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Background Spartan, Inc., is considering the development of a subsidiary in Singapore that would manufacture and sell tennis rackets locally. Spartan’s financial managers have asked the manufacturing, marketing, and financial departments to provide them with relevant input so they can apply a capital budgeting analysis to this project. In addit...
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Though disadvantages of DFI may exist, MNCs can compare benefits of DFI among countries and use DFI to achieve those benefits (Exhibit 13.1). MNCs measure the benefits of DFI by following the steps in Exhibit 13.2 MNCs apply a multinational capital budgeting process to compare the benefits and costs of international projects. This capital budget...
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Should the firm attempt to increase or reduce sales in new or existing foreign markets? Should the firm increase or reduce its dependency on foreign suppliers? Should the firm establish or eliminate production facilities in foreign markets? Should the firm increase or reduce its level of debt denominated in foreign currencies?
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Allows an MNC to lock in a specific exchange rate at which it can purchase a currency and hedge payables. A forward contract is negotiated between the firm and a financial institution. The contract will specify the: currency that the firm will pay currency that the firm will receive amount of currency to be received by the firm rate at which th...
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Any points off of the PPP line represent purchasing power disparity. If the exchange rate does not move as PPP theory suggests, there is a disparity in the purchasing power of the two countries. Point C in Exhibit 8.3 represents a situation where home inflation (Ih) exceeds foreign inflation (If ) by 4 percent. Yet, the foreign currency appreciate...
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Governments sometimes intervene to prevent their currencies from moving too far in a certain direction. Critics suggest that managed float allows a government to manipulate exchange rates to benefit its own country at the expense of others. Currencies of most large developed countries are allowed to float, although they may be periodically manage...
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Similar to forward contracts in terms of obligation to purchase or sell currency on a specific settlement date in the future. Differ from forward contracts because futures have standard contract specifications: Standardized number of units per contract (See Exhibit 5.2) Offer greater liquidity than forward contracts Typically based on U.S. doll...
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Relative Inflation: Increase in U.S. inflation leads to increase in U.S. demand for foreign goods, an increase in U.S. demand for foreign currency, and an increase in the exchange rate for the foreign currency. (See Exhibit 4.5) Relative Interest Rates: Increase in U.S. rates leads to increase in demand for U.S. deposits and a decrease in demand f...
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When the euro is appreciating against the dollar (based on an upward movement of the direct exchange rate of the euro), the indirect exchange rate of the euro is declining. When the euro is depreciating (based on a downward movement of the direct exchange rate) against the dollar, the indirect exchange rate is rising.
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Removal of the Berlin Wall: Led to reductions in trade barriers in Eastern Europe. Single European Act of 1987: Improved access to supplies from firms in other European countries. North American Free Trade Agreement (NAFTA): Allowed U.S. firms to penetrate product and labor markets that previously had not been accessible. General Agreement on Ta...
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