,340,002.34
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6. Problem 2
Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €20 million which is payable in one year. The current spot exchange rate is $1.05/€ and the one-year forward rate is $1.10/€. The annual interest rate is 6.0% in the U.S. and 5.0% in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure.
It is considering two hedging alternatives: sell the euro proceeds from the sale forward or borrow euros from Credit Lyonnaise against the euro receivable. Which alternative would you recommend? Why?
Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods?
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7. Answer 2
In the case of forward hedge, the future dollar proceeds will be
(20,000,000)(1.10) = $22,000,000.
In the case of money market hedge (MMH), the firm has to first borrow the PV of its euro receivable, i.e.,
20,000,000/1.05 =€19,047,619.
Then the firm should exchange this euro amount into dollars at the current spot rate to receive:
(€19,047,619)($1.05/€) = $20,000,000,
which can be invested at the dollar interest rate for one year to yield:
$20,000,000(1.06) = $21,200,000.
Clearly, the firm can receive $800,000 more by using forward hedging.
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Final Review

8. Answer 2 (cont.) According to IRP, F = S(1+i$)/(1+iF).
Thus the “indifferent” forward rate will be:
F = 1.05(1.06)/1.05 = $1.06/€.
Note: IRP means
1+ i $ What you can get by depositing in the US = F $ € S $ € i € What you can get by depositing in the foreign country € here
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Final Review

9. Problem 3 A "primary" stock market is
A big internationally-important market like the NYSE
Where brokers and market makers trade
A market where corporations issue new shares to initial investors
The market that provides market participants with marketability and share valuation
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10. 171207
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11. Problem 4 The more concentrated a national stock market is
The greater opportunity a global investor has to include shares from that county in an internationally diversified portfolio
The less opportunity a global investor has to include shares from that county in an internationally diversified portfolio
The broader the investor base across a number of different shares and industries
None of the above
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12. 171207
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13. Problem 5
Suppose that the US capital markets are integrated with the rest of the world and that the world beta measure of Dell stock is 0.7, that is, β Dell W =0.7. If we assume that the risk-free rate is 6 percent and the expected return on the world market portfolio is 12 percent, that is, R f =6% and R W =12%, the expected return on Dell stock can be computed as
4.2%
8.4%
10.2%
14.4%
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14. R i = R f + β i Local R Local − R f
Answer 5
If the capital markets around the world are segmented, then the expected return can be computed using typical CAPM with the local market index, i.e.
R i = R f + β i Local R Local − R f
On the other hand, if the capital markets are integrated globally, then the expected return should be computed using CAPM with the world (or global) market index, i.e.
R i = R f + β i World R World − R f
Since the problem is assuming the capital markets are integrated, the expected return of Dell can be computed as
R Dell = R f + β Dell World R World − R f =6% %−6% =10.2%
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15. Problem 6
Choose a wrong description: In most cases, cross-listings are beneficial for MNCs, because after cross-listing
Liquidity (or trading volume) in the market improves
The corporations can attract more external investors and hence raise more capital
Cost of capital for most firms increases
Their information disclosure is enhanced and correspondingly their corporate governance is improved
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16. Slides from
Chapter 17
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17. Slides from
Chapter 13
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18. Problem 7
MNCs may undertake overseas investment projects in a foreign country, despite the fact that local firms may enjoy inherent advantages. This implies that
MNCs are making a mistake in this case and will have to eventually withdraw
MNCs should have significant advantages over local firms such as comparative advantages due to intangible assets
The local firms will not have to compete due to their inherent advantages over the foreigners
The government and citizens of the host countries always welcome MNCs and their investment
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19. 171207
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20. Problem 8
A U.S. firm holds a real estate in Italy and faces the following scenario:
Where P* is the price of the real estate denominated by Euro and P is the same price denominated by US Dollar
Compute Var[S], i.e. the variance of S
Compute Cov[P,S], i.e. the covariance between P and S
Compute the measure of economic exposure b, which is Cov P,S Var S
State 1
State 2
State 3
Probability
1/3
S (Spot Rate)
$1.2/€
$1.1/€
$1.0/€ P*
€3,000
€2,700
€2,400
P (=P*×Spot Rate)
$3,600
$2,920
$2,400
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Final Review

21. Answer 8 Variance of S Covariance between P and S
First, calculate the mean of S, i.e. E[S]
=1.1
Then, the mean of squared deviations
− − − =0.0067
Covariance between P and S
First, calculate the mean of P, i.e. E[P]
=2973
Then, the mean of the multiplication of two deviations
− − − − − −1.1 =40
Sensitivity measure “b”
Cov P,S Var S = =€
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22. Q&As
Thanks for Listening
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