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Multinational Corporate Finance

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1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its
bid ask percentage spread is:

a) 4.44%.
b) 4.26%.
c) 4.03%.
d) 4.17%.

2. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35.
The value of the Peruvian Sol in Canadian dollars is:

a) 0.3621 Canadian dollars.
b) 0.3977 Canadian dollars.
c) 2.36 Canadian dollars.
d) 2.51 Canadian dollars

3. The ADR of a British firm is convertible into 3 shares of stock. The share price of the
firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $_______.

a) 48.90
b) 146.70
c) 55.21
d) none of the above

4. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the
Australian dollar was $0.69. The Australian dollar ________ by _______%.

a) depreciated; 5.80
b) depreciated; 4.00
c) appreciated; 5.80
d) appreciated; 4.00

5. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro
is $1.05. What is the annualized forward premium or discount of the euro?

a) 1.9 percent discount.
b) 1.9 percent premium.
c) 7.6 percent premium.
d) 7.6 percent discount.

6. You are a speculator who sells a put option on Canadian dollars for a premium of
$.03 per unit, with an exercise price of $.86. The option will not be exercised until
the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the
expiration date, your net profit per unit is:

a) $.08
b) $.03
c) $.05
d) $.08
e) none of the above

7. Carl is an option writer. In anticipation of a depreciation of the British pound from its
current level of $1.50 to $1.45, he has written a call option with an exercise price of
$1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be
$1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts
rationally)?

a) -$0.01
b) $0.01
c) -$0.04
d) $0.04
e) -$0.03

8. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is
$.66. The forward rate exhibits a _______ of _______.

a) premium; about 6%
b) discount; about 6%
c) discount; about 6.45%
d) premium; about 6.45%

9. Assume the following information:

U.S. investors have $1,000,000 to invest
1-year deposit rate offered on U.S. dollars = 12%
1-year deposit rate offered on Singapore dollars = 10%
1-year forward rate of Singapore dollars = $.412
Spot rate of Singapore dollar = $.400

Given this information:
a) interest rate parity exists and covered interest arbit¬rage by U.S investors
results in the same yield as investing domestically.
b) interest rate parity doesn't exist and covered interest arbitrage by U.S.
investors results in a yield above what is possible domestically.
c)interest rate parity exists and covered interest arbit¬rage by U.S. investors
results in a yield above what is possible domesti¬cally.
d) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

10. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at
Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate
is $.325 at Bank Y. Given this informa¬tion, what would be your gain if you use
$1,000,000 and execute locational arbitrage? That is, how much will you end up
with over and above the $1,000,000 you started with?

a) $15,385.
b) $15,625.
c) $22,136.
d) $31,250.

11. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute loca¬tional arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

a) $11,764.
b) $11,964.
c) $36,585.
d) $24,390.
e) $18,219.

12. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80.
What is the value of the Canadian dollar in pounds?

a) 2.00
b) 2.40
c) .80
d) .50
e) none of the above

13.According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one year, and a 2% rate of inflation in European countries that use the euro, and require a 3% real return on invest¬ments over one year, the nominal interest rate on one year U.S. Treasury securities would be:

a) 9%.
b) 3%.
c) 2%.
d) 5%.
e) 8%.

14.Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will _______ by about _______.

a) appreciate; 3%
b) appreciate; 1%
c) depreciate; 3%
d) appreciate; 2%

15.The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 1.3%. The
current exchange rate for the Japanese yen (¥) is $0.0075. After supply and
demand for the Japanese yen has adjusted in the manner suggested by purchasing
power parity, the new exchange rate for the yen will be:

a) $0.0076
b) $0.0075
c) $0.0074
d) $0.0131
e) none of the above

16.You have an opportunity to invest in Australia at an interest rate of 8%. Moreover,
you expect the Australian dollar (A$) to appreciate by 2%. Your effective return from
this investment is:

a) 8.00%.
b) 6.00%.
c) 10.16%.
d) 5.88%.

