Global Financial Strategy

Final Exam Review Questions Instructions

A. Please be concise and precise in your answers.

B. Practice answers for closed book, class room setting.

C. Suggested length: minimum one page; maximum two pages per question.

D. You would answer 5 questions or Problems in two hours in final exam. Questions

1. Ethical Standards

a. Can a multinational firm adopt varying ethical standards [such as with regard to product safety (Pinto), employee benefits (Nike) and “kickbacks” to win business (HP)] in its global operations? Why or Why Not? Discuss in depth based on the goals of multinational corporations? (Be sure to identify the merits and demerits/pitfalls for both options).

b. How do corporate governance and financial management differ for US based corporations and global multinational corporations?

(Read: Class notes and discussions)

2. Global Pricing Strategy

With the emergence of the Internet as a dominant influence in global markets, many anticipated that the “Law of One Price” for all products would evolve. However that did not materialize.

 What is “Law of One Price”?. When would that exist globally?  Identify the major pricing strategies/ methodologies of corporations in pricing products and services.  How is “internet pricing” different from ‘brick and mortar’ pricing? Discuss the impact of the Internet on “Global Pricing Strategies” of firms.

(Class presentation, notes, and presentation by Professor) 3. Triangular Arbitrage Strategy:

A. Is the foreign exchange market inefficient? Discuss.

B. Problem:

The following Quotations are available to you. (You may either buy or sell at the stated rates) Singapore Bank: Singapore dollar quote for Korean Won Won 714.00/S$ Hong Kong Bank: HK$ quote for Singapore dollars HK$ 4.70/S$ Korean Bank: Korean won quote for Hong Kong dollars Won 150.00/HK$

Assume you have an initial HK$1,000,000. Is triangular Arbitrage possible? If so, explain the Steps, and compute your profit?  What are the implications of trading spreads and commission costs for this profit?

(Read: Class notes, and problem presented in class)

4. Financial Institutions Muti-goal Optimization Strategy:

a. Identify the major ‘objectives’ and ‘problems’ in the management of financial institutions globally. What strategies do institutions use to meet these challenges?

b. How do regulators evaluate the financial institutions?

c. Why did ‘Virtual Banks’ fail? Discuss in depth. Based on this, What are the prospects for Mobile Banking worldwide in the forthcoming decade?

d. How do Central Banks promote Monetary Stability? Explain with reference to the recent ‘sub-prime’ crisis.

(Read: Class Notes)

5. Theoretical Relationship 1: Relationship between Money Supply and Inflation; Monetary Equation

a. What Causes Inflation? Discuss.

b. What is the ‘Monetary Equation’. Why is it important to the financial manager?

c. What are the implications of this for the ‘foreign exchange market’?

(Read: presentation in class and class notes) 6. Trade Policy and Offshoring Strategy:

a. Why do nations trade with one another? Explain in your own words. (Ricardo’s theory of Comparative advantage: Economics and Efficiency)

b. What is Dynamic Comparative Advantage? What are the implications of this for the current debate on “Outsourcing” and “Off-shoring?” [Vernon]

c. What strategies should corporations adopt to minimize the impact of off-shoring on its employees?

(Read: Article presented in class, and class hand outs)

7. Theoretical Relationship 2 : Relationship between Inflation and Interest Rates; Domestic Fisher Effect

What is the ‘Domestic Fisher Effect’? What is the relationship between Inflation and interest rates ? Why is it important for the Global Financial manager?

(Read: class notes and hand outs)

8. Theoretical Relationship # 3: Relationship between Inflation and Exchange Rates; Purchasing Power Parity

Explain the concept of ‘purchasing power parity’ (PPP) in your own words. What are the requisite conditions for PPP to exist? What is the relationship between PPP and exchange rates ?

(Read: class notes and Instructor Notes on PPP)

9. Theoretical Relationship # 4: Relationship between Interest Rates and Exchange Rates; Interest Rate Parity

Illustrate the concept of ‘Interst Rate Parity’ and ‘Covered Interest Arbitrage’ with a numerial example. What are the implications of this for Foreign Exchange Market.?

(Read: class notes and Instructor Notes on IRP) 10. Auctions Market Strategy :

Are auctions the optimal method to sell a security or service? Explain the advantages, and disadvantages of the Auction method of Selling for the buyer and seller, using a specific example.. Explain why corporations do not sell “all” their products by auctions? What are the reasons for the success of Internet auction companies such as e-bay and Priceline?.

(Read Presentations in class)

11. Global Financial Crisis:

Briefly Explain these crisis in your own words, what these are about, what caused it, how it was resolved and what are the lessons learnt from it.

