1.         If the Chinese yuan has a floating exchange rate with the US dollar,a)     US multinationals have no economic exposureb)    Chinese exporting firms do not face currency riskc)     Currency risk can lead to economic exposure2.If real exchange rates are measured as domestic inflation divided by foreign inflation proofed for nominal exchange rates, a real exchange rate greater than one indicatesa)   competitiveness of domestic multinationals has improvedb)    relative purchasing power of domestic consumers has improvedc)     relative purchasing power of foreign consumers has improvedadditional questions in the attachment file.
1. If the Chinese yuan has a floating exchange rate with the US dollar, a) US multinationals have no economic exposure b) Chinese exporting firms do not face currency risk c) Curren
Last First Student ID # Date: 10/26/2021 Instructions Instructions: Read carefully. You have 150 minutes to type your answers on to the downloaded word file of the exam, upload the exam as single PDF file to iCollege Assignments. Upload exam completed as single PDF file no later than 12noon 3. You can use financial calculators and your own help sheet (see below). 4. Partial credit will be given for showing your work in detail, correct approach to the problem and writing legibly. You must write your final answer clearly. 5. State your assumptions, if any, clearly. For questions requiring numerical work, whether multiple choice or numerical problems, no credit will be given unless the working is shown as part of your answer. 6. Manage your time well during the test. Answer all questions. The total score is 100 points. You may refer to the e-book, notes, and/or videos during the exam but using a help-sheet (8.5” x 11”) is recommended to help you manage time. Good Luck! Honor Codes You are expected to follow the Honor Code. Any violation of the code will be reported to the concerned authority. Statement: I have completed this exam on my own with no help from any other person. Signature: _____________________________________________________________ [Part A: 40 points] Multiple Choice Questions (Each worth 5 points) 1. If the Chinese yuan has a floating exchange rate with the US dollar, US multinationals have no economic exposure Chinese exporting firms do not face currency risk Currency risk can lead to economic exposure 2.If real exchange rates are measured as domestic inflation divided by foreign inflation proofed for nominal exchange rates, a real exchange rate greater than one indicates a) competitiveness of domestic multinationals has improved relative purchasing power of domestic consumers has improved relative purchasing power of foreign consumers has improved 3.As a US multinational you decide to borrow long-term debt of 1 million KRW at 8% for one year. The exchange rate on the date you borrowed the debt is 100 KRW / $ and the exchange rate on the date you repaid the debt is 110 KRW / $. What is the nominal cost of borrowing the KRW debt in US$ terms? – 8.33% -18.24% -1.82% 4.Managing short-term transaction exposure with currency forward contracts is different from managing it with currency options because currency options will give you upside gains but immunize against losses currency forwards will give you upside gains but immunize against losses currency options require you to mark to market the daily gains or losses 5.Taxation of multinational corporations is a way to penalize them with higher tax rates than other US companies used by multinationals to save tax on foreign-source income free of double taxation internationally as a guiding principle 6.Measuring economic exposure of a multinational firm can be done by using either of the following two methods: measuring the mean or measuring the median of the firm’s cash flows measuring the sensitivity of the firm’s cash flows to exchange rate changes or regressing firm’s cash flows on the exchange rates to estimate economic exposure measuring the accounting exposure or measuring translation exposure of the firm 7.The lesson learnt from the Rolls Royce case-study is: managers not always good about ascertaining hedging versus speculation hedging with currency derivatives cannot reduce exchange rate risk hedging with currency derivatives is an important corporate decision 8.If international Fisher effect (IFE) holds interest rates will be able to forecast exchange rates real exchange rates will be equal across the two countries inflation rates will be equal across the two countries [Part B: 60 points] Answer any 6 of 8 conceptual questions / numerical problems. If you answer all 8, we will get best 6! Conceptual questions / Numerical problems Taxation of foreign source income Define the guiding principle of juridic domicile (1 sentence) Provide a detailed numerical example of double taxation using a foreign tax rate of 30%, and US tax rate of 34%. What is the effective tax rate in the US? From a taxation viewpoint, how is a foreign branch different from a foreign subsidiary? (3 sentences) (10 points) Pepkoe’s Competitiveness Pepkoe sells its popular soft-drink in Japan which competes head-on with Suzukoe’s Japanese version of the soft-drink. In early 2005, when the exchange rate was 110 JPY / $, Pepkoe’s price was $ 2 per bottle, while Suzukoe’s price was 200 JPY per bottle. By late 2005, the exchange rate had moved to 120 JPY / $, but neither Pepkoe nor Suzukoe had changed their prices for their soft-drinks. What has been the impact on Pepkoe’s competitiveness in the US market if Suzukoe is selling in the US market as well? What has been the impact on the relative purchasing power of the Japanese consumer of soft drinks? Note: Show work and formulae used in sufficient detail (10 points) 3. Link Technologies’ (LT) hedging strategies LT used currency futures and currency options to hedge against exchange risk. a. Suggest at least one statistical technique for ascertaining whether LT was correctly hedging against exchange risk while using these derivative contracts. b. Explain how the statistical technique you suggest helps in determining that the hedging is being correctly implemented. c. If correlation (unhedged cashflows, derivative cashflows) is negative, will variance (unhedged cashflows) be greater than OR less than variance (hedged cashflows)? [Hint: Use the learning from your LT case-study in answering this question] (10 points) Foreign tax credit or FTC Scheme You are an assistant to the CFO at Home Depot. She wants you to provide very short responses for following questions: If the tax rate in Canada (40%) is greater than in the US (34%), what is the tax treatment under the FTC scheme for bringing cashflows from Canada into the US? If the tax rate in Mexico (20%) is less than the tax rate in the US (34%), what is the tax treatment under the FTC scheme for bringing cashflows from Mexico into the US? (10 points) Transfer Pricing Assume that a multinational corporation (MNC) is (i) shipping product from Brazil (Country B) to Australia (Country A), and (ii) the tax rate in Country B < tax rate in country A, in answering the following questions: If MNC managers wish to minimize (taxes + tariffs), how should they go about setting the transfer price. [Use a graph to motivate your answer] If MNC managers wish to minimize (taxes), how should they go about setting the transfer price [Provide thumb-rules as part of your answer] If MNC managers wish to minimize (tariffs), how should they go about setting the transfer price [Indicate which country imposes the tariffs] Provide reasons for each of your answers. (10 points) Real Exchange Rates and MNC Competitiveness a.Define the real exchange rate R(t), indicating the variables used. b.What is the impact on US MNC competitiveness and relative purchasing power of US consumers if and when R(t) > 1? (2 sentences) c.Why is it important to use real exchange rates when discussing industry competitiveness in foreign markets? For example, the competitiveness of the US auto industry in foreign markets? (3-4 sentences) (10 points) 7.Relative purchasing power parity applications a.Define relative purchasing power parity b.In using relative purchasing power parity, how is inflation defined in terms of domestic price-level and foreign price-level? c.What is the difference between absolute and relative purchasing power parity? (10 points) 8.Managing economic exposure applications a.Describe one financial method for managing economic-exposure b.Describe one nonfinancial method for managing economic-exposure c.Who can use the detailed method for determining economic exposure and who can use the regression based method for determining economic exposure? Why? [Hint: For example, think of the Rolls Royce case study in the class notes] (10 points)




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