国际财务管理课后习题答案chapter9

IM-1CHAPTER9MANAGEMENTOFECONOMICEXPOSURESUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMSQUESTIONS1.Howwouldyoudefineeconomicexposuretoexchangerisk?Answer:Economicexposurecanbedefinedasthepossibilitythatthefirm’scashflowsandthusitsmarketvaluemaybeaffectedbytheunexpectedexchangeratechanges.2.Explainthefollowingstatement:“Exposureistheregressioncoefficient.”Answer:Exposuretocurrencyriskcanbeappropriatelymeasuredbythesensitivityofthefirm’sfuturecashflowsandthemarketvaluetorandomchangesinexchangerates.Statistically,thissensitivitycanbeestimatedbytheregressioncoefficient.Thus,exposurecanbesaidtobetheregressioncoefficient.3.SupposethatyourcompanyhasanequitypositioninaFrenchfirm.Discusstheconditionunderwhichthedollar/francexchangerateuncertaintydoesnotconstituteexchangeexposureforyourcompany.Answer:Merechangesinexchangeratesdonotnecessarilyconstitutecurrencyexposure.IftheFrenchfrancvalueoftheequitymovesintheoppositedirectionasmuchasthedollarvalueofthefrancchanges,thenthedollarvalueoftheequitypositionwillbeinsensitivetoexchangeratemovements.Asaresult,yourcompanywillnotbeexposedtocurrencyrisk.4.Explainthecompetitiveandconversioneffectsofexchangeratechangesonthefirm’soperatingcashflow.Answer:Thecompetitiveeffect:exchangeratechangesmayaffectoperatingcashflowsbyalteringthefirm’scompetitiveposition.Theconversioneffect:Agivenoperatingcashflowsintermsofaforeigncurrencywillbeconvertedintohigherorlowerdollar(homecurrency)amountsastheexchangeratechanges.IM-25.Discussthedeterminantsofoperatingexposure.Answer:Themaindeterminantsofafirm’soperatingexposureare(1)thestructureofthemarketsinwhichthefirmsourcesitsinputs,suchaslaborandmaterials,andsellsitsproducts,and(2)thefirm’sabilitytomitigatetheeffectofexchangeratechangesbyadjustingitsmarkets,productmix,andsourcing.6.Discusstheimplicationsofpurchasingpowerparityforoperatingexposure.Answer:Iftheexchangeratechangesarematchedbytheinflationratedifferentialbetweencountries,firms’competitivepositionswillnotbealteredbyexchangeratechanges.Firmsarenotsubjecttooperatingexposure.7.GeneralMotorsexportscarstoSpainbutthestrongdollaragainstthepesetahurtssalesofGMcarsinSpain.IntheSpanishmarket,GMfacescompetitionfromtheItalianandFrenchcarmakers,suchasFiatandRenault,whosecurrenciesremainstablerelativetothepeseta.WhatkindofmeasureswouldyourecommendsothatGMcanmaintainitsmarketshareinSpain.Answer:PossiblemeasuresthatGMcantakeinclude:(1)diversifythemarket;trytomarketthecarsnotjustinSpainandotherEuropeancountriesbutalsoin,say,Asia;(2)locateproductionfacilitiesinSpainandsourceinputslocally;(3)locateproductionfacilities,say,inMexicowhereproductioncostsarelowandexporttoSpainfromMexico.8.Whataretheadvantagesanddisadvantagesoffinancialhedgingofthefirm’soperatingexposurevis-à-visoperationalhedges(suchasrelocatingmanufacturingsite)?Answer:Financialhedgingcanbeimplementedquicklywithrelativelylowcosts,butitisdifficulttohedgeagainstlong-term,realexposurewithfinancialcontracts.Ontheotherhand,operationalhedgesarecostly,time-consuming,andnoteasilyreversible.9.Discusstheadvantagesanddisadvantagesofmaintainingmultiplemanufacturingsitesasahedgeagainstexchangerateexposure.Answer:Toestablishmultiplemanufacturingsitescanbeeffectiveinmanagingexchangeriskexposure,butitcanbecostlybecausethefirmmaynotbeabletotakeadvantageoftheeconomyofscale.IM-310.Evaluatethefollowingstatement:“Afirmcanreduceitscurrencyexposurebydiversifyingacrossdifferentbusinesslines.”Answer:Conglomerateexpansionmaybetoocostlyasameansofhedgingexchangeriskexposure.Investmentinadifferentlineofbusinessmustbemadebasedonitsownmerit.11.Theexchangerateuncertaintymaynotnecessarilymeanthatfirmsfaceexchangeriskexposure.Explainwhythismaybethecase.Answer:Afirmcanhaveanaturalhedgingpositiondueto,forexample,diversifiedmarkets,flexiblesourcingcapabilities,etc.Inaddition,totheextentthatthePPPholds,nominalexchangeratechangesdonotinfluencefirms’competitivepositions.Underthesecircumstances,firmsdonotneedtoworryaboutexchangeriskexposure.IM-4PROBLEMS1.SupposethatyouholdapieceoflandintheCityofLondonthatyoumaywanttosellinoneyear.AsaU.S.resident,youareconcernedwiththedollarvalueoftheland.Assumethat,iftheBritisheconomyboomsinthefuture,thelandwillbeworth£2,000andoneBritishpoundwillbeworth$1.40.IftheBritisheconomyslowsdown,ontheotherhand,thelandwillbeworthless,i.e.,£1,500,butthepoundwillbestronger,i.e.,$1.50/£.YoufeelthattheBritisheconomywillexperienceaboomwitha60%probabilityandaslow-downwitha40%probability.(a)Estimateyourexposurebtotheexchangerisk.(b)Computethevarianceofthedollarvalueofyourpropertythatisattributabletotheexchangerateuncertainty.(c)Discusshowyoucanhedgeyourexchangeriskexposureandalsoexaminetheconsequencesofhedging.Solution:(a)Letuscomputethenecessaryparametervalues:E(P)=(.6)($2800)+(.4)($2250)=$1680+$900=$2,580E(S)=(.6)(1.40)+(.4)(1.5)=0.84+0.60=$1.44Var(S)=(.6)(1.40-1.44)2+(.4)(1.50-1.44)2=.00096+.00144=.0024.Cov(P,S)=(.6)(2800-2580)(1.4-1.44)+(.4)(2250-2580)(1.5-1.44)=-5.28-7.92=-13.20b=Cov(P,S)/Var(S)=-13.20/.0024=-£5,500.Youhaveanegativeexposure!Ast