17. If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then
the British pound (£) is expected to ____________ by about _________%,
according to the international Fisher effect (IFE).

a) depreciate; 2.9
b) appreciate; 2.9
c) depreciate; 1.0
d) appreciate; 1.0

18. Silicon Co. has forecasted the Canadian dollar for the most recent period to be $0.73. The realized value of the Canadian dollar in the most recent period was $0.80. Thus, the absolute forecast error as a percentage of the realized value was ______%.

a) 9.6
b) -9.6
c) 8.8
d) -8.8

19. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:

a) $.860
b) $.848
c) $.740
d) $.752
e) none of the above

20. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another
subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the
parent company. The German subsidiary generated a net outflow of ?2,000,000 this
year, while the Greek subsidiary generated a net inflow of ?1,500,000. What is the
net inflow or outflow as measured in U.S. dollars this year? The exchange rate for
the euro is $1.05.

a) $3,675,000 outflow
b) $525,000 outflow
c) $525,000 inflow
d) $210,000 outflow

21. Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to
the Netherlands. Cerra estimates the standard deviation of daily percentage
changes of the euro to be 1 percent over the last 100 days. Assume that these
percentage changes are normally distributed. Using the value-at-risk (VAR) method
based on a 95% confidence level, what is the maximum one-day loss in dollars if the
expected percentage change of the euro tomorrow is 0.5%? The current spot rate of
the euro (before considering the maximum one-day loss) is $1.01.

a) -$ 75,750
b) -$ 60,600
c) -$111,100
d) -$ 25,250

22. Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments
denominated in both euros and Canadian dollars in one month. Based on today's
spot rates, the dollar value of the funds to be received is estimated at $500,000 for
the euros and $300,000 for the Canadian dollars. Based on data for the last fifty
months, Volusia estimates the standard deviation of monthly percentage changes to
be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation
coefficient between the euro and the Canadian dollar is 0.30. Assuming an expected
percentage change of 0 percent for each currency during the next month, what is the
maximum one-month loss of the currency portfolio? Use a 95 percent confidence
level and assume the monthly percentage changes for each currency are normally
distributed.

a) -9.00%.
b) -30.00%.
c) -5.00%.
d) none of the above

23. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to
determine the total dollar amount received (after accounting for the option premium)
if the firm purchases and exercises a put option:

Exercise price = $.61
Premium = $.02
Spot rate = $.60
Expected spot rate in 30 days = $.56
30 day forward rate = $.62

a) $630,000
b) $610,000
c) $600,000
d) $590,000
e) $580,000

24. The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist:

U.S. Switzerland
360 day borrowing rate 7% 5%
360 day deposit rate 6% 4%

You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:

a) $101,904
b) $101,923
c) $ 98,770
d) $ 96,914
e) $ 92,307.

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Solution Preview

1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its
bid ask percentage spread is:

b) 4.26%.

Bid ask percentage spread = ($.47 - $.45)/$.47 = 4.26%

2. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35.
The value of the Peruvian Sol in Canadian dollars is:

b) 0.3977 Canadian dollars.

$.35/$.88 = .3977

3. The ADR of a British firm is convertible into 3 shares of stock. The share price of the
firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $_______.

b) 146.70

3 × 30 × $1.63 = $146.70

4. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the
Australian dollar was $0.69. The Australian dollar ________ by _______%.

c) appreciated; 5.80

($0.73 - $0.69)/$0.69 = 5.80%

5. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro
is $1.05. What is the annualized forward premium or discount of the euro?

c) 7.6 percent premium.

[(F/S) - 1] × 360/90 = 7.6 percent

6. You are a speculator who sells a put option on Canadian dollars for a premium of
$.03 per unit, with an exercise price of $.86. The option will not be exercised until
the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the
expiration date, your net profit per unit is:

e) none of the above

Net profit = $.78 + $.03 - $.86 = -$.05.

7. Carl is an option writer. In anticipation of a depreciation of the British pound from its
current level of $1.50 to $1.45, he has written a call option with an exercise price of
$1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be
$1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts
rationally)?

a) -$0.01

The net profit per unit is $1.51 + $.02 - $1.54 = -$.01.

8. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is
$.66. The forward rate exhibits a _______ of _______.

d) premium; about 6.45%

Premium = (Forward rate - Spot rate)/Spot rate = ($.66 - $.62)/$.62 = 6.45%

9. Assume the following ...

Solution Summary

The solution answers various multinational corporate finance questions.

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Internattional Finance

True/False
______ 1. Multinational financial management requires that financial analysts consider the effects of changing currency values.
____ 2.
Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations and subsidiaries.
____ 3.
When the value of the U.S. dollar appreciates against another country's currency, we may purchase more of the foreign currency with a dollar.
____ 4.
The United States and most other major industrialized nations currently operate under a system of floating exchange rates.
____ 5.
Exchange rate quotations consist solely of direct quotations.
____ 6.
Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.
____ 7.
A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
____ 8.
LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U.S. corporations.
____ 9.
Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company's currency, will be worth less than was originally projected because of exchange rate changes.
____ 10.
Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.
____ 11.
Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.
____ 12.
If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.
____ 13.
If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate.
____ 14.
A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.
____ 15.
The cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.
____ 16.
The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.
____ 17.
When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.
Multiple Choice
Which of the following are reasons why companies move into international operations?
a. To take advantage of lower production costs in regions where labor costs are relatively low.
b. To develop new markets for the firm's products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.

____ 19.
Multinational financial management requires that
a. The effects of changing currency values be included in financial analyses.
b. Legal and economic differences need not be considered in financial decisions because these differences are insignificant.
c. Political risk should be excluded from multinational corporate financial analyses.
d. Traditional U.S. and European financial models incorporating the existence of a competitive marketplace not be recast when analyzing projects in other parts of the world.
e. Cultural differences need not be accounted for when considering firm goals and employee management.

____ 20.
If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will
a. Appreciate against the U.S. dollar.
b. Depreciate against the U.S. dollar.
c. Remain unchanged against the U.S. dollar.
d. Appreciate against other major currencies.
e. Appreciate against the dollar and other major currencies.

____ 21.
In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?
a. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
b. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
c. The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.
d. The yen-dollar exchange rate in the 180-day forward market equals the yen-dollar exchange rate in the 90-day spot market.
e. The relationship between spot and forward interest rates cannot be inferred.

____ 22.
Which of the following statements is NOT CORRECT?
a. Any bond sold outside the country of the borrower is called an international bond.
b. Foreign bonds and Eurobonds are two important types of international bonds.
c. Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
d. The term Eurobond applies only to foreign bonds denominated in U.S. currency.
e. A Eurodollar is a U.S. dollar deposited in a bank outside the U.S.

____ 23.
Currently, a U.S. trader notes that in the 6-month forward market, the Japanese yen is selling at a premium (that is, you receive more dollars per yen in the forward market than you do in the spot market), while the British pound is selling at a discount. Which of the following statements is CORRECT?
a. If interest rate parity holds, 6-month interest rates should be the same in the U.S., Britain, and Japan.
b. If interest rate parity holds among the three countries, the United States should have the highest 6-month interest rates and Japan should have the lowest rates.
c. If interest rate parity holds among the three countries, Britain should have the highest 6-month interest rates and Japan should have the lowest rates.
d. If interest rate parity holds among the three countries, Japan should have the highest 6-month interest rates and Britain should have the lowest rates.
e. If interest rate parity holds among the three countries, the United States should have the highest 6-month interest rates and Britain should have the lowest rates.

____ 24.
Today in the spot market $1 = 1.82 Swiss francs and $1 = 130 Japanese yen. In the 90-day forward market, $1 = 1.84 Swiss francs and $1 = 127 Japanese yen. Assume that interest rate parity holds worldwide. Which of the following statements is most CORRECT?
a. Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Swiss securities.
b. Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Japanese securities.
c. Interest rates on 90-day risk-free U.S. securities equal the interest rates on 90-day risk-free Japanese securities.
d. Since interest rate parity holds interest rates should be the same in all three countries.
e. Interest rates on 90-day risk-free U.S. securities equal the interest rates on 90-day risk-free Swiss securities.

