Karen Chen
FIN446
National University
September 2, 2021
Week 1 Homework
Chapter 1
1. Agency Problems of MNCs
a. Explain the agency problem of MNCs.
 Agency problem of MNCs occurs when the conflict goals between a firm’s manager
and shareholder.
b. Why might agency costs be larger for an MNC than for a purely domestic firm?
 Agency costs might be more significant for an MNC than a domestic firm for a few
reasons. (1) Monitor the manager of subsidiaries in foreign countries is more
complicated. (2) Managers of subsidiaries in foreign countries raised in different
cultures might not have the same uniform goals. (3) The larger MNCs create more
agency problems due to their size. (4) Some non-US managers have conflicts on
short-term decisions for the MNCs that could result in issues on the firm’s goal
pursuing.
2. Comparative Advantage
a. Explain how the theory of comparative advantage relates to the need for international
business.
 The theory of comparative advantage is the ability to produce a specialized good or
service by a particular country at a lower cost than any trading partner. This
situation creates a more significant opportunity for the country and penetrates
foreign markets. Therefore, they rely on other countries to supply other products,
which is a need for international business.
b. Explain how the product cycle theory relates to the growth of an MNC.
 The product cycle theory suggests that the firm will attempt to capitalize on its
perceived advantages in markets other than initially established at some point in
time.
3. Imperfect Markets
a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries
in foreign markets.
 An imperfect market is a condition where resources are in a competitive market to
share high-cost barriers with a small number of buyers and sellers. Therefore, the
MNC must sometimes use foreign resources rather than produce the resources.
b. If perfect markets existed, would wages, prices, and interest rates among countries be more
similar or less similar than under conditions of imperfect markets? Why?
 If perfect markets existed, all the necessary resources would be available and
transferred to those countries willing to pay. As soon as this situation occurred,
shortages in the specific country would decrease, and such resources' costs would
be similar among other countries.
4. Q17. International Joint Venture
a. Explain how the joint venture enabled Anheuser-Busch to achieve its objective of
maximizing shareholder wealth.
Karen Chen
FIN446
National University
September 2, 2021

The joint venture enabled Company AB to achieve the objective of maximizing their
shareholders' wealth by the following points: (1) Exploring foreign markets with
Japan to increase the revenue. (2) Use utilization distribution channels within Japan
to reduce the costs for distribution and transportation. (3) Use the resources of Kirin
Brewery to sell locally and become a more competitive firm within the industry.
b. Explain how the joint venture limited the risk of the international business.
 The joint venture limited the risk of the international business of Company AB and
Company K by altering the exchange rate, working with foreign governments, lower
investment costs, and all the associated risks with foreign markets.
c. Many international joint ventures are intended to circumvent barrier that normally prevent
foreign competition. What barrier in Japan did Anheuser-Busch circumvent as a result of the
joint venture? What barrier in the United States did Kirin circumvent as a result of the joint
venture?
 Company AB eliminates the barrier of distribution channels in Japan with a joint
venture. Company K eliminates the barrier of skills and information technology in
the United States with a joint venture.
d. Explain how Anheuser-Busch could have lost some of its market share in countries outside
Japan as a result of this particular joint venture.
 Company AB could have lost some of its market share in countries outside Japan
due to this particular joint venture. It discloses all the information to Company K
regarding product and expansion policies. Company K will compete in the beer
industry after knowing Company AB's entire execution of business operations.
5. Q19. Valuation of an MNC
a. Birm plans a licensing deal in which it will sell technology to a firm in Germany for $3 million;
the payment is invoiced in dollars, and this project has the same risk level as its existing
business.
 (1) expected cash flows in dollars
b. Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses.
 (2) expected cash flows in euros that are ultimately converted into dollars
 (4) Birm's weighted average cost of capital
c. Birm plans to discontinue its relationship with a U.S. supplier so that it can import a small
amount of supplies (denominated in euros) at a lower cost from a Belgian supplier.
 (2) expected cash flows in euros that are ultimately converted into dollars
d. Birm plans to export a small amount of materials to Ireland that are denominated in euros.
 (2) expected cash flows in euros that are ultimately converted into dollars
Chapter 2
1. Balance of Payments
a. Of what is the current amount generally composed?
 The current amount is generally composed of:
Karen Chen
FIN446
National University
September 2, 2021
i.
Balance of trade.
ii.
