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International Finance (MNEs)

1. Distinguish the cost of capital for a purely domestic corporation and an MNE; support with explanations and rationale.

2. Contrast the use of calls and puts and determine which scenarios would be better suited to one over the other. Provide examples of each in the context of an MNE.

3. Contrast a direct quote versus an indirect quote when considering foreign exchange of currency.

4. How does balance of payments impact foreign exchange rates?

5. How is political risk assessed in the context of an MNE? What factors should be considered when considering FDI? Address the various levels of FDI that mitigate risk.

Please answer each question separately; 150-200 words each question, APA style, at least 1 citation per question may be the same for every question if applicable.

Solution Preview

See attached file for solution.

International Finance
1. Distinguish the cost of capital for a purely domestic corporation and an MNE; support with explanations and rationale.
MNCs have different cost of capital than domestic firms due to many differences in the structure and the way they operate.
MNCs have larger size than domestic companies due to which they are given preferential treatment by creditors.
MNCs have access to international markets while domestic company does not have such access. Hence MNCs may obtain funds from international markets where cost is lower.
MNCs have more stable earnings due to diverse operations due to which they have reduced cost of capital. Their chances of bankruptcy are lower. Hence creditors may be willing to provide funds to MNCs at lower rate of return.
However there are MNCs which may be exposed to higher risk than domestic companies due to exchange rate fluctuations. If these MNCs do not hedge against the risk they may have more financial problems than domestic companies which do not face such risk. In such cases cost of capital is higher.
Reference:
Multinational cost of capital and capital structure. (n.d). Retrieved from http://raptor1.bizlab.mtsu.edu/s-drive/FMICHELLO/Applied%2520Interanational%2520Financial%2520Management/Solutions%2520Manual/0538482214_IFM10e_IM_Ch17.doc&sa=U&ei=shcLUonxF8iplQWUjIHoBA&ved=0CC8QFjAH&usg=AFQjCNHN5DHtUbtvJXmA2TMIfiJDRsJO-g
2. Contrast the use of calls and puts and determine which scenarios would be better suited to one over the other. Provide examples of each in the context of an MNE.
There are two types of options - call option and put option. A call option ...

Solution Summary

The expert distinguishes the cost of capital for a purely domestic corporation and an MNE. The use of calls and puts are contrasts.

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