Ch 17 Essay

7957 Words Oct 13th, 2011 32 Pages
Chapter 27

Multinational Financial Management
ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS

Most of the questions are illustrated in the BOC spreadsheet model.

27-1 A purely domestic firm does not have to deal with exchange rates, different laws in different countries, transferring funds between subsidiaries in different countries, having to communicate in different languages, and so forth. All of these factors create complications and challenges for multinational firms. In spite of these challenges, there is a strong trend among corporations to “go global.” The primary motivation is profit—many firms can increase their rates of return on investment, and their stock prices, by going global. Some do it primarily to get raw
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is typically used to calculate cross rates. The following formula (implemented in the Excel model) shows the number of pairs of exchange rates if N = 5 currencies are being analyzed:

Number of pairs with N = 250 currencies: [pic] = [pic]= 15 – 5 = 10.

Now note that if there were 250 countries, each with its own currency, there would be 31,125 different exchange rates, which would be a lot to follow and keep track of. However, with things benchmarked off the dollar, there would only be 249 basic exchange rates, and all the cross rates could be found from the dollar exchange rates. It’s important to note that if all exchange rates (where currencies can be converted to other currencies) are not priced exactly in accordance with their cross rates, then arbitrageurs can and will trade in currencies and bring about an equilibrium. For example, traders would sell euros and buy pounds, or vice versa, if the pound/euro rate were not in perfect sync with the dollar/pound and dollar/euro rates. Going to the euro has made life much easier for European companies and for individuals who deal across borders, because only one currency can now be used in most European countries.

27-3 (See the BOC model for data and examples of spot and forward rates.) Spot rates are rates for immediate exchange,

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