The net amount of interest payments to foreign investors.
iii.
Payments from international tourism.
iv.
Private gifts and grants.
b. Of what is the capital account generally composed?
 The capital account includes all capital investments made between countries - direct
foreign investment and purchases of securities with maturities for more than one
year.
2. Inflation Effect on Trade
a. How would a relatively high home inflation rate affect the home country’s current account,
other things being equal?
 A relatively high home inflation rate tends to increase imports and decrease exports
for the specific country.
b. Is a negative current account harmful to a country? Discuss.
 A negative current account is usually harmful to a country. This situation indicates
lost jobs in a country. It simply means a country is exporting more goods and
services than they import. Also, when a domestic demand exists when exports
exceed imports. However, this does not cause any harm to a country; even it's a
negative account.
3. Government Restrictions – How can government restrictions affect international payments
among countries?
 Government restriction can affect international payments among countries
significantly. For example, governments can place tariffs or quotas on imports to
restrict imports. They can also place extra taxes on income from foreign securities
discouraging investors from purchasing. If there are no restrictions, the
governments can encourage international payments among countries.
4. IMF
a. What are some of the major objectives of the IMF?
 Major objectives of the IMF are:
i.
Promote cooperation among countries on international monetary issues.
ii.
Promote stability in exchange rates.
iii.
Provide temporary funds to member countries attempting to correct
imbalances of international payments.
iv.
Promote free mobility of capital funds across countries.
v.
Promote free trade.
b. How is the IMF involved in international trade?
 The IMF was involved in international trade by stabilizing international payments
through a board of governors composed of finance officers of 188 member
countries. Each member country assigned by a quota reflects its economic status
and must pay this assigned quota. The trades between the countries represent a
significant portion of international payments.
Karen Chen
FIN446
National University
September 2, 2021
5. Q11. Free Trade – There has been considerable momentum to reduce or remove trade barriers
in an effort to achieve “free trade.” Yet, one disgruntled executive of an exporting firm stated,
“Free trade is not conceivable; we are always at the mercy of the exchange rate. Any country
can use this mechanism to impose trade barriers.” What does this statement mean?
 The statement above suggested that even if there were no natural barriers, a
government could attempt to control the exchange rates to reduce foreign
competition. For example, a U.S. firm may be discour­aged to export goods to Japan
if the dollar's value is very high against the yen. The prices of U.S. goods from the
Japanese viewpoint are too high because of the strong dollar standing in the
market. The reverse situation could also possibly occur when a Japanese exporting
firm is priced out of the U.S. market because of a strong yen and weak dollar.
6. Q12. International Investments
a. Assume that the dollar is presently weak and is expected to strengthen over time. How will
these expectations affect the tendency of U.S. investors to invest in foreign securities?
 The expectations of strengthening dollars would discourage U.S. investors from
investing overseas. If the dollar is relatively weak now, U.S. investors will need
more dollars to acquire foreign currency for their investments. Supposedly the
dollar strengthens over time; investors will exchange the foreign currency into
dollars at a much lower exchange rate. That to be said, the exchange rate effect
would reduce the yield that earns on an investment.
b. Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest
abroad.
 Low U.S. interest rates can attract U.S. MNCs to invest abroad because the investors
can seek higher returns.
c. In general terms, what is the attraction of foreign investments to U.S. investors?
 In general terms, the main attraction of foreign investments to U.S. investors is
potential higher returns. International stocks and bonds can outperform U.S. stocks.
However, the situation does not guarantee returns on investments abroad will be
higher. Most investors diversify their investment portfolio to include international
investment to reduce risk and seek a higher return.
Chapter 3
1. Q8. Forward Contract – The Wolfpack Corp. is a U.S. exporter that invoices its exports to the
United Kingdom in British pounds. If it expects that the pound will appreciate against the dollar
in the future, should it hedge its exports with a forward contract? Explain.
 A forward contract is an agreement between an MNC and a foreign exchange dealer
to exchange currencies at a specific date that the transaction will occur. The
Wolfpack Corporation should not hedge from this case because it would only
benefit pounds when the currency converts from pounds to dollars.
Karen Chen
FIN446
National University
September 2, 2021
2. Q9. Euro – Explain the foreign exchange situation for countries that use the euro when they
engage in international trade among themselves.
 Foreign currency exchange does not exist in the euro since many countries part of
the Eurozone shares a single currency. Euro is using as the medium of exchange.
