International Financial Management Chapters 8 to 11 Questions Paper Read Chapters 8, 9, 10 & 11 (APA style) INTERNATIONAL FINANCIAL MANAGEMENT, 11e Jeff

International Financial Management Chapters 8 to 11 Questions Paper Read Chapters 8, 9, 10 & 11 (APA style)


Don't use plagiarized sources. Get Your Custom Essay on
International Financial Management Chapters 8 to 11 Questions Paper Read Chapters 8, 9, 10 & 11 (APA style) INTERNATIONAL FINANCIAL MANAGEMENT, 11e Jeff
Get an essay WRITTEN FOR YOU, Plagiarism free, and by an EXPERT!
Order Essay

Jeff Madura

ISBN: 978-0538-482-967

Chapter 8

Mexican interest rates are normally substantially higher than U.S. interest rates.

a. What does this imply about the inflation differential (Mexico inflation minus U.S. inflation), assuming that the peso interest rate is the same in both countries? Does this imply that the Mexican peso will appreciate or depreciate? Explain.

b. It may be argued that the high Mexican interest rate should entice U.S. investors to invest in Mexican money market securities, which could cause the peso to appreciate. Reconcile this theory with your answer (a). If you believe that the high Mexican interest rate does not entice U.S. investors, explain why.

c. Assume that the difference between Mexican and U.S. interest rates is typically attributed to a difference in expected inflation in the two countries. Also assume that purchasing power parity holds. Do you think that your business cash flows would be adversely affected? In reality, purchasing power parity does not hold consistently. Assume that the inflation differential (Mexico inflation minus U.S. inflation) is not fully offset by the exchange rate movement of the peso. Would this benefit or hurt your business? Now assume that the inflation differential is more than offset by the exchange rate movement of the peso. Would this benefit or hurt your business?

Chapter 9

a. Mexican interest rates are normally substantially higher than U.S. interest rates. What does this imply about the forward rate as a forecast of the future spot rate?

b. Does the forward rate reflect a forecast of appreciation or depreciation of the Mexican peso? Explain how the degree of the expected change implied by the forward rate forecast is tied to the interest rate differential.

c. Do you think that today’s forward rate or today’s spot rate of the peso would be a better forecast of the future spot rate of the peso.

Chapter 10

Recall that your Mexican business invoices in Mexican pesos.

a. You are already aware that a decline in the value of the peso could reduce your dollar cash flows. Yet, according to purchasing power parity, a weak peso should only occur in response to a high level of Mexican inflation, and such high inflation should increase your profits. If this theory holds precisely, your cash flows would not really be exposed. Should you be concerned about your exposure, or not? Explain.

b. If you shift your invoicing policy to be only in dollars, how will your transaction exposure be affected?

c. Why might the demand for your business change if you shift your invoice policy? What are the implications for economic exposure?

Chapter 11

Mexican interest rates are normally substantially higher than U.S. interest rates.

a. Assuming that interest rate parity exists, do you think hedging with a forward rate would be beneficial if the spot rate of the Mexican peso was expected to decline slightly over time?

b. Would hedging with a money market hedge be beneficial if the spot rate of the Mexican peso was expected to decline slightly over time (assume zero transaction costs)? Explain.

