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Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 21 >> Have studies found that more or less government involvement in a prospective project is helpful in the success of the business?
Answer Preview: Prior and early engagement with key FDI stakeholders host govern…

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 23 >> What is investment insurance, and what organizations provide such coverage?
Answer Preview: Political risk insurance, as it sounds, is insurance acquired by the multinational to serve as so…

, Chapter: 12- Operating Exposure -Problem: 12 >> Explain how matching currency cash flows can offset operating exposure.
Answer Preview: The essence of this approach is to create opera…

, Chapter: 18- Multinational Capital Budgeting & Cross-Border Acquisitions -Problem: 10 >> A foreign subsidiary does not have an independent cost of capital. However, in order to estimate the discount rate for a comparable host-country firm, the analyst should try to calculate a hypothetical cost of capital. How is this done? Discount Rate Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to
Answer Preview: As part of this process, the analyst can estimate the sub…

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 5 >> A strongly competitive home market can sharpen a firm’s competitive advantage relative to firms located in less competitive markets. This phenomenon is known as Porter’s “diamond of national advantage.” Explain what is meant by the “diamond of national advantage.”
Answer Preview: A strongly competitive home market can sharpen a firms competitive advantage relative to firms located in less competitive home markets. This phenomen…

, Chapter: 14- Funding the Multinational Firm -Problem: 24 >> What are the primary alternatives for the external financing of a foreign subsidiary?
Answer Preview: External financing types: 1) bo…

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 25 >> What are the primary pros and cons of using a gradual investing strategy to mitigate political risk?
Answer Preview: Gradual investing is where capital is invested in stages, often starting with on…

, Chapter: 2- The International Monetary System -Problem: 7 >> How does a crawling peg fundamentally differ from a pegged exchange rate?
Answer Preview: In a crawling peg system, the government will make occasional small …

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 18 >> Answer the following: a.    What is the difference between expropriation and creeping expropriation? b.    What is the difference between direct and indirect expropriation?
Answer Preview: a. Creeping expropriation is when a variety of seemingly small or individual restrictions and interv…

, Chapter: 2- The International Monetary System -Problem: 6 >> What do the terms de facto and de jure mean in reference to the International Monetary Fund's use of the terms?
Answer Preview: A countrys actual exchange rate pr…

, Chapter: 7- Foreign Currency Derivatives: Futures and Options -Problem: 18 >> What is the difference between a historic volatility and an implied volatility?
Answer Preview: Historic volatility is the standard deviation of daily sp…

, Chapter: 12- Operating Exposure -Problem: 7 >> Explain how the concept of macroeconomic uncertainty expands the scope of analyzing operating exposure.
Answer Preview: Macroeconomic uncertainty is the sensi…

, Chapter: 13- The Global Cost and Availability of Capital -Problem: 17 >> What is the paradox?
Answer Preview: The paradox is an attempt to explain under what conditions an MNE would hav…

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 14 >> How is political risk defined, and how does political risk associated with business differ from a more general political risk to all social activities? What is the difference between firm-specific risk and country-specific risk? Political Risk Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. In
Answer Preview: Political risk is the possibility that political events in a particular country will influence the e…

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 26 >> What are some of the characteristics of a well-designed dispute resolution process?
Answer Preview: A multinational firm knows, prior to investing in any specific country, that it will bare the risk t…

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 15 >> How do the major categories of potential financial losses to multinational companies associated with political risk differ across financial form – profitability, cash flow, and asset ownership? Political Risk Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment return
Answer Preview: As described in Exhibit 17 3, there are three categories of financial impact: Category I: Losses in …

, Chapter: 14- Funding the Multinational Firm -Problem: 10 >> ADRs and GDRs can be sponsored or unsponsored. What does it mean and will it matter to the investors purchasing the shares?
Answer Preview: Sponsored depositary receipts. Sponsored ADRs are created at t…

, Chapter: 3- The Balance of Payments -Problem: 9 >> What is the difference between a “real” asset and a “financial” asset?
Answer Preview: Real assets are goods (me…

, Chapter: 8- Interest Rate Risk and Swaps -Problem: 18 >> Why are there significantly larger swings in the value of a cross-currency swap than there is in a plain vanilla interest rate swap?
Answer Preview: Cross-currency swaps are subject to both …

