Term
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Definition
| the political uncertainty associated with a particular country |
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Term
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Definition
| short- to medium-term loans of a Eurocurrency to multinational corporations and governments of medium to high credit quality |
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Definition
| a time deposit that is in a bank located in a country different from the country that issued the currency |
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Definition
| a U.S. dollar deposited in a bank outside the United States |
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Definition
| international markets where currencies are bought and sold in wholesale amounts |
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Term
| foreign exchange rate risk, or exchange rate risk |
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Definition
| the uncertainty associated with future currency exchange rate movements |
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Term
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Definition
| a rate agreed on today for an exchange to take place on a specified date in the future |
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Definition
| the removal of barriers to free trade and the integration of national economies |
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Definition
| a financial transaction intended to reduce risk |
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Term
| London Interbank Offer Rate (LIBOR) |
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Definition
| the interest rate British-based banks charge each other for short-term loans. Also, commonly used as the base rate for Eurodollar loans that are not between two banks |
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Term
| multinational corporation |
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Definition
| a business firm that operates in more than one country |
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Term
| repatriation of earnings restrictions |
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Definition
| restrictions placed by a foreign government on the amount of cash that can be repatriated, or returned to a parent company by a subsidiary doing business in the foreign country |
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Definition
| the exchange rate for immediate delivery |
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Term
| transnational corporation |
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Definition
| a multinational firm that has widely dispersed ownership and that is managed from a global perspective |
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Term
| The bid quote is the rate at which the dealer will sell foreign currency. |
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Definition
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Term
| If a firm is located in a country with a relatively unstable political environment, management will require a lower rate of return on capital projects. |
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Definition
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Term
| Long-term debt sold by a foreign firm to investors in a foreign country and denominated in that country’s currency is called a |
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Definition
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Term
| Which one of the following statements about Eurobonds is NOT true? |
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Definition
Multinational firms can use Eurobonds to finance international or domestic projects.
XX Eurobonds are bonds that have to be registered.
Eurobonds also pay interest annually.
Eurobonds are bearer bonds and do not have to be registered. |
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Term
| Spot rate: Tantrix, Inc., purchased its inventory from an Indian manufacturer at a cost of Rs.5,325,000. The dollar cost of this payable is $125,634.07 at today’s spot rate. What is the spot rate today? |
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Definition
Inventory cost to firm = Rs. 5,325,000
Dollar cost of purchase = $125,634.07
Spot rate at which the foreign currency revenue was converted:
Rs.5,325,000/$125,634.07
= Rs.42.3850 = $0.0236/Rs. |
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Term
| Spot rate: Given that the spot rate is $1.5136/€ and the 90-day forward quote is $1.4974/€, we can say that |
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Definition
| Since the forward quote of $1.4974/€ implies that fewer dollars will be needed to purchase the euro compared to the spot rate of $1.5136/€, we can say that the U.S. dollar is at a forward premium against the euro. |
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Term
| Forward rate: John Travers is planning a holiday to Thailand but is concerned that the U.S. dollar will decline in value before he makes his trip. His travel agent has planned a trip for him for a total cost of 41,250 Thai baht. John plans to purchase the bahts forward and is given a dollar estimate of $1,247.17 based on the 30-day forward quote. What is the forward rate? |
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Definition
Cost of trip = THB 41,250
Cost of trip based on forward rate = $1,247.17
30-day forward quote = THB 41,250 / $1,247.17 = THB 33.0745/$ |
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Term
| Bid-ask spread: Banco Herrero wants to make a bid-ask spread of 0.55 percent on its foreign exchange transactions. If the ask rate on the Mexican peso (MP) is MP10.4192/$, what does the bid rate have to be? |
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Definition
Bid-Ask spread = Ask rate - bid rate/ask rate
0.0055 = 10.4192 - bid rate/10.4192
10.4192 - bid rate = 0.0055 x 10.4192
= 0.0057
Bid rate = 10.4192 - 0.0057
= MP10.3619/$
The ask rate will have to be MP10.3619/$ to provide a 0.55 percent bid-ask spread. |
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Term
| Cross rate: Trident Corp. recently purchased machinery parts worth 23.5 million Mexican pesos (MP). Management needs to find out the U.S. dollar cost of the payables. It has access to two quotes for Canadian dollars (C$): C$1.0774/$ and C$0.0981/MP. What will it cost Trident to purchase 23.5 million Mexican pesos? Round to the nearest dollar. |
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Definition
Foreign currency payables = MP 23.5 million
To find the MP/$ quote, divide the C$/MP quote by the C$/$ quote.
Cross rate = C$0.0981/MP / C$1.0774/$ = $0.0910525/MP
Dollar cost of payables
= MP23,500,000 × $0.0910525/MP
= $2,139,735 |
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Term
| Hedging: Kapona Industries has purchased equipment from a Korean firm for a total cost of 11,500,000 Korean won. The firm has to pay in 90 days. J. P. Morgan has given the firm a 90-day forward quote of $0.0009791/won. Assume that on the day the payment is due, the spot rate is at $0.001004/ won. How much would Kapona save by hedging with a forward contract? Round to the nearest dollar. |
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Definition
Foreign currency payables = 11,500,000 Korean won
Spot rate on payment date = $0.001004/ won
Dollar cost of payables = 11,500,000 won × $0.001004/ won= $11,546
30-day forward rate = $0.0009791/won
Cost if hedged at forward rate = 11,500,000 won × $0.0009791/won= $11,259.65
Cost savings = $11,546.00 – $11,259.65 = $286.35 |
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