____ 25.
If one Swiss franc can purchase $0.85 U.S. dollars, how many Swiss francs can one U.S. dollar buy?
a. 1.2588
b. 1.1765
c. 1.3647
d. 1.2471
e. 1.0824

____ 26.
If one U.S. dollar buys 1.46 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?
a. 0.7123
b. 0.5548
c. 0.6849
d. 0.5685
e. 0.6781

____ 27.
If one British pound can purchase $1.90 U.S. dollars, how many British pounds can one U.S. dollar buy?
a. 0.4947
b. 0.6105
c. 0.4053
d. 0.5263
e. 0.4579

____ 28.
If one U.S. dollar buys 0.72 euro, how many dollars can you purchase for one euro?
a. 1.0417
b. 1.5694
c. 1.3889
d. 1.2917
e. 1.0556

____ 29.
If one U.S. dollar sells for 0.51 British pound, how many dollars should one British pound sell for?
a. 1.9020
b. 2.2941
c. 1.5294
d. 2.0588
e. 1.9608

____ 30.
Suppose 144 yen could be purchased in the foreign exchange market for one U.S. dollar today. If the yen depreciates by 23.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
a. 136.3824
b. 177.1200
c. 132.8400
d. 145.2384
e. 157.6368

____ 31.
Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?
a. 12.88%
b. 12.75%
c. 10.63%
d. 15.38%
e. 12.50%

____ 32.
Suppose DeGraw Corporation, a U.S. exporter, sold a solar heating station to a Japanese customer at a price of 139.0 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, DeGraw agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would DeGraw actually receive after it exchanged yen for U.S. dollars?
a. $900,259.07
b. $711,204.66
c. $1,008,290.16
d. $954,274.61
e. $702,202.07

____ 33.
Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 0.50 euros. What is the cross rate of Swiss francs to euros?
a. 2.9046
b. 3.0738
c. 2.8200
d. 2.3970
e. 3.1584

____ 34.
Suppose that currently, 1 British pound equals 1.98 U.S. dollars and 1 U.S. dollar equals 1.40 Swiss francs. How many Swiss francs are needed to purchase 1 pound?
a. 2.3008
b. 3.1046
c. 2.5225
d. 2.8274
e. 2.7720

____ 35.
A currency trader observes the following quotes in the spot market:
1 U.S. dollar = 1.21 Japanese yen
1 British pound = 2.25 Swiss francs
1 British pound = 1.65 U.S. dollars
Given this information, how many yen can be purchased for 1 Swiss franc?
a. 1.0471
b. 1.0382
c. 0.8873
d. 0.9494
e. 0.6832

____ 36.
A currency trader observes the following quotes in the spot market:
1 U.S. dollar = 10.875 Mexican pesos
1 British pound = 3.955 Danish krone
1 British pound = 1.65 U.S. dollars
Given this information, how many Mexican pesos can be purchased for 1 Danish krone?
a. 5.3083
b. 3.6750
c. 5.6259
d. 3.4935
e. 4.5370

____ 37.
If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ______________ to the spot rate.
a. 6.09% premium
b. 6.76% premium
c. 7.51% discount
d. 8.35% discount
e. 9.18% discount

____ 38.
Suppose one British pound can purchase 1.82 U.S. dollars today in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days?
a. $1.4860
b. $1.6511
c. $1.8346
d. $2.0384
e. $2.2422

____ 39.
Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.665 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?
a. $242.57
b. $259.55
c. $208.61
d. $213.46
e. $269.25

____ 40.
Suppose a U.S. firm buys $200,000 worth of television tubes from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.975 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?
a. $5,088.63
b. $7,012.38
c. $5,336.85
d. $6,205.64
e. $6,391.81

____ 41.
Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.50. If interest rate parity holds, what is the spot exchange rate ($/£)?
a. $1.5074
b. $1.4019
c. $1.4924
d. $1.5376
e. $1.7185

____ 42.
Suppose hockey skates sell in Canada for 165 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States?
a. $94.89
b. $99.58
c. $113.64
d. $131.21
e. $117.15

____ 43.
Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.255 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?
a. 20.96%
b. 13.17%
c. 18.89%
d. 17.33%
e. 20.27%

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