Answers are provided in Append

Answers are provided in Appendix A at the back of the text.

1. Explain why more acquisitions have taken place in Europe in recent years.

2. What are some of the barriers to international acquisitions?

3. Why might a U.S.–based MNC prefer to establish a foreign subsidiary rather than acquire an existing firm in a foreign country?

4. Provo, Inc. (based in Utah), has been considering the divestiture of a Swedish subsidiary that produces ski equipment and sells it locally. A Swedish firm has already offered to acquire this Swedish subsidiary. Assume that the U.S. parent has just revised its projections of the Swedish krona’s value downward. Will the proposed divestiture now seem more or less feasible than it did before? Explain.

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Answers are provided in Append

Answers are provided in Appendix A at the back of the text.

1. Offer some reasons why U.S. firms might prefer to engage in direct foreign investment (DFI) in Canada rather than Mexico.

2. Offer some reasons why U.S. firms might prefer to direct their DFI to Mexico rather than Canada.

3. One U.S. executive said that Europe was not considered as a location for DFI because of the euro’s value. Interpret this statement.

4. Why do you think U.S. firms commonly use joint ventures as a strategy to enter

China?

5. Why would the United States offer a foreign automobile manufacturer large incentives for establishing a production subsidiary in the

United States? Isn’t this strategy indirectly subsidizing the foreign competitors of U.S. firms?

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Answers are provided in Append

Answers are provided in Appendix A at the back of the text.

1. Assume that the following spot exchange rates exist today:

£1 ¼ $1:50

C$ ¼ $:75

£1 ¼ C$2

Assume no transaction costs. Based on these exchange rates, can triangular arbitrage be used to earn a profit? Explain.

2. Assume the following information:

Spot rate of £ ¼ $1:60

180


day forward rate of £ ¼ $1:56

180


day British interest rate ¼ $4%

180


day U:S interest rate ¼ $3%

Based on this information, is covered interest arbitrage by U.S. investors feasible (assuming that U.S. investors use their own funds)? Explain.

3. Using the information in the previous question, does interest rate parity exist? Explain.

4. Explain in general terms how various forms of arbitrage can remove any discrepancies in the pricing of currencies.

5. Assume that the British pound’s 1-year forward rate exhibits a discount. Assume that interest rate parity continually exists. Explain how the discount on the British pound’s 1-year forward discount would change if British 1-year interest rates rose by 3 percentage points while U.S. 1-year interest rates rose by 2 percentage points.

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Answers are provided in Append

Answers are provided in Appendix A at the back of the text.

1. Explain why it would be virtually impossible to set an exchange rate between the Japanese yen and the U.S. dollar and to maintain a fixed exchange rate.

2. Assume the Federal Reserve believes that the dollar should be weakened against the Mexican peso.

Explain how the Fed could use direct and indirect intervention to weaken the dollar’s value with respect to the peso. Assume that future inflation in the United States is expected to be low, regardless of the Fed’s actions.

3. Briefly explain why the Federal Reserve may attempt to weaken the dollar.

4. Assume the country of Sluban ties its currency (the slu) to the dollar and the exchange rate will remain fixed. Sluban has frequent trade with countries in the eurozone and the United States. All traded products can easily be produced by all the countries, and the demand for these products in any country is very sensitive to the price because consumers can shift to wherever the products are relatively cheap. Assume that the euro depreciates substantially against the dollar during the next year.

a. What is the likely effect (if any) of the euro’s exchange rate movement on the volume of Sluban’s exports to the eurozone? Explain.

b. What is the likely effect (if any) of the euro’s exchange rate movement on the volume of Sluban’s exports to the United States? Explain.

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Answers are provided in Append

Answers are provided in Appendix A at the back of the text.

 1. Briefly describe how various economic factors can affect the equilibrium exchange rate of the Japanese yen’s value with respect to that of the dollar.

2. A recent shift in the interest rate differential between the United States and Country A had a large effect on the value of Currency A. However, the same shift in the interest rate differential between the United States and Country B had no effect on the value of Currency B. Explain why the effects may vary.

3. Smart Banking Corp. can borrow $5 million at 6 percent annualized. It can use the proceeds to invest in Canadian dollars at 9 percent annualized over a 6- day period. The Canadian dollar is worth $.95 and is expected to be worth $.94 in 6 days. Based on this information, should Smart Banking Corp. borrow U.S. dollars and invest in Canadian dollars? What would be the gain or loss in U.S. dollars?

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