Chapter 1, Problem 36QA

1. Explain the differences and similarities between Forward, Futures, andOptions. Then why can there be a Long Term Funding Deficit related to a company's cash flows? and Explain the meaning of international parity conditions, and why it can be used to predict exchange rates. and what is the meaning of foreign exchange exposure and types of foreign exchange exposure faced by multinational companies.

Which of the following factors is not expected to generally have a favorable impact on the firm's cost of capital? Group of answer choices easy access to international capital markets. high degree of international diversification. high exposure to exchange rate fluctuations. all of these

Question Which of the statements below is FALSE? A.        Multinational capital budgeting is a straightforward application of the Net Present Value (NPV. model with one twist: we can do the analysis in either domestic currency or foreign currency. B.         If we are using foreign currency for the NPV decision, all we have to do is restate all the foreign incremental cash flow in terms of future value and use the current exchange rate. C.         In conducting a multinational NPV, one must be careful to avoid differences with rounding of exchange rates, discount rates, and cash flow to produce the exact same value. D.        With the foreign currency approach in NPV analysis, if we know the appropriate discount rate in the home country and the expected inflation rates in the two countries, we can determine the appropriate foreign discount rate.

Transaction exposure:       A. measures the extent to which foreign exchange volatility may affect a firm's future ongoing revenues and costs.       B. measures the effects of FX changes on the balance sheet of the firm.       C. refers to the extent to which the value of the firm's cash flows may be affected by changes in the exchange rate.       D. tries to measure the impact of unexpected exchange rate fluctuations on the net present value of the firm's future cash flows.

The value of a multinational company (MNC) increases by the _________ of the expected foreign cash flows and ________ of foreign currencies denominating these cash flows.  A. decrease; appreciation B. decrease; depreciation C. increase; depreciation D. increase; appreciation

A key issue facing financial executives of multinational firms is exposure to exchange rate changes.a. Define exposure, differentiating between accounting and economic exposure. What role does inflation play?b. Describe at least three circumstances under which economic exposure is likely to exist? c. Of what relevance are the international Fisher effect and purchasing power parity to your answers to parts a and b? d. What is exchange risk, as distinct from exposure

Which of the statements below is FALSE? A.        Multinational capital budgeting is a straightforward application of the Net Present Value (NPV. model with one twist: we can do the analysis in either domestic currency or foreign currency. B.         If we are using foreign currency for the NPV decision, all we have to do is restate all the foreign incremental cash flow in terms of future value and use the current exchange rate. C.         In conducting a multinational NPV, one must be careful to avoid differences with rounding of exchange rates, discount rates, and cash flow to produce the exact same value. D.        With the foreign currency approach in NPV analysis, if we know the appropriate discount rate in the home country and the expected inflation rates in the two countries, we can determine the appropriate foreign discount rate.

In one sense, international investing may be viewed as no more than a straight-forward generalisation of portfolio selection in a domestic market on the other hand, international investments pose problems not encountered in domestic markets. (a) In what ways can the challenges and problems of international investing be mitigated or managed? Outline and discuss the approaches in detail. (b)An investment in risk-free British government securities paying 10% annual interest in British pounds is made by an American investor who starts with $ 20 000. The current exchange rate is $2 per pound. At the end of the year the pound depreciates against the dollar. Calculate the investor’s return in both dollar and pound what if the exchange rate is $2.00, and $2.20?

A UK-based firm has identified three variables that impacts its cash flow, hence risk associated with its cashflow. The identified variables are interest rates (INT), the euro/sterling exchange rate (EXCH), and the price of gas (GAS). The relationship between the variables can be expressed as follows: Change in cash flow = ₔ+ ß1 INT + ß2 EXCH + ß3 GAS + ҙ (a) Explain the relationship as expressed in the multiple regression analysis. (b) Identify the dependent variable and independent variables and type of risks associated to each variable and how to manage these risks. (c) How do you describe the relationship between the independent variables and the dependent variable. (d) Identify and briefly explain the three commonly used approaches to quantifying financial risks.