, Chapter: 11- Translation Exposure -Problem: 17 >> What is hyperinflation and what are the consequences for translating foreign financial statements in countries experiencing hyperinflation? Financial Statements Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as cur
Answer Preview: Hyperinflation is, by definition, a very high and rapid monetary inflation, or the period dur…

, Chapter: 7- Foreign Currency Derivatives: Futures and Options -Problem: 8 >> What is the difference between the price of an option, the value of an option, the premium on an option, and the cost of a foreign currency option?
Answer Preview: They all mean the …

, Chapter: 15- Multinational Tax Management -Problem: 1 >> What is the primary objective of multinational tax planning?
Answer Preview: The primary objecti…

, Chapter: 3- The Balance of Payments -Problem: 17 >> Brazil has experienced periodic depreciation of its currency over the past 20 years despite occasionally running a current account surplus. Why has this phenomenon occurred?
Answer Preview: Brazil has experienced periodic deprecia…

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 19 >> Lawful expropriation must be accompanied by lawful compensation. What criteria have to be met to fulfill this requirement?
Answer Preview: Most international investment agreements require compensation that meets three conditions: p…

, Chapter: 6- International Parity Conditions -Problem: 18 >> If transaction costs for undertaking covered or uncovered interest arbitrage were large, how do you think it would influence arbitrage activity?
Answer Preview: It would result in large discrepan…

, Chapter: 10- Transaction Exposure -Problem: 2 >> Which of the three currency exposures relate to cash flows already contracted for, and which of the exposures do not?
Answer Preview: Transaction exposures are existing expo…

, Chapter: 15- Multinational Tax Management -Problem: 2 >> What is meant by the term ‘tax morality’? If for example, your company has a subsidiary in Russia where some believe tax evasion is a fine art, should you comply with Russian tax laws or violate the laws as do your local competitors?
Answer Preview: The MNE faces not only a morass of foreign taxes but also an ethical question. In ma…

, Chapter: 2- The International Monetary System -Problem: 8 >> What does it mean to say the international monetary system today is a global eclectic?
Answer Preview: The current global market in currency i…

, Chapter: 10- Transaction Exposure -Problem: 5 >> What – according to financial theory – is the value of a firm?
Answer Preview: According to financial …

, Chapter: 10- Transaction Exposure -Problem: 3 >> Define currency risk.
Answer Preview: Currency risk is th…

, Chapter: 3- The Balance of Payments -Problem: 2 >> What institution provides the primary source of similar statistics for balance of payments and economic performance worldwide?
Answer Preview: The primary source of similar sta…

, Chapter: 10- Transaction Exposure -Problem: 11 >> Which contract is more likely not to be performed, a payment due from a customer in foreign currency (a currency exposure), or a forward contract with a bank to exchange the foreign currency for the firm's domestic currency at a contracted rate (the currency hedge)?
Answer Preview: The forward contract agreement w…

, Chapter: 8- Interest Rate Risk and Swaps -Problem: 16 >> How do corporate borrowers use interest rate or cross currency swaps to reduce the costs of their debt?
Answer Preview: All firms are always interested in opportunities to lower the cost of their debt. The plain v…

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 20 >> What are the seven most common political risk mitigation strategies employed by multinational enterprises? Political Risk Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign...
Answer Preview: 1. Stakeholder engagement 2. Use of dom…

, Chapter: 15- Multinational Tax Management -Problem: 24 >> How is cross-border digital commerce challenging the traditional ways in which multinational companies are taxed?
Answer Preview: Digital commerce has challenged the traditional definition of where a taxable transact…

, Chapter: 8- Interest Rate Risk and Swaps -Problem: 13 >> If interest rate swaps are not the cost of government borrowing, what credit quality do they represent?
Answer Preview: Although in principle the swap marke…

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 16 >> Define the following types of political risk: a.    Adverse regulatory change b.    Breach of contract c.    Expropriation
Answer Preview: a. Adverse regulatory change, also termed regulatory risk, refers to changes in host country regulat…

, Chapter: 8- Interest Rate Risk and Swaps -Problem: 4 >> From the point of view of a borrowing corporation, what are credit and repricing risks? Explain steps a company might take to minimize both.
Answer Preview: For a corporate borrower, it is especially important to distingui…

