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Practice Final Material Type: Exam; Professor: Geppert; Class: International Financial Management; Subject: Finance ; University: University of Nebraska - Lincoln; Term: Fall 2010;
Typology: Exams
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Page 1 of 21
Borrow Invest
Germany 7.00 % 6.25%
Bid Ask
Spot € 0.6200 $/€ 0.6250 $/€
Forward € 0.6100 $/€ 0.6150 $/€
If you didn’t want to take on any risk, where would you want to invest (the US or
Germany) and what would the effective $ interest rate be?
(1a) The US, 3.50%
(1b) Germany, 3.70%
(1c) Germany, 4.39%
(1d) Germany, 4.54%
(1e) Germany, 4.55%
Page 2 of 21
Term in months Borrowing rate in
US on $,
compounded
monthly
Lending rate
in US on $,
compounded
monthly
Borrowing
rate in
Germany on
compounded
monthly
Lending rate in
Germany on €,
compounded
monthly
Bid Ask
Spot Rate 0.6500 $/€ 0.6507 $/€
Your company has purchased a product and has agreed to pay 375,000 € as payment in 6
months. If you use a money market hedge to eliminate the exchange risk, what is the
minimum dollar value of your payable in 6 months?
2a) $249,
2b) $249,
2c) $248,
2d) $247,
Page 4 of 21
Column 1 Column 2 Column 3
(1) Increase (1) Exports (1) Source of funds
(2) Decrease (2) Imports (2) Use of funds
(3)Services Provided by US
(4)Services Received by US
(5) US Direct Investment Overseas
(6) Foreign Direct Investment in the US
(7) US Claims on Foreigners
(8) US Liabilities Foreigners
(9) Official Reserves
4a)
Column1 Column 2 Column 3
4b)
Column1 Column 2 Column 3
4c)
Column1 Column 2 Column 3
4d)
Column1 Column 2 Column 3
4e)
Column1 Column 2 Column 3
4f)
Column1 Column 2 Column 3
Page 5 of 21
Use the information below to answer questions 5 to 8
The parent corporation located in US, needs the current equivalent of $1,000,000. The
parent decides to borrow the funds from the subsidiary as a dollar denominated
loan.
i
us
= 7% US interest rate
i
f
= 9% German interest rate
t
us
= 28% US income tax rate
t
f
= 35% Foreign income tax rate
e
0
= 0.6200$/€ Spot exchange rate
t
w
= 10% Non income tax deductible Withholding Tax for the parent
on interest paid to non-US creditors
i
9% Transfer interest rate for intracorporate loans
5a) gains $0.
5b) loses $0.
5c) gains $0.
5d) loses $0.
5e) gains $0.
5f) loses $0.
6a) 50,806 €e
6b) $19,
6c) $31,
6d) $24,
7a) 564,516 €e1 - $350,
17b) $350,000 - 564,516 €e
7c) $1,000,000 – 1,612,903 €e
7d) 1,612,903 €e1-$1,000,
Page 7 of 21
Use the information below to answer Questions 11 to 13
Your company has a subsidiary in Germany. The following trade pattern exists between
the subsidiary and the parent corporation:
(a) The parent buys an input good in US for P
I
= $2.
(b) The parent processes the input at a cost of C px
(c) The parent ships the semi-processed good to the subsidiary for P*
(d) The subsidiary further processes the input at a cost of C sx
(e) The subsidiary sells the final good for P
f
(f) The US income tax rate is t
us
= 35%
(g) The German income tax rate is t
f
(h) The German government charges a non-income tax deductible per unit tariff
of
All input and output markets are perfectly competitive.
(11a) (P* - P I
px
)(1-t us
f
sx
I
P*)(1-t f
(11b) (P* - P I
px
)(1-t us
f
sx
I
)(1-t f
(11c) (P* - P I
px
)(1-t
us
f
sx
)(1-t
f
I
(11d) (P* - P I
px
)(1-t us
f
sx
)(1-t f
I
Page 8 of 21
12a)
max
¿
f
sx
1 − τ
I
12b)
max
¿
f
sx
1 + τ
I
12c)
P
max
¿
=
P
f
− C
sx
− τ
I
12d)
max
¿
f
sx
f
f
12e)
max
¿
f
sx
1 − t
f
1 − t
f
I
the transfer price?
13a)
1 − t
us
−
1 − t
f
− τ
I
1 − t
f
13b)
us
f
13c)
us
f
I
Page 10 of 21
When P* = P* min
When P* = P* max
Parent (located in US) $5,000 $
Subsidiary (located in the
foreign country)
Overall Corporation $5,000 $7,
The foreign government charges a dividend withholding tax of 10%. The Withholding
tax will be eliminated in 1 year. The US interest rate is 15% while the foreign interest
rate is 2%.
