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Chapter 2: 2

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Chapter 2: 2. Explain the mechanism that restores the balance-of-payments equilibrium when it is disturbed under the gold standard. 9. There are arguments for and against the alternative exchange rate regimes. a. List the advantages of the flexible exchange rate regime. b. Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime. c. Rebut the above criticism from the viewpoint of the proponents of the flexible exchange rate regime. Chapter 3: 12. Explain how each of the following transactions will be classified and recorded in the debit and credit of the U.S. balance of payments: a. A Japanese insurance company purchases U.S. Treasury bonds and pays out of its bank account kept in New York City. b. A U.S. citizen consumes a meal at a restaurant in Paris and pays with her American Express card. c. An Indian immigrant living in Los Angeles sends a check drawn on his LA bank account as a gift to his parents living in Mumbai. d. A U.S. computer programmer is hired by a British company for consulting and gets paid from the U.S. bank account maintained by the British company. Chapter 5: 6. Why does most interbank currency trading worldwide involve the U.S. dollar? Chapter 6 Problem: 1. Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he or she invest to maximize the return? Chapter 9: 6. Discuss the implications of purchasing power parity for operating exposure Chapter 12: 7. What should a borrower consider before issuing dual-currency bonds? What should an investor consider before investing in dual-currency bonds? Chapter 14 Problem: 1. Alpha and Beta Companies can borrow for a five-year term at the following rates: a. Calculate the quality spread differential (QSD). b. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. No swap bank is involved in this transaction. Chapter 17: 8. Discuss what factors motivated Novo Industri to seek U.S. listing of its stock. What lessons can be derived from Novo’s experiences? Chapter 18: 2. What is the intuition behind the NPV capital budgeting framework? Chapter 2: 2. Explain the mechanism that restores the balance-of-payments equilibrium when it is disturbed under the gold standard. 9. There are arguments for and against the alternative exchange rate regimes. a. List the advantages of the flexible exchange rate regime. b. Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime. c. Rebut the above criticism from the viewpoint of the proponents of the flexible exchange rate regime. Chapter 3: 12. Explain how each of the following transactions will be classified and recorded in the debit and credit of the U.S. balance of payments: a. A Japanese insurance company purchases U.S. Treasury bonds and pays out of its bank account kept in New York City. b. A U.S. citizen consumes a meal at a restaurant in Paris and pays with her American Express card. c. An Indian immigrant living in Los Angeles sends a check drawn on his LA bank account as a gift to his parents living in Mumbai. d. A U.S. computer programmer is hired by a British company for consulting and gets paid from the U.S. bank account maintained by the British company. Chapter 5: 6. Why does most interbank currency trading worldwide involve the U.S. dollar? Chapter 6 Problem: 1. Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he or she invest to maximize the return? Chapter 9: 6. Discuss the implications of purchasing power parity for operating exposure Chapter 12: 7. What should a borrower consider before issuing dual-currency bonds? What should an investor consider before investing in dual-currency bonds? Chapter 14 Problem: 1. Alpha and Beta Companies can borrow for a five-year term at the following rates: a. Calculate the quality spread differential (QSD). b. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. No swap bank is involved in this transaction. Chapter 17: 8. Discuss what factors motivated Novo Industri to seek U.S. listing of its stock. What lessons can be derived from Novo’s experiences? Chapter 18: 2. What is the intuition behind the NPV capital budgeting framework?