c. What are some limitations on using currency futures or options that may make it difficult for you to perfectly hedge against exchange rate risk over the next year or so. This is an electronic version of the print textbook. Due to electronic rights restrictions,
some third party content may be suppressed. Editorial review has deemed that any suppressed
content does not materially affect the overall learning experience. The publisher reserves the right
to remove content from this title at any time if subsequent rights restrictions require it. For
valuable information on pricing, previous editions, changes to current editions, and alternate
formats, please visit to search by ISBN#, author, title, or keyword for
materials in your areas of interest.
International Financial
Florida Atlantic University
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
International Financial Management,
11th Edition
Jeff Madura
Vice President of Editorial, Business: Jack
W. Calhoun
Editor-in-Cheif: Joe Sabatino
Executive Editor: Mike Reynolds
© 2012, 2010 South-Western, Cengage Learning
ALL RIGHTS RESERVED. No part of this work covered by the copyright
herein may be reproduced, transmitted, stored, or used in any form or by
any means graphic, electronic, or mechanical, including but not limited
to photocopying, recording, scanning, digitizing, taping, web distribution,
information networks, or information storage and retrieval systems,
except as permitted under Section 107 or 108 of the 1976 United States
Copyright Act, without the prior written permission of the publisher.
Developmental Editor: Kendra Brown
Senior Editorial Assistant: Adele Scholtz
Marketing Manager: Nathan Anderson
Marketing Coordinator: Suellen Ruttkay
Director, Content and Media Production:
Barbara Fuller Jacobsen
Content Project Managers: Emily Nesheim
and Scott Dillon
Supervising Media Editor: Scott Fidler
Manufacturing Planner: Kevin Kluck
Production Service: Integra
For product information and technology assistance, contact us at
Cengage Learning Customer & Sales Support, 1-800-354-9706
For permission to use material from this text or product,
submit all requests online at
Further permissions questions can be emailed to
ExamView® is a registered trademark of eInstruction Corp. Windows is
a registered trademark of the Microsoft Corporation used herein under
license. Macintosh and Power Macintosh are registered trademarks of
Apple Computer, Inc. used herein under license. © 2008 Cengage
Learning. All Rights Reserved.
Senior Art Director: Michelle Kunkler
Internal Designer: Juli Cook/Plan-ItPublishing
Cover Designer: Red Hangar Design
Cover Image: © Zhanghaitao/
Rights Acquisitions Director: Audrey
Rights Acquisitions Specialist: Sam
Library of Congress Control Number: 2009933901
ISBN-13: 978-0-538-48296-7
ISBN-10: 0-538-48296-6
5191 Natorp Boulevard
Mason, OH 45040
Cengage Learning products are represented in Canada by
Nelson Education, Ltd.
For your course and learning solutions, visit
Purchase any of our products at your local college store or at our
preferred online store
Printed in the United States of America
1 2 3 4 5 6 7 15 14 13 12 11
Dedicated to Mary
Brief Contents
About the Author
PART 1: The International Financial Environment
Multinational Financial Management: An Overview
International Flow of Funds 29
International Financial Markets 57
Exchange Rate Determination 99
Currency Derivatives 123
PART 2: Exchange Rate Behavior
Government Influence on Exchange Rates 177
International Arbitrage and Interest Rate Parity 211
Relationships among Inflation, Interest Rates, and Exchange Rates
PART 3: Exchange Rate Risk Management
Forecasting Exchange Rates 283
Measuring Exposure to Exchange Rate Fluctuations 311
Managing Transaction Exposure 341
Managing Economic Exposure and Translation Exposure 379
PART 4: Long-Term Asset and Liability Management
Direct Foreign Investment 403
Multinational Capital Budgeting 421
International Corporate Governance and Control 457
Country Risk Analysis 483
Multinational Capital Structure and Cost of Capital 507
Long-Term Debt Financing 531
PART 5: Short-Term Asset and Liability Management
19 Financing International Trade 559