3. Q10. Indirect Exchange Rate – If the direct exchange rate of the euro is $1.25, what is the euro’s
indirect exchange rate? That is, what is the value of a dollar in euros?
 Indirect Exchange Rate for Euro = 1/Direct Exchange Rate for Euro
= 1/1.25 = 0.8 euro
4. Q11. Cross Exchange Rate – Assume Poland’s currency (the zloty) is worth $.17 and the Japanese
yen is worth $.008. What is the cross rate of the zloty with respect to yen? That is, how many
yen equal a zloty?
 Cross Rate of Z = Value of Z/Value of Y
= $0.17/$0.008 = 21.25
5. Q23. Interest Rates – Why do interest rates vary among countries? Why are interest rates
normally similar for those European countries that use the euro as their currency? Offer a
reason why the government interest rate of one country could be slightly higher than the
government interest rate of another country, even though the euro is the currency used in both
countries.
 The interest rate may vary from country to country due to the country's supply and
demand of money. The Central Bank of the specific country regulates interest rates.
It keeps the same for the euro because they monitor and form similar monetary
policies between these countries that shared the currency. The government interest
rate of one country could be slightly higher than the government interest rate of
another country, even though the euro is the currency used in both countries
because of the default risk premium.
6. Q24. Interpreting Exchange Rate Quotations – Today you notice the following exchange rate
quotations: (a) $1 = 3.00 Argentine pesos and (b) 1 Argentine peso = .50 Canadian dollars. You
need to purchase 100,000 Canadian dollars with U.S. dollars. How many U.S. dollars will you
need for your purchase?
 Value of Canadian Dollar in Peso = 1/Value of Peso in Canadian Dollar
= 1/0.50 = 2
 Value of Canadian Dollar in US Dollar = Value of Canadian Dollar in Peso/Value of US
Dollar in Peso
= 2/3 = 0.666
 $100,000 Canadian Dollars
=$100,000 x $0.666 = $66,666
Internet/Excel Exercises
1. Go to the Yahoo! Site for exchange rate data (finance.yahoo.com/currency)
a. What is the prevailing direct exchange rate of the Japanese yen?
 The prevailing exchange rate of one USD to Yen is 109.67 JPY.
b. What is the prevailing direct exchange rate of the euro?
Karen Chen
FIN446
National University
September 2, 2021
 The prevailing direct exchange rate of one Euro to USD is $1.19.
c. Based on your answers to question a and b, show how to determine the number of yen per
euro.
 Yen Per Euro = USD Per Yen/USD Per Euro
= $0.0092/$1.19 = 0.0077
d. One euro is equal to how many yen according to the table in Yahoo!?
 130.30 JPY
e. Based on your answer to question d, show how to determine how many euros are equal to
one Japanese yen.
 Euro Per Yen= USD Per Euro/USD Per Yen
= $1.19/$0.0092 = 129.35
f. Click on the euro in the first column in order to generate a historical trend of the direct
exchange rate of the euro. Click 5y to review the euro’s exchange rate over the last 5 years.
Briefly explain this trend (whether it is mostly upward or downward), and the point(s) at
which was an abrupt shift in the opposite direction.
 For the last five years, the Euro to USD exchange rate conclude an overall
depreciation of dollars with an average of $1.20 in 2021. The average in 2016 has
the lowest average of $1.11, the only year with a positive trend in the last five years.
Chapter 4
1. Q18. Factors Affecting Exchange Rates
a. Identify the most obvious economic reasons for the persistent depreciation of the peso.
 Mexico’s economic condition is unable, which would lead to the depreciation of the
peso.
b. High interest rates are commonly expected to strengthen a country’s currency because they
can encourage foreign investment in securities in that country, which results in the
exchange of other currencies for that country. Yet, the peso’s value has declined against the
dollar over most years even though Mexican interest rates are typically much higher than
U.S. interest rates. Thus, it appears that the high Mexican interest rates do not attract
substantial U.S. investment in Mexico’s securities. Why do you think U.S. investors do not
try to capitalize on the high interest rates in Mexico?
 U.S investors did not try to capitalize on the high interest rates in Mexico due to the
country's instability and brought in a very high risk of default.
c. Why do you think the bid/ask spread is higher for pesos than for currencies of industrialized
countries? How does this affect a U.S. firm that does substantial business in Mexico?
