International Finance

1. Frizzell Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
A) sell euros forward.
B) purchase euro currency put options.
C) purchase euro currency call options.
D) purchase euros forward.
E) remain unhedged.

2. Assume that Hoseman Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Todayâ??s spot rate of the S$ is $.50, and the 180 day forward rate is $.53. A call option on S$ exists, with an exercise price of $.52, a premium of $.02, and a 180 day expiration date. A put option on S$ exists, with an exercise price of $.51, a premium of $.02, and a 180 day expiration date. Hoseman has developed the following probability distribution for the spot rate in 180 days:

Possible Spot Rate
in 90 Days Probability
$.48 10%
$.53 60%
$.55 30%

The probability that the forward hedge will result in a higher payment than the options hedge is _______ (include the amount paid for the premium when estimating the U.S. dollars required for the options hedge).
A) 0% B) 10% C) 30% D) 40% E) 70%

3. A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency _______ in year 1 and _______ in years 2 though 5.

A) depreciates; depreciates
B) appreciates; appreciates
C) depreciates; appreciates
D) appreciates; depreciates

4.Other things being equal, a foreign subsidiary in China would more likely be divested by the U.S. parent if new information caused the parent to suddenly anticipate that:
A)the Chinese yuan would depreciate in the future.
B)the Chinese yuan would appreciate in the future.
C)the Chinese yuan would remain somewhat stable in the future.
D)none of these; the value of the Chinese yuan has no impact on the feasibility of a divestiture.

5. The term â??local target capital structureâ? is used in the text to represent the:
A) average capital structure of local firms where the MNCâ??s subsidiary is based.
B) average capital structure of local firms where the MNCâ??s parent is based.
C) desired capital structure of a subsidiary of a particular MNC.
D) desired capital structure of a particular MNC overall (including all subsidiaries).

6. A firm forecasts the euroâ??s value as follows for the next year:
Possible Percentage Change Probability
â?"2% 10%
3% 50%
6% 40%

The annual interest rate on euro is 7%. The expected value of the effective financing rate from a U.S. firmâ??s perspective is about:

A) 8.436%.
B) 10.959%.
C) 11.112%.
D) 11.541%.