20 Short-Term Financing 579
21 International Cash Management 601
Appendix A: Answers to Self-Test Questions 635
Appendix B: Supplemental Cases 648
Appendix C: Using Excel to Conduct Analysis 669
Appendix D: International Investing Project 676
Appendix E: Discussion in the Boardroom 679
Glossary 687
Index 695
Preface xxi
About the Author xxix
PART 1: The International Financial Environment
Managing the MNC, 3
How Business Disciplines Are Used to Manage the MNC, 4
Agency Problems, 4
Management Structure of an MNC, 6
Why Firms Pursue International Business, 8
Theory of Comparative Advantage, 8
Imperfect Markets Theory, 8
Product Cycle Theory, 8
How Firms Engage in International Business, 9
International Trade, 10
Licensing, 10
Franchising, 11
Joint Ventures, 11
Acquisitions of Existing Operations, 11
Establishing New Foreign Subsidiaries, 11
Summary of Methods, 12
Valuation Model for an MNC, 13
Domestic Model, 13
Multinational Model, 14
Valuation of an MNC That Uses Two Currencies, 14
Valuation of an MNC That Uses Multiple Currencies, 15
Uncertainty Surrounding an MNC’s Cash Flows, 16
How Uncertainty Affects the MNC’s Cost of Capital, 17
Organization of the Text, 18
Summary, 19
Point Counter-Point: Should an MNC Reduce Its Ethical Standards to Compete
Internationally?, 19
Self-Test, 19
Questions and Applications, 20
Advanced Questions, 21
Discussion in the Boardroom, 24
Running Your Own MNC, 24
Blades, Inc. Case: Decision to Expand Internationally, 24
Small Business Dilemma: Developing a Multinational Sporting Goods Corporation, 25
Internet/Excel Exercises, 26
Online Articles with Real World Examples, 26
Term Paper on the International Credit Crisis, 27
Balance of Payments, 29
Current Account, 29
Capital and Financial Accounts, 31
Growth in International Trade, 32
Events That Increased Trade Volume, 32
Impact of Outsourcing on Trade, 34
Trade Volume among Countries, 35
Trend in U.S. Balance of Trade, 37
Factors Affecting International Trade Flows, 38
Cost of Labor, 39
Impact of Inflation, 39
Impact of National Income, 39
Impact of Government Policies, 39
Impact of Exchange Rates, 42
International Capital Flows, 46
Factors Affecting Direct Foreign Investment, 46
Factors Affecting International Portfolio Investment, 47
Impact of International Capital Flows, 47
Agencies that Facilitate International Flows, 49
International Monetary Fund, 49
World Bank, 50
World Trade Organization, 50
International Financial Corporation, 51
International Development Association, 51
Bank for International Settlements, 51
OECD, 51
Regional Development Agencies, 51
Summary, 52
Point Counter-Point: Should Trade Restrictions Be Used to Influence Human Rights
Issues?, 52
Self-Test, 52
Questions and Applications, 53
Advanced Questions, 53
Discussion in the Boardroom, 54
Running Your Own MNC, 54
Blades, Inc. Case: Exposure to International Flow of Funds, 54
Small Business Dilemma: Identifying Factors That Will Affect the Foreign Demand at the
Sports Exports Company, 55
Internet/Excel Exercises, 55
Online Articles with Real World Examples, 56
Foreign Exchange Market, 57
History of Foreign Exchange, 57
Foreign Exchange Transactions, 58
Foreign Exchange Quotations, 60
Interpreting Foreign Exchange Quotations, 63
International Money Market, 68
Origins and Development, 68
Money Market Interest Rates among Currencies, 69
International Credit Market, 71
Regulations in the Credit Market, 71
Syndicated Loans in the Credit Market, 73
Impact of the Credit Crisis on the Credit Market, 73
International Bond Market, 74
Eurobond Market, 75
Development of Other Bond Markets, 76
Risk of International Bonds, 76
Impact of the Greek Crisis on Bonds, 77
International Stock Markets, 78
Issuance of Stock in Foreign Markets, 78
Issuance of Foreign Stock in the United States, 79
Non-U.S. Firms Listing on U.S. Exchanges, 80
Investing in Foreign Stock Markets, 81
How Financial Markets Serve MNCs, 84
Summary, 85
Point Counter-Point: Should Firms That Go Public Engage in International
Offerings?, 85
Self-Test, 85
Questions and Applications, 85
Advanced Questions, 86
Discussion in the Boardroom, 87
Running Your Own MNC, 87
Blades, Inc. Case: Decisions to Use International Financial Markets, 88