, Chapter: 7- Foreign Currency Derivatives: Futures and Options -Problem: 9 >> What are the three different prices or ‘rates' integral to every foreign currency option contract?
Answer Preview: All currency options have th…

, Chapter: 5- The Foreign Exchange Market -Problem: 10 >> Convert the following indirect quotes to direct quotes and direct quotes to indirect quotes:a. Euro: €1.22/$ (indirect quote);b. Russia: Rub 30/$ (indirect quote);c. Canada: $0.72/C$ (direct quote);d. Denmark: $0.1644/DKr (direct quote);
Answer Preview: a. 1/1 22 = $0 8197/ (direct…

, Chapter: 15- Multinational Tax Management -Problem: 18 >> What is Section 482 of the U.S. Internal Revenue Code and what guidelines does it recommend when setting transfer prices?
Answer Preview: Most transfer pricing regulations require the use of a correct or …

, Chapter: 14- Funding the Multinational Firm -Problem: 9 >> What is the difference between a GDR, ADR, and GRS? How are these differences significant?
Answer Preview: Similar to ordinary shares, GDRs have the added benefit of being able to be traded on equity exchan…

, Chapter: 14- Funding the Multinational Firm -Problem: 5 >> What are the three key elements related to raising equity capital in the global marketplace?
Answer Preview: Equity issu…

, Chapter: 14- Funding the Multinational Firm -Problem: 18 >> What is the advantage of securiational corptized debt instruments sold on a market versus bank borrowing for multinorations?
Answer Preview: If a multinational firm is widely known in the global capital markets, it …

, Chapter: 12- Operating Exposure -Problem: 14 >> Explain how back-to-back loans can hedge foreign exchange operating exposure. Would firms have any specific worries about their partner in a back-to-back loan arrangement?
Answer Preview: Two firms in different countries lend their home curr…

, Chapter: 10- Transaction Exposure -Problem: 6 >> How does currency hedging theoretically change the expected cash flows of the firm?
Answer Preview: Hedging reduces the variability …

, Chapter: 8- Interest Rate Risk and Swaps -Problem: 10 >> What would be the preferred strategy for a borrower paying interest on a future date if they expected interest rates to rise?
Answer Preview: They should s…

, Chapter: 15- Multinational Tax Management -Problem: 25 >> What does it mean for a country—or its government—to compete for business on the basis of taxation?
Answer Preview: As global competitiveness has increased over time, the …

, Chapter: 12- Operating Exposure -Problem: 11 >> Operating exposures can be partially managed by adopting operating or financing policies that offset anticipated foreign exchange exposures. What are four of the most commonly employed proactive policies?
Answer Preview: The four most common proactive p…

, Chapter: 7- Foreign Currency Derivatives: Futures and Options -Problem: 17 >> What is an option delta? How does it change when the option is in-the-money, at-the-money, or out-of-the-money?
Answer Preview: Option It is a contract providing the right to the buyer, but not commitment …

, Chapter: 10- Transaction Exposure -Problem: 15 >> What is the difference between a balance sheet hedge, a financing hedge, and a money market hedge. Balance Sheet Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Answer Preview: A balance sheet hedge is any foreign currency denominate…

, Chapter: 12- Operating Exposure -Problem: 16 >> How do some firms attempt to hedge their long-term operation exposure with contractual hedges? What assumptions do they make in order to justify contractual hedging of their operating exposure? How effective is such contractual hedging in your opinion?
Answer Preview: The ability of firms to hedge the "unhedgeable" is dependent upon predictability: 1) the predictabil…

, Chapter: 10- Transaction Exposure -Problem: 20 >> Why do many firms only allow hedging of booked exposures, and not quotation or backlog exposures?
Answer Preview: Until the transaction exists on the accounting boo…

, Chapter: 15- Multinational Tax Management -Problem: 5 >> What is the difference between a direct tax and an indirect tax?
Answer Preview: Taxes are classified on the basis of whether they are app…

, Chapter: 17- Foreign Direct Investment & Political Risk -Problem: 17 >> What criteria have to be met for a government's seizure of a company's business to be considered ‘'lawful' by international law?
Answer Preview: The state, any state, has the sovereign right under …

, Chapter: 6- International Parity Conditions -Problem: 4 >> According to the theory of purchasing power parity, what should happen to a currency which is undervalued?
Answer Preview: Theoretically, if the currency is underv…

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