Session 13 - Multinational Finance, Chapter 17

All page numbers are references to Corporate Finance: A Focused Approach 7th edition by Ehrhardt and Brigham (Cengage Learning, 2020)

Chapter 17

Things to Absorb - This is a light coverage chapter. Understand the main reasons companies go “global” and how multinational and domestic financial management differ. Know terms such as exchange rate, Eurodollar, Eurobond, direct quotation, indirect quotation, cross rate, interest rate parity, purchasing power parity, forward and spot exchange rates, pegged vs floating rates, etc. You need to be able to calculate direct and cross exchange rates, simple interest rate parity and purchasing power parity.
 

Things You Do Not Need to Absorb - How to compute the NPV of a foreign investment on an exam.

Things to Read - Read Chapter 17.

Things to Do - Make 100 on the quiz. Be able to answer end of chapter Questions 1-4, 9, 10, Problems 1-8, 10-12. Be able to compute exchange rates, cross rates, interest rate parity, forward-spot rates, and purchasing power parity. If you really like this topic use the Excel spreadsheets in the Toolkit for the chapter. Testing is likely to be directly from quiz questions or end of chapter questions and problems.

1. Watch the Chapter Introduction and Overview video. The Powerpoints for all of this chapter's videos are located here.
2. Read pages 697-701.
3. Watch the What is a Multinational and Basics of Exchange Rates video (Minicase, pages 741-743, covers parts a-b) covers . After this video, you should be able to answer end of chapter questions 1 and 6.
4. Read pages 702-707.
5. Watch the Computing Direct, Indirect and Cross Exchange Rates video (Minicase, part c) . After this video, you should be able to answer end of chapter question 4 and end of chapter problems 1 and 6.
6. Read pages 707-710.
7. If you feel the need, watch the video on International Monetary System (Minicase, parts d-e). It is unlikely this topic will be tested on the Exam, although some definitions are possible.
8. Read the remainder of the chapter.
9. You should watch the video on Spot and Forward Rates (Minicase, part f). Similarly the video on Interest Rate Parity and Purchasing Power Parity (Minicase, parts g-i) has testable topics. The final video on International Capital Budgeting and Working Capital Management (Minicase, parts j-n) is neither testable nor competently delivered.
10. Make sure you think you could solve the remaining suggested end of chapter Questions and Problems.
11. Below are audio solutions
a.If one Swiss franc can purchase $0.71 U.S. dollars, how many Swiss francs can one U.S. dollar buy? | Audio Solution
b. A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland? | Audio Solution
c. Suppose one British pound can purchase 1.82 U.S. dollars today in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days? | Audio Solution
d. Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market? | Audio Solution
e. Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 1.64 euros. What is the cross-rate of Swiss francs to euros? | Audio Solution
12. Review the remaining above suggested questions and problems. Be prepared for a 10 question quiz over Chapter 17.

Modified October 19, 2019.