Small Business Dilemma: Use of the Foreign Exchange Markets by the Sports Exports
Company, 88
Internet/Excel Exercises, 89
Online Articles with Real World Examples, 89
Appendix 3: Investing in International Financial Markets, 90
Measuring Exchange Rate Movements, 99
Exchange Rate Equilibrium, 100
Demand for a Currency, 101
Supply of a Currency for Sale, 101
Equilibrium, 102
Factors That Influence Exchange Rates, 103
Relative Inflation Rates, 104
Relative Interest Rates, 105
Relative Income Levels, 106
Government Controls, 107
Expectations, 107
Interaction of Factors, 108
Influence of Factors across Multiple Currency Markets, 109
Movements in Cross Exchange Rates, 110
Explaining Movements in Cross Exchange Rates, 111
Anticipation of Exchange Rate Movements, 112
Institutional Speculation Based on Expected Appreciation, 112
Institutional Speculation Based on Expected Depreciation, 112
Speculation by Individuals, 113
The “Carry Trade”, 114
Summary, 115
Point Counter-Point: How Can Persistently Weak Currencies Be Stabilized?, 116
Self-Test, 116
Questions and Applications, 116
Advanced Questions, 117
Discussion in the Boardroom, 120
Running Your Own MNC, 120
Blades, Inc. Case: Assessment of Future Exchange Rate Movements, 120
Small Business Dilemma: Assessment by the Sports Exports Company of Factors That Affect
the British Pound’s Value, 121
Internet/Excel Exercises, 122
Online Articles with Real World Examples, 122
Forward Market, 123
How MNCs Use Forward Contracts, 123
Non-Deliverable Forward Contracts, 126
Currency Futures Market, 127
Contract Specifications, 128
Trading Currency Futures, 129
Trading Platforms for Currency Futures, 129
Comparison to Forward Contracts, 129
Credit Risk of Currency Futures Contracts, 130
How Firms Use Currency Futures, 131
Closing Out a Futures Position, 131
Speculation with Currency Futures, 132
Currency Options Market, 133
Option Exchanges, 133
Over-the-Counter Market, 134
Currency Call Options, 134
Factors Affecting Currency Call Option Premiums, 135
How Firms Use Currency Call Options, 135
Speculating with Currency Call Options, 136
Currency Put Options, 139
Factors Affecting Currency Put Option Premiums, 139
Hedging with Currency Put Options, 139
Speculating with Currency Put Options, 140
Contingency Graph for a Purchaser of a Call Option, 142
Contingency Graph for a Seller of a Call Option, 143
Contingency Graph for a Buyer of a Put Option, 143
Contingency Graph for a Seller of a Put Option, 143
Conditional Currency Options, 143
European Currency Options, 145
Summary, 145
Point Counter-Point: Should Speculators Use Currency Futures or Options?, 146
Self-Test, 146
Questions and Applications, 147
Advanced Questions, 149
Discussion in the Boardroom, 153
Running Your Own MNC, 153
Blades, Inc. Case: Use of Currency Derivative Instruments, 153
Small Business Dilemma: Use of Currency Futures and Options by the Sports Exports
Company, 154
Internet/Excel Exercises, 155
Online Articles with Real World Examples, 155
Appendix 5A: Currency Option Pricing, 156
Appendix 5B: Currency Option Combinations, 160
Part 1 Integrative Problem: The International Financial Environment, 173
PART 2: Exchange Rate Behavior
Exchange Rate Systems, 177
Fixed Exchange Rate System, 177
Freely Floating Exchange Rate System, 179
Managed Float Exchange Rate System, 180
Pegged Exchange Rate System, 181
Dollarization, 186
A Single European Currency, 186
Monetary Policy in the Eurozone, 187
Impact on Firms in the Eurozone, 187
Impact on Financial Flows in the Eurozone, 187
Exposure of Countries within the Eurozone, 188
Government Intervention, 189
Reasons for Government Intervention, 189
Direct Intervention, 189
Indirect Intervention, 192
Intervention as a Policy Tool, 193
Influence of a Weak Home Currency, 193
Influence of a Strong Home Currency, 194
Summary, 195
Point Counter-Point: Should China Be Forced to Alter the Value of Its Currency?, 196
Self-Test, 196
Questions and Applications, 196
Advanced Questions, 197
Discussion in the Boardroom, 199
Running Your Own MNC, 199
Blades, Inc. Case: Assessment of Government Influence on Exchange Rates, 199
