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Internationa Corperate Finance
Internationa Corperate Finance
There has been considerable momentum to reduce or remove trade barriers in an effort to achieve free trade. Yet one dis!runtled e"ecutive of an e"#ortin! firm stated $ree trade is not conceivable% &e are al&a's at the merc' of the e"chan!e rate. (n' countr' can use this mechanism to im#ose trade barriers. )hat does this statement mean*
Question 10 Usin! -e!ression (nal'sis to 1easure E"#osure. a. 2o& can a U.S. com#an' use re!ression anal'sis to assess its economic e"#osure to fluctuations in the 3ritish #ound*
(NS)E-. ( U.S. com#an' could 4uantif' its #erformance b' measurin! the #ercenta!e chan!e
in earnin!s stoc5 #rice or some other variable to be used as the de#endent variable. The inde#endent variable is the #ercenta!e chan!e in the 3ritish #ound. 6a!!ed e"chan!e rate variables could also be included as additional inde#endent variables to ca#ture an' la!!ed im#act of the #ound7s movements on the firm.
b. In usin! re!ression anal'sis to assess the sensitivit' of cash flo&s to e"chan!e rate movements &hat is the #ur#ose of brea5in! the database into sub #eriods*
currenc' is chan!in! over time.
c. (ssume the re!ression coefficient based on assessin! economic e"#osure &as much hi!her in the second sub #eriod than in the first sub #eriod. )hat does this tell 'ou about the firm7s de!ree of economic e"#osure over time* )h' mi!ht such results occur*
(NS)E-. The firm is more e"#osed to chan!e in currenc' values. This could occur if the firm hed!es currenc' #ositions less or is sim#l' increasin! its de!ree of forei!n business.
Question 8
9oes ::: Eliminate ;oncerns about 6on!<Term E"chan!e -ate -is5* :OINT. Yes. Studies have sho&n that e"chan!e rate
movements are related to inflation differentials in the lon! run. 3ased on ::: the currenc' of a hi!h<inflation countr' &ill de#reciate a!ainst the dollar. ( subsidiar' in that countr' should !enerate inflated revenue from the inflation &hich &ill hel# offset the adverse e"chan!e effects &hen its earnin!s are remitted to the #arent. If a firm is focused on lon!<term #erformance the deviations from ::: &ill offset over time. In some 'ears the e"chan!e rate effects ma' e"ceed the inflation effects and in other 'ears the inflation effects &ill e"ceed the e"chan!e rate effects. ;OUNTE-<:OINT. No. Even if the relationshi# bet&een inflation and e"chan!e rate effects is consistent this does not !uarantee that the effects on the firm &ill be offsettin!. ( subsidiar' in a hi!h< inflation countr' &ill not necessaril' be able to ad=ust its #rice level to 5ee# u# &ith the increased costs of doin! business there. The effects var' &ith
each 1N;7s situation. Even if the subsidiar' can raise its #rices to match the risin! costs there are short<term deviations from :::. The investors &ho invest in an 1N;7s stoc5 ma' be concerned about short<term deviations from ::: because the' &ill not necessaril' hold the stoc5 for the lon! term. Thus investors ma' #refer that firms mana!e in a manner that reduces the volatilit' in their
)2O IS ;O--E;T* Use the Internet to learn more about this issue. )hich ar!ument do 'ou su##ort* Offer 'our o&n o#inion on this issue.
(NS)E-. It is #ossible that inflation and e"chan!e rate effects &ill offset over the lon! run. 2o&ever man' investors &ill not be satisfied because the' ma' invest in the firm for =ust a fe& 'ears or even a shorter term. Thus the' &ill #refer that 1N;s assess their e"#osure to e"chan!e rate ris5 and attem#t to limit the ris5.
Question > )ith the !ro&th in international business over the #ast decade various international financial mar5ets have been develo#ed. $inancial mana!ers of 1ulti National ;om#anies +1N;, must understand the various
-e4uired. ;riticall' anal'se the motives for usin! international financial mar5ets b' the business in order to facilitate their international business transactions.