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International Business Finance-Exchange rate

For your job as the business reporter for a local newspaper, you are given the assignment of putting together a series of articles on the multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in the foreign exchange markets by JGAR, a local firm that us the subsidiary of Daedlufetarg, a large German manufacturing firm. Your editor would like you to address several specific questions dealing with multinational finance. Prepare a response to the following memorandum from your editor:

TO; Business Reporter
FROM: Perry White, Editor, Daily Planet
RE: Upcoming Series on Multinational Finance

In your upcoming series on multinational finance, I would like to make sure you cover several specific points. In addition, before you begin this assignment, I want to make sure we are all reading from the same script, as accuracy has always been the cornerstone of the Daily Planet. I'd like a response to the following questions before we proceed:

1. What new problems and factors are encountered in international as opposed to domestic financial management?
2. What do the term arbitrage profits mean?
3. What can as firm do to reduce exchange risk?
4. What are the differences between a forward contract, a future contract, and options?

Use the following data in your response to the remaining questions:

Selling Quotes for Foreign Currencies in New York

Country-Currency Contract S/Foreign

Canada-dollar Spot 0.8450
30-day 0.8415
90-day 0.8390
Japan-Yen Spot 0.004700
30-day 0.004750
90-day 0.004820
Switzerland-franc Spot 0.5150
30-day 0.5182
90-day 0.5328

5. An America business needs to pay (a) 15,000 Canadian dollars (b) 1.5 million yen, and (c) 55,000 Swiss franc to business abroad. What are the dollar payments to the respective countries?
6. An American business pays $20,000, $5,000, and $15,000 to supplier in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive?
7. Compute the indirect quote for the spot and forward Canadian dollar Contract?
8. You own $10,000. The dollar rate in Tokyo is 216.6752. The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set-up an arbitrage scheme with your capital. What is the gain (loss) in dollars?
9. Compute the Canadian dollar/yen spot rate from the data in the preceding table hide problem

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1. What new problems and factors are encountered in international as opposed to domestic financial management?
"International finance distinguishes itself from domestic finance due to exchange rate, cross border barriers and financing opportunities in the global market.
Foreign Risks: International trade and investment requires dealing with foreign currencies, receiving the foreign exchange in the future or paying the foreign exchange in the future, which exposes a company/investor to currency risk, which is the risk of an adverse exchange rate movement. Also, there are potential political Risks for multinationals making investments and doing business overseas. Building production facilities overseas is a long term investment. Political climate can change and present risks. It may be difficult to enforce a contract in a foreign country.
Market Imperfections/Barriers to Trade: Various frictions and impediments, such as protectionist legislation, dumping laws, trade restrictions, tariffs, quotas, etc. present threats and opportunities. Honda produces cars in the United States of America to circumvent trade protection against Japanese cars in the USA. Also there are differences in tax treatment across countries.

Expanded Opportunities: Multinationals have access to larger markets to buy/sell/produce products. Investors have access to an expanded set of investment opportunities which can result in reduced risk exposure and/or higher returns through international diversification.

2. What does the term arbitrage profits mean?

Arbitrage profit means riskless profit. One enters into two or more contracts simultaneously to benefit from price discrepancies to make riskless profit.

3. What can a firm do to reduce exchange ...

Solution Summary

Answers questions on international financial management, arbitrage profits, exchange risk, forward contract, future contract, options, exchange rate calculations.