Small Business Dilemma: Assessment of Central Bank Intervention by the Sports Exports
Company, 200
Internet/Excel Exercises, 201
Online Articles with Real World Examples, 201
Appendix 6: Government Intervention during the Asian Crisis, 202
International Arbitrage, 211
Locational Arbitrage, 211
Triangular Arbitrage, 213
Covered Interest Arbitrage, 216
Comparison of Arbitrage Effects, 220
Interest Rate Parity (IRP), 220
Derivation of Interest Rate Parity, 221
Determining the Forward Premium, 222
Graphic Analysis of Interest Rate Parity, 224
How to Test Whether Interest Rate Parity Exists, 226
Interpretation of Interest Rate Parity, 226
Does Interest Rate Parity Hold?, 226
Considerations When Assessing Interest Rate Parity, 227
Variation in Forward Premiums, 228
Forward Premiums across Maturities, 228
Changes in Forward Premiums over Time, 229
Summary, 231
Point Counter-Point: Does Arbitrage Destabilize Foreign Exchange Markets?, 231
Self-Test, 232
Questions and Applications, 232
Advanced Questions, 234
Discussion in the Boardroom, 238
Running Your Own MNC, 238
Blades, Inc. Case: Assessment of Potential Arbitrage Opportunities, 238
Small Business Dilemma: Assessment of Prevailing Spot and Forward Rates by the Sports
Exports Company, 239
Internet/Excel Exercise, 239
Online Articles with Real World Examples, 240
Purchasing Power Parity (PPP), 241
Interpretations of Purchasing Power Parity, 241
Rationale behind Relative PPP Theory, 242
Derivation of Purchasing Power Parity, 242
Using PPP to Estimate Exchange Rate Effects, 243
Graphic Analysis of Purchasing Power Parity, 244
Testing the Purchasing Power Parity Theory, 246
Why Purchasing Power Parity Does Not Occur, 249
International Fisher Effect (IFE), 250
Fisher Effect, 250
Using the IFE to Predict Exchange Rate Movements, 251
Implications of the International Fisher Effect, 252
Derivation of the International Fisher Effect, 253
Graphic Analysis of the International Fisher Effect, 255
Tests of the International Fisher Effect, 257
Limitations of the IFE, 258
IFE Theory versus Reality, 259
Comparison of the IRP, PPP, and IFE, 260
Summary, 261
Point Counter-Point: Does PPP Eliminate Concerns about Long-Term Exchange Rate
Risk?, 261
Self-Test, 262
Questions and Applications, 262
Advanced Questions, 264
Discussion in the Boardroom, 268
Running Your Own MNC, 268
Blades, Inc. Case: Assessment of Purchasing Power Parity, 268
Small Business Dilemma: Assessment of the IFE by the Sports Exports Company, 269
Internet/Excel Exercises, 269
Online Articles with Real World Examples, 270
Part 2 Integrative Problem: Exchange Rate behavior, 271
Midterm Self-Exam, 272
PART 3: Exchange Rate Risk Management
Why Firms Forecast Exchange Rates, 283
Forecasting Techniques, 284
Technical Forecasting, 284
Fundamental Forecasting, 286
Market-Based Forecasting, 290
Mixed Forecasting, 292
Guidelines for Implementing a Forecast, 293
Forecast Error, 293
Measurement of Forecast Error, 293
Forecast Errors among Time Horizons, 294
Forecast Errors over Time Periods, 294
Forecast Errors among Currencies, 295
Forecast Bias, 296
Graphic Evaluation of Forecast Bias, 297
Comparison of Forecasting Methods, 298
Forecasting under Market Efficiency, 299
Using Interval Forecasts, 300
Methods of Forecasting Exchange Rate Volatility, 300
Summary, 301
Point Counter-Point: Which Exchange Rate Forecast Technique Should MNCs Use?, 302
Self-Test, 302
Questions and Applications, 303
Advanced Questions, 304
Discussion in the Boardroom, 307
Running Your Own MNC, 307
Blades, Inc. Case: Forecasting Exchange Rates, 307
Small Business Dilemma: Exchange Rate Forecasting by the Sports Exports Company, 308
Internet/Excel Exercises, 309
Online Articles with Real World Examples, 309
Relevance of Exchange Rate Risk, 311
The Investor Hedge Argument, 312
Currency Diversification Argument, 312
Stakeholder Diversification Argument, 312
Response from MNCs, 313
Transaction Exposure, 313
Estimating “Net” Cash Flows in Each Currency, 313
Exposure of an MNC’s Portfolio, 315
Transaction Exposure Based on Value at Risk, 318
Economic Exposure, 322
Exposure to Local Currency Appreciation, 322
Exposure to Local Currency Depreciation, 324
Economic Exposure of Domestic Firms, 324
