Name______________________

EXAM #1—Fall 2019

BUS 351—International Finance

 Show all of your work to receive full/partial credit. Fully explain your answers.
 This exam is worth 150 points

1. (10 Points) Compare two US-based companies. Magic, Inc. has annual net income of $20m
and is exclusively a US company (no foreign sales and no foreign suppliers). Bird Company
also has annual net income equal to the equivalent of $20m, but half of that comes from a
subsidiary in Paraguay. Which company would need to worry more about agency problems?
Why? What could be done to reduce those agency problems (without reorganizing the
company to copy the business model followed by the other) and how would those work?

2. (10 Points) The theory of comparative advantage justifies international business by

suggesting each country should use its comparative advantage to specialize in production and
then import from other countries products where it is at a disadvantage. There are two other
theories used to justify international business. Explain ONE of them and give an example of
a situation where it might hold.
3. (10 Points) Ford Motor has long had a strategic alliance with Mazda.

a. Explain the pluses and minuses of this strategic alliance approach for Ford versus just
deciding to export their cars and trucks.

b. Explain the pluses and minuses of this strategic alliance approach versus going ahead
and buying Mazda and setting up a new subsidiary in Japan.

4. (10 Points) Consider the valuation model for a multinational business (or project). Consider
a company wishing to expand its operations internationally and is considering either India or
Hong Kong. Experts agree country risk is higher in India than Hong Kong. The expected
dollar-equivalent cash flows of investing either country are equal. Which project would be
more valuable and why?
5. (10 Points) If you believe the Russian ruble is going to depreciate versus the euro over the
next year, explain whether you would rather be borrowing in Russia or investing in Russia
and why.

6. (15 Points) Suppose both Argentine and US interest rates increase, but that Argentine
interest rates increase more.
a. Explain and show graphically what that would likely do to the value of the Argentine
peso versus the dollar.

b. Suppose that your prediction in part a turns out to not be true (the value of the peso
moves the opposite of what you predicted). Explain why the relative interest rate
increase in Argentina didn’t have the predicted results (what else likely changed?).
7. (15 Points) Suppose Dubuque Bank & Trust has a bid price of $1.11 per euro and an ask
price of $1.18 per euro.

a. You are getting ready to travel to Spain and want to convert $500 into euros for
spending money. How many euros could you get from DB&T?

b. Would it be better for you (exchange rate-wise) to convert your dollars at DB&T or
would it be better to use your credit card? (i.e, in which case would your $500 buy
more euros?) Why?

c. Suppose you come back from your vacation and have 40 euros left over. If the bid
and ask prices at DB&T are unchanged, how many dollars would you receive for
those euros?
8. (20 Points) Use the following exchange rates:
 1 USD = 1.341 CAD (Canadian dollars)
 1 Euro = $1.094
 1 GBP = $1.235
 1 USD = 14.988 ZAR (South African Rand)

a. What is the USD equivalent of 500,000 ZAR?

b. What is the USD equivalent of 125,000 Euros?

c. What is the GBP equivalent of $60,000?

d. What is the CAD equivalent of $75,000?

e. What is the ZAR equivalent of 100,000 CAD?

f. What is the Euro equivalent of 100,000 GBP?

9. (20 Points) Suppose the current exchange rate is 9.047 NOK/USD (NOK is Norwegian
Krone). Also you have the following 270 day rates (expressed in annualized terms):
United States Norway

Borrowing Rate 6.27% 12.45%

Lending/Saving Rate 5.64% 11.82%

If you believe that the spot rate will be 8.66 NOK/USD in 270 days, demonstrate how you
might seek to speculate and make money using borrowed funds (the equivalent of $250,000).
Go ahead and calculate the dollar profit or loss in both directions (borrowing one currency
and lending the other….and then flip-flopping it).
10. (30 Points) Consider the case of Brexit (the UK plan to leave the European Union). There is
still not a deal in place for how that will happen (or when).

a. How would you expect that to impact the Financial account for the UK? Explain.

b. Draw the supply and demand for the UK currency (British Pounds, GBP), using the
dollar as the alternate currency (and be sure to state whether you are using $/GBP or
GBP/$ as your price).

c. How would your answer from part a impact your graph? Show and Explain.

d. Does that cause the GBP to appreciate or depreciate? Explain.

e. Based on your answer to part d, explain how the Current Account of the UK will
likely be impacted.