International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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1. Explain the differences and similarities between Forward, Futures, andOptions.
Then why can there be a Long Term Funding Deficit related to a company's cash flows? and Explain the meaning of international parity conditions,
and why it can be used to predict exchange rates.
and what is the meaning of foreign exchange exposure and types of foreign exchange exposure faced by multinational companies.
A UK-based firm has identified three variables that impacts its cash flow, hence risk associated with its cashflow. The identified variables are interest rates (INT), the euro/sterling exchange rate (EXCH), and the price of gas (GAS). The relationship between the variables can be expressed as follows:
Change in cash flow = ₔ+ ß1 INT + ß2 EXCH + ß3 GAS + ҙ
(a) Explain the relationship as expressed in the multiple regression analysis.
(b) Identify the dependent variable and independent variables and type of risks associated to each variable and how to manage these risks.
(c) How do you describe the relationship between the independent variables and the dependent variable. (d) Identify and briefly explain the three commonly used approaches to quantifying financial risks.
Suppose that Salem Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economic exposure of its cash flows. Salem wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the only foreign currency in which it deals).
Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios.
The following table shows Salem’s cash flows under each of these exchange rates.
Use the table to answer the question that follows.
Exchange Rate Scenario
Exchange Rate Scenario
Exchange Rate Scenario
C$1=$0.70
C$1=$0.75
C$1=$0.80
(Millions)
(Millions)
(Millions)
Sales
(1) U.S. Sales
$315
$315
$315
(2) Canadian Sales
$3.50
$4.00
$4.00
(3) Total Sales in U.S. $
$318.50
$318.75
$319.00
Cost of Materials and Operating Expenses
(4)…
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- The value of a multinational company (MNC) increases by the _________ of the expected foreign cash flows and ________ of foreign currencies denominating these cash flows. A. decrease; appreciation B. decrease; depreciation C. increase; depreciation D. increase; appreciationarrow_forwardIn an attempt to manage economic exposure, the following are examples of diversifying operating cash flows, EXCEPT: A) Diversification of sales across different countries B) Locating manufacturing facilities is various countries C) Issuing bonds in foreign countries D) Buying raw materials from more than one country Parrow_forwardStatement I - Exchange rate risk is a factor that contributes to the difficulty of the company to manage its international creditStatement II - A relaxation in collection policy that lengthens the firm collection period ultimately lengthens the firms operating cycle and cash conversion cycle a. False; False b. True; False c. True; True d. False; Truearrow_forward
- Explain how you will manage each of these situations. The major export markets of your company have suffered a substantial depreciation in their currency rates compared to the AUD.arrow_forwardExplain the International Fisher effect and Interest Rate Parity theories. If these theories exist, explain MNCs' justification to invest excess cash in foreign country. Present a situation in which investment in the foreign money market would provide a higher rate of return than the one offered at the home market.arrow_forward“Foreign exchange risk represents exposures to changes in the values of current holdings and future cash flows denominated in foreign currencies. The potential for loss arises from the process of revaluing foreign currency positions in rupee terms. The Group’s foreign exchange risk is presently limited to future cash flows in foreign currencies arising from foreign exchange transactions and translation of net open position in foreign currencies. The Group is carefully monitoring the net foreign currency exposure as well as utilizing the currency swap and forward contract to hedge the related exposure.” Assets (Rs) Liabilities (Rs) Net foreign currency exposure(Rs) United States Dollar 1,676,431 1,624,382 52,049 Great Britain Pound 40,884 73,931 -33,047 Japanese Yen 5,209 0 5,209 Euro 51,011 98,973 -47,962 Other currencies 4,489 120 4,369 1,778,024 1,797,406 -19,382 Required: Elaborate in…arrow_forward
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