Measuring Economic Exposure, 324
Translation Exposure, 327
Determinants of Translation Exposure, 327
Exposure of an MNC’s Stock Price to Translation Effects, 329
Summary, 329
Point Counter-Point: Should Investors Care about an MNC’s Translation Exposure?, 330
Self-Test, 330
Questions and Applications, 331
Advanced Questions, 332
Discussion in the Boardroom, 337
Running Your Own MNC, 337
Blades, Inc. Case: Assessment of Exchange Rate Exposure, 338
Small Business Dilemma: Assessment of Exchange Rate Exposure by the Sports Exports
Company, 339
Internet/Excel Exercises, 339
Online Articles with Real World Examples, 340
Policies for Hedging Transaction Exposure, 341
Hedging Most of the Exposure, 341
Selective Hedging, 341
Hedging Exposure to Payables, 342
Forward or Futures Hedge on Payables, 342
Money Market Hedge on Payables, 343
Call Option Hedge on Payables, 343
Comparison of Techniques to Hedge Payables, 346
Evaluating the Hedge Decision, 349
Hedging Exposure to Receivables, 349
Forward or Futures Hedge on Receivables, 349
Money Market Hedge on Receivables, 350
Put Option Hedge on Receivables, 350
Comparison of Techniques for Hedging Receivables, 353
Evaluating the Hedge Decision, 356
Summary of Hedging Techniques, 356
Limitations of Hedging, 357
Limitation of Hedging an Uncertain Payment, 357
Limitation of Repeated Short-Term Hedging, 357
Alternative Hedging Techniques, 359
Leading and Lagging, 360
Cross-Hedging, 360
Currency Diversification, 360
Summary, 361
Point Counter-Point: Should an MNC Risk Overhedging?, 361
Self-Test, 362
Questions and Applications, 362
Advanced Questions, 365
Discussion in the Boardroom, 370
Running Your Own MNC, 370
Blades, Inc. Case: Management of Transaction Exposure, 371
Small Business Dilemma: Hedging Decisions by the Sports Exports Company, 372
Internet/Excel Exercises, 372
Online Articles with Real World Examples, 373
Appendix 11: Nontraditional Hedging Techniques, 374
Managing Economic Exposure, 379
Assessing Economic Exposure, 380
Restructuring to Reduce Economic Exposure, 381
Issues Involved in the Restructuring Decision, 383
A Case on Hedging Economic Exposure, 384
Savor Co.’s Dilemma, 385
Assessment of Economic Exposure, 385
Assessment of Each Unit’s Exposure, 386
Identifying the Source of …
Purchase answer to see full

Calculate your paper price
Pages (550 words)
Approximate price: -

Why Choose Us

Top quality papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.

Professional academic writers

We have hired a team of professional writers experienced in academic and business writing. Most of them are native speakers and PhD holders able to take care of any assignment you need help with.

Free revisions

If you feel that we missed something, send the order for a free revision. You will have 10 days to send the order for revision after you receive the final paper. You can either do it on your own after signing in to your personal account or by contacting our support.

On-time delivery

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.

Original & confidential

We use several checkers to make sure that all papers you receive are plagiarism-free. Our editors carefully go through all in-text citations. We also promise full confidentiality in all our services.

24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

Total price:

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.


Essay Writing Service

You are welcome to choose your academic level and the type of your paper. Our academic experts will gladly help you with essays, case studies, research papers and other assignments.


Admission help & business writing

You can be positive that we will be here 24/7 to help you get accepted to the Master’s program at the TOP-universities or help you get a well-paid position.


Editing your paper

Our academic writers and editors will help you submit a well-structured and organized paper just on time. We will ensure that your final paper is of the highest quality and absolutely free of mistakes.


Revising your paper

Our academic writers and editors will help you with unlimited number of revisions in case you need any customization of your academic papers