 The bid/ask spread is higher for pesos than for currencies of industrialized countries
because of Mexico's status of instability to cause a high interest rate. U.S firms
would have to pay a considerable expense to transport the goods earned in pesos to
dollars - depreciate of pesos.
2. Q19. Aggregate Effects on Exchange Rates
Karen Chen
FIN446
National University
September 2, 2021
a. U.S. inflation has suddenly increased substantially, while Country K’s inflation remains low.
 If inflation in the US increases, the goods made in the US will be less competitive
than the goods made in Country K. Consumers will shift to purchase goods from
Country K, and the demand for the currency of Country K will increase.
b. U.S. interest rates have increased substantially, while Country K’s interest rates remain low.
Investors of both countries are attracted to high interest rates.
 If the interest rate increases in the US, more investors will invest to the US rather
than in Country K. Then, the value of Country K's currency would decrease, and the
USD will increase.
c. U.S. interest rates have increased substantially, while Country K’s income level has remained
unchanged.
 If the income level of the US increases, then consumers in the US would demand
more foreign goods from Country K and cause an increase to Country K's currency
against USD.
d. The United States is expected to impose a small tariff on goods imported from Country K.
 If a tariff is imposed on goods from Country K, the products will be more expensive
where the demand for the goods in the US would decrease. Therefore, the value of
Country K's currency would decrease to USD.
e. Combine all expected impacts to develop an overall forecast.
 The value of Country K's currency would not change too much to USD based on the
following factors given by the book:
i.
Trades and trade flows would cause the value of Country K's currency to
decrease
ii.
Inflation, interest rate, increase in income, and tariff would cause the value
of Country K's currency to increase
3. Q20. Speculation
a. How could Blue Demon Bank attempt to capitalize on its expectations without using
deposited funds? Estimate the profits that could be generated from this strategy.
 (1) Amount Converted into Dollars = Borrowed Amount in Pesos x Spot Rate
=$70,000,000 x $0.15 = $10,500,000
(2) Effective Interest Rate = Leading Rate x (Number of Days/Number of Days in a
Year) = 0.08 (8%) x (10/360) = 0.0022
(3) Amount Accumulated in 10 Days = Amount Converted into Dollars x (1 + Effective
Interest Rate) =$10,500,000 x (1+0.0022) = $10,523,333
(4) Effective Interest Rate = Borrowing Rate x (Number of Days/Number of Days in a
Year) = 0.087(8.7%) x (10/360) = 0.0024
(5) Amount repaid in Peso = Borrow Amount x (1 + Effective Interest Rate)
= $70,000,000 x (1 + 0.0024) = $70,169,169
(6) Amount Converted into Dollars to Rapid Loan = Amount Rapid in Peso X
Depreciation Spot Rate = $70,169,169 X $0.14 = $9,823,684
(7) Profit = Amount Accumulated in 10 Days – Amount Converted into Dollars to
Repaid Loan = $10,523,333 - $9,823,684 = $699,649
Karen Chen
FIN446
National University
September 2, 2021
b. Assume all the preceding information with this exception: Blue Demon Bank expects the
peso to appreciate from its present spot rate of $.15 to $.17 in 30 days. How could it
attempt to capitalize on its expectations without using deposited funds? Estimate the profits
that could be generated from this strategy.
 (1) Converted Dollars Amount to Peso = Amount Borrowed in Dollars/Spot Rate
= $10,000,000/$0.15 = $66,666,667
(2) Effective Interest Rate = Leading Rate x (Number of Days/Number of Days in a
Year) = 0.085 (8.5%) x (30/360) = 0.0071
(3) Amount Accumulated in 30 Days = Amount Converted into Dollars x (1 + Effective
Interest Rate) = $66,666,667 x (1 + 0.0071) = $67,138,867
(4) Accumulated Amount Converted into Dollars = Amount Accumulated in 30 Days
x Appreciation Spot Rate = $67,138,867 x $0.17 = $11,413,607
(5) Effective Interest Rate = Borrowing Rate x (Number of Days/Number of Days in a
Year) = 0.083(8.3%) x (30/360) = 0.006917
(6) Amount Required to Repay = Borrowed Amount X (1 + Effective Interest Rate)
=$10,000,000 x (1 + 0.0069) = $10,069,170
(7) Profit = Accumulated Amount Converted into Dollars – Amount Required to
Repay = $11,413,607 - $10,069,170 = $1,344,437