- Debt Crisis: Russia, Iceland

- Foreign Exchange Crisis: Mexico, Asian Crisis

- Banking Crisis: Japan, USA Subprime

12. Risk Management and Hedging Strategy Using Forwards You have been hired by Amerikan Airlines. Your primary task is to keep the Airline in Business and to ensure that you have to accomplish these two goals.

 Keep airfares low and at a comparable steady price throughout the year  Protect the airline from fluctuating fuel costs With these objectives you need to develop Hedging strategies in the Forward Market. An historical Review reveals that the Airline consumes 1 million barrels of fuel during the planned horizon and the price of fuel has fluctuated in the previous 5 years from $30.00 to $145.00. Fuel cost represents about 40% of the cost of operation and is next in importance to salaries and wages. Identify the steps you would initiate to protect the company from fluctuating fuel costs and achieve your above two objectives. (Read Presentations in class) 13. Risk Management and Hedging Strategy Using Futures

You have been hired as a Financial Analyst at “Burger Donalds” and scheduled to begin on July 1, 2012. Your first Assignment involves the Futures Markets. The Burger Production Manager informs that he wants 5 million bushels of wheat on December 1, 2012 of the year to ensure continued and uninterrupted production of Super Burgers. You glance through the Wall Street Journal on July 1 and observe these prices. Spot Price of Wheat on July 1 (Per Bushel) $7.52 July Wheat futures price (Delivery on July 31) $7.54 August Wheat futures price (Delivery on Aug 31) $7.55 October Wheat futures price (Delivery on Oct 31) $7.56 November Wheat futures price (Delivery on Nov 30) $7.58 From Historical company records you know that if you buy the wheat ahead of the required time you can store it at a cost of 2 cents per bushel per month. Outline all your strategies (at least six!) and their implications. (Read Presentations in class)

14. Risk Management and Hedging Strategy Using Options

You have been hired as a manager of a well diversified mutual fund which has a portfolio of Stocks valued at $100 million dollars. It is approximately invested in 500 different shares. These stocks attempt to match/track the S&P 500 index, which has a current value of 1,000 points. You are very concerned about the state of the economy: An interest rate increase, oil price shock, volatile situation abroad and the like. You want to protect the value of your portfolio. Make a presentation to your board members about how you can use the Options market for Portfolio insurance with specific emphasis on its costs and benefits.

(Read Presentations in class) 15. Risk Management and Hedging Strategy Using Swaps:Debt for Equity Swaps:

A few years back the Government of Japan made the offer to the Government of Brazil:

The Brazilian government will give the “Exclusive rights to all the Minerals/ Metals/ and Mining opportunities in Brazil to a consortium of Japanese Corporations for one hundred years to mine, manufacture, extract and sell the commodities. After the one hundred years the Japanese corporations will vacate and the properties will be transferred to the Brazilian government or its designee. In return for this privilege the Japanese Consortium will retire the “entire external debt” of the Brazilian Government (This was estimated to be $250 billion dollars).

Identify from the perspectives of the Japanese and Brazilian Governments what are the advantages and disadvantages of this proposal. Could this Debt for Equity Swap Work? Why or Why Not? What are the potential problems? As a global manager, what strategies should you adopt to make this work?

(Read Presentations in class)

16. Foreign Exchange Hedging using Foreign Currency Derivatives: Problem Scout Finch is the Chief Financial Officer [CFO] of Dayton Manufacturing, a U.S. based manufacturer of gas turbine equipment. She has just concluded negotiations for the sale of a turbine generator to Crown, a British firm for One million pounds. This single sale is quite large in relation to Dayton’s present business. Dayton has no other current foreign customers, so the currency risk of this sale is of particular concern. The sale is made in March with payment due three months later in June. Scout Finch has collected the following financial market information for the analysis of her currency exposure problem:  Spot Exchange rate: $1.7640 per British pound.  Three month forward rate: $1.7549 per pound (a 2.2676% p. a. discount on the pound)  Dayton’s cost of capital: 12%  U.K. three month borrowing interest rate: 10.0% (or 2.5% per quarter)  U.K. three month investment interest rate: 8.0% (or 2% per quarter)  U.S. three month borrowing interest rate: 8.0% ( or 2.0% per quarter)  U.S. three month investment interest rate: 6.0% (or 1.5% per quarter)  June put option in the over-the-counter (bank) market for 1,000,000 British pounds; Strike price $1.75 (nearly at-the money) 1.5% premium  June put option in the over-the counter (bank) market for 1,000,000 