Financial test review: Multinational Finance

Financial test review: Multinational finance
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FIRE 316 Test Review Questions - Midterm 1
1- Although Wal-Mart originally entered global markets to source low cost merchandise for sale in the US, other features of global markets are more important to Wal-Mart than is access to cheaper products. Do you agree or disagree with this statement? Explain your opinion.
Having already, been established in North America, Wal-Mart has teemed up with other retail outlets in host countries to expand its business operations. Even though, the low cost model is still important to the company, acquiring other stores in the areas of operations improves the company’s market penetration rate.
2- Apple could not exist in its current state without its extensive involvement in international commerce and would probably face steadily declining stock price as well. Recent in a manner which shows some familiarity with Apple and the benefits of international business operations.
North America is a mature marker, and international business has been vital to the success of Apple, Inc. In Asia, there are many opportunities especially in the Smartphone market. The growing middle class in the emerging market are also more likely to purchase Apple’s premium products as their income levels rises. China is now an important market for Apple, given its population and rising income levels. International business operations improve the company’s brand awareness and image, improving sales in new areas of operations.
3- Briefly explain how corporate legal structure and tax return filing strategy can be used by a US multinational company to postpose US tax liability on the income of a foreign subsidiary.
When multinationals (MNCs) report their earnings of subsidiaries separately rather than consolidating them, they may fail to report deferred income. Hence, the tax liability for the subsidiaries would be delayed. Such foreign subsidiaries would have to be incorporated in a different jurisdiction for this arrangement to be utilized.
4- Briefly explain the factors which determine currency exchange rates. What kinds of factors cause exchange rates to vary over time? How are the international parity conditions involved in exchange rate determination?
Interest rates, inflation, central bank actions, economic outlook, speculation, economic growth and government intervention affect the exchange rate. Over time, inflation, interest rates, market forces and the general economic condition affect the exchange rate. The international parity conditions holds that the differences in the purchasing power affect the extent to which people demand one currency over the other (Taylor, 2013).
5- Company ABC commits to Purchase $5 million of a product from a Japanese supplier to be delivered within 180 days from today with payment to be made 270 days from today in yen. What are the risks faced by ABC? What are the events in the currency markets which would erode the potential profit in selling these products in the US? How can ABC protect itself from the adverse consequences of currency market fluctuations?
There is a currency risk exposure from dealing in the yen, given that the yen may get stronger, meaning that ABC would need to use more dollars. Besides volatility in currency, there could be inflationary pressure, a drastic change in the interest rates and liquidity problems if there is an unexpected change in the market. Using forward contracts and hedging will then reduce the risk exposure for ABC.
6- Discuss the tools available to multinational corporations in managing their political risk.
Political decisions in the host countries can adversely affect business. Assessing the political risk of a country through research or working with consultants, and use of political risk insurance policies, as well as joint ventures as some of the common tools to manage political risk.
7- Distinguish between transactional, translational, and investment risk due to currency exchange rate fluctuations faced by multinational companies.
Explain the basic elements of an effective approach to hedging exchange rate risks (i.e., what is thought process?). What kinds of risks are best hedged by option like currency derivatives?
Transaction exposure occurs, when there are both receivables and payables being affected by changes in the exchange rate. Economic exposure is the risk that the current exchange is affected by unexpected changes in the exchange rate. The translation exposure is related to the extent by which the financial reporting is affected by exchange rate movements (Madura, 2013). Investment risk is related to potential losses in investments because of currency fluctuations. Hedging takes into account differences in foreign exchange to reduce the foreign-exchange risks (Madura, 2013). Options and other financial derivatives help to hedge against transaction exposure
8- Given a $ to yen Exchange rate of 78.5, what is the information contained in this quote? If the Purchasing Power Parity Theory is correct, what is true about the relationship between the US dollar and the Yen at the exchange rate? Explain the Purchasing Power Parity condition and its rationale.
1 dollar is equivalent to 78.5 yen. According to Taylor (2013), the Purchasing Power Parity assumes that price levels are the same globally if expressed in a common currency. As such, the purchasing power for a unit of the dollar/ yen ought to be the same globally.
9- React to the following statement: “When faced with significant political risk in a targeted foreign country, the only prudent option is for a corporation to avoid financial exposure to that market.” Is the statement true, false or partly true? Why?
The statement is partly true, as there as political risk which might prove might costly for the corporation, and the legal structure might make it hard to get fair compensation. Nonetheless, prior assessment of the situation is necessary, as entry into the new market might prove worthwhile.
10- React to the following statement: Although import export activity is the oldest type of international business, it is no longer terribly important as a part of the global economy.
Globalization has led to better connectivity in the world, but exports and imports still account for large percentages of international trade, since exports are a major source of foreign revenues.
11- The “fair value” of a currency forward contract is determined by the relationship between interest rates of the two contrives in question and the time period covered by the contract. Is this statement exactly true, partly true or false? Explain your response. Do dealers always price forward contracts at their “fair value”? Why?
The statement is true since there is an assumption made by the two parties about how the futures contract should be priced in view of the interest rate and time covered. Nonetheless, dealers focus other factors when pricing the forward contracts.
12- The current s...