1. Crusader Co. expects to receive 20 millioneuros in each of the next 10 years. It will need to obtain 4 million Mexican pesos in each of the next 10 years. The euro exchange rate is presently valued at $1.38 and is expected to depreciate by 3 percent each year over time. The peso is valued at $.13 and is expected to depreciate by 3 percent each year over time. Review the valuation equation for an MNC. Do you think that the exchange rate movements will have a favorable or unfavorable effect on the MNC?
2. What are agency costs?
Are agency costs larger for an MNC than for a purely domestic firm? Why or why not?
3. What is the theory of comparative advantage and explain how the theory relates to the need for international business?
What is the product cycle theory and explain how the theory relates to the growth of an MNC?
4. How would a relatively low home inflation rate affect the home country’s current account, other things being equal?
Is a negative current account harmful to a country? Why or why not?
5. Assume that the U.S. inflation rate becomes low relative to South Korea inflation. Other things being equal, how should this affect the (a) U.S. demand for South Korean won, (b) supply of South Koreanwon for sale, and (c) equilibrium value of the South Koreanwon?
6. Assume U.S. interest rates increase relative to Argentina interest rates. Other things being equal, how should this affect the (a) U.S. demand for Argentinean pesos, (b) supply of pesos for sale, and (c) equilibrium value of the peso?
7. Assume that the U.S. income level rises at a much higher rate than does the British income level. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of British pounds for sale, and (c) equilibrium value of the British pounds?
Assuming no effect on U.S. interest rates, demand for Canadian dollars should increase, supply of Canadian dollars for sale may not be affected, and the Canadian dollar’s value should increase.
8. How can currency futures be used for hedging?
How can currency futures be used for speculating?
1. When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging?
Paraphrase the answer: A call option can hedge a firm’s future payables denominated in euros. It effectively locks in the maximum price to be paid for euros.
A put option on euros can hedge a U.S. firm’s future receivables denominated in euros. It effectively locks in the minimum price at which it can exchange euros received
2. Assume that the U.S. income level rises at a much higher rate than does the British income level. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of British pounds for sale, and (c) equilibrium value of the British pounds?
Paraphrase the answer: Assuming no effect on U.S. interest rates, demand for Canadian dollars should increase, supply of Canadian dollars for sale may not be affected, and the Canadian dollar’s value should increase.
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