Formula Sheets: FINA 5500
Exam 1
Valuation Model
Valuation model for MNC:

m
 E  CFj , t   E  ER j , t 
n 
 j 1
Value =  
t =1
1  k t





where E (CFj,t ) = expected cash flows denominated
in currency j to be received by the
U S parentt att th
U.S.
the end
d off period
i dt
E (ERj,t ) = expected exchange rate at which
currency j can be converted to
dollars at the end of period t
k = the weighted average cost of capital of
the U.S. parent company
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Opportunity Cost Analysis
• The opportunity cost of product X (in
terms of product Y)
= How many units of product Y does it take
to make one unit of product X
= number of units of pproduct Y pper one unit
of product X
= cost of Y / cost of X
BOP Accounting
ACCOUNT
CREDITS
DEBITS
Merchandise:
A. Export of Goods
B. Import of Goods
Service:
C. Export of Service
D. Import of Service
Net Investment
Income:
Unilateral
Transfers:
Capital Flows:
E. Income from Foreign
Investments
G. Transfers to US from
Overseas
I. Increase in Foreign
Investments in US /
Decrease in US
investments overseas
Official Reserve: K. Decrease in Official
Holding of FX & Gold
F. Income paid to
Foreign Investors
H. Transfers to
Overseas from US
J. Decrease in Foreign
Investments in US /
Increase in US
investments overseas
L. Increase in Official
Holding of FX & Gold
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BOP Accounting (contd.)
Balance of Trade (BOT)
= (A - B) + (C-D)
Current Account Balance
= (A-B) + (C-D) + (E-F) + (G-H)
Capital Account Balance
= (I-J)
Official Reserve Balance
= (K-L)
Current Account + Capital Account + Official Reserve = 0
Currency Conversion
Quotes: DQ (direct quote): The dollar price of one unit of foreign currency (FC)
IQ (indirect quote): Number of units of FC per one dollar; DQ = 1 / IQ and IQ = 1 / DQ
Currency Conversion:
Converting USD into FC
Converting FC into USD
Using DQ
USD / DQ = FC
FC * DQ = USD
Using IQ
USD * IQ = FC
FC / IQ = USD
DQ0 (IQO) = Direct (indirect) quote, at the beginning of the period
DQ1 (IQ1) = Direct (indirect) quote, at the end of the period
% change in DQ = 100*(DQ1 – DQ0) / DQ0 ; or % change in DQ = 100*[100 / (100 + % change in IQ) - 1]
% change in IQ = 100*(IQ1 – IQ0) / IQ0 ; or % change in IQ = 100*[100 / (100 + % change in DQ) - 1]
Ask Price (A): The buying price for one unit of FC from the currency dealer; Bid Price (B): The selling price for one unit of FC to the
currency dealer; Bid-Ask Spread = 100* (A – B) / A
Cross-Quotes: DQ1= $ price of FC1; DQ2 = $ price of FC2;
The price of FC1 in terms of FC2 (how many unit of FC2 does it take to buy one FC1) = DQ1 / DQ2
The price of FC2 in terms of FC1 (how many unit of FC1 does it take to buy one FC2) = DQ2 / DQ1
Bid-Ask cross quotes (Let ASK1 and BID1 & ASK2 and BID2 be the Ask and Bid prices for FC1 and FC2 in DIRECT QUOTES) :
Ask price of FC1 in terms of FC2 = ASK1 / BID2 ; and Bid price of FC1 in terms of FC2 = BID1 / ASK2
Ask price of FC2 in terms of FC1= ASK2 / BID1 ; and Bid price of FC2 in terms of FC1 = BID2 / ASK1
Forward Premium or Discount: [(forward rate – spot rate) / spot rate] * [360/days to maturity] * 100
Dollar Return on foreign assets = (1 + Rf) (1 + Rx) - 1
Rf = return on foreign assets based on foreign currency
Rx = return on foreign currency = same as percentage change in DQ
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