(16) What is the maximum dividend the corporation as a whole can pay to the US
stockholders today
16a) $7,
16b) $5,
16c) $6,
16d) $6,
(17) What is the maximum dividend the subsidiary can pay today?
17a) $7,
17b) $5,
17c) $6,
17d) $6,
(18) What is the optimal transfer pricing / dividend policy and how much does it give
the US stockholders in 1 year?
18a) Set P* = P* min
, pay dividend now, gets $5,750 to stockholders in 1 year.
18b) Set P* = P* max
, pay dividend now, gets $7,316 to stockholders in 1 year.
18c) Set P* = P* max
, pay dividend now, gets $7,245 to stockholders in 1 year.
18d) Set P* = P* max
, pay dividend in 1 year, gets $7,140 to stockholders in 1 year.
Traditional Flow Model would predict:
19a) The dollar would get weaker, because German citizens would import (on net) less
from US.
19b) The dollar would get stronger because German citizens would import (on net)
more from US.
19c) The dollar would get stronger because faster real income growth increases
inflation in Germany
19d) The dollar would get stronger because faster real income growth decreases
inflation in Germany
Page 11 of 21
foreign nominal interest rates:
(20a)
Foreign citizens want to invest in the US because of the higher interest rates
Foreign citizens first must buy dollars to invest in the US
Increased supply of foreign currency creates a surplus of foreign currency
The Dollar strengthens to eliminate the surplus
(20b)
The US Federal Reserve Bank has tight monetary policy
Tight monetary policy means fewer dollars in circulation
Fewer dollars in circulation creates a shortage of dollars and the so the dollar gets
stronger
(20c)
Higher nominal interest rates in the US reflect lower expected inflation in the US
By relative PPP, the dollar must strengthen to equalize the common currency price
in the two countries
(20d)
Lower nominal interest rates in the US reflect lower expected inflation in the US
By relative PPP, the dollar must strength to equalize the common currency price
in the two countries
Page 13 of 21
option?
22a)
22b)
22c)
22d)
Probability
$ value
Probability
$ value
Probability
$ value
Probability
$ value
Page 14 of 21
New York 1.314 Dollars / Euro
Tokyo 1.901 Dollars /Pound
London 0.6712 Pound / Euro
Given the rates above, what is the arbitrage profit on a “per dollar traded” basis?
24 Use the rates in the table below to answer the question
Dollars/Foreign
Spot 1.
90 day Forward 1.
What is the annualized 90-day forward premium or discount?
string
Today 90 days
Cash -In Cash -In Cash -Out
Cash -Out
Page 16 of 21
Use the following table and information to answer questions 26 to 28
Currency Bid ($/€) Ask($/€)
Spot Euro € 1.3500 1.
90 day Forward € 1.3800 1.
Your company has a 350,000€ receivable due in 90 days
A) 350,000€ in Box A
B) 350,000€ in Box B
C) 350,000€ in Box C
D) 350,000€ in Box D
27 Which contract below would hedge the above natural position?
A) Contract to BUY 350,000€ in 90 days at 1.3700$/€
B) Contract to SELL 350,000€ in 90 days at 1.37100$/€
C) Contract to SELL 350,000€ in 90 days at 1.3800$/€
D) Contract to BUY 350,000€ in 90 days at 1.3800$/€
e
$ value
w/ forward
open
Page 17 of 21
The values for X and Y are given by
Page 19 of 21
Page 20 of 21
Use the information given to answer questions 35 to 37
Your company has a subsidiary in Germany. The following trade pattern exists
between the subsidiary and the parent corporation:
(a) The subsidiary buys an input good in Germany for P
I
= $1.
(b) The subsidiary process the input at a cost of C sx
(c) The subsidiary ships the semi-processed good to the parent for P*
(d) The German Government charges an ad-valorem income tax deductible export
tax of x
(e) The US government charges an ad-valorem non-income tax deductible import
tariff of
i
= 25%
(f) The parent further processes the input at a cost of C px
(g) The parent sells the final good for P
f
(h) The US income tax rate is t
us
= 35%
(i) The German income tax rate is t
f
(j) The after tax US interest rate (compounded annually) is i
us
= 4%
(k) The after tax German interest rate (compounded annually) is i
f
All input and output markets are perfectly competitive.
(a) (P* - P I
sx
x
P*)(1-t f
f
px
I
P*)(1-t us
(b) (P* - P I
sx
)(1-t f
x
f
px
I
P*)(1-t us
(c) (P* - P I
sx
x
)(1-t f
f
px
)(1-t us
I
(d) (P* - P I
sx
x
P*)(1-t f
f
px
)(1-t us
I
(e) (P* - P I
sx
x
P*)(1-t
f
f
px
)(1-t
us
I
(f) (P* - P I
sx
x
P*)(1-t f
f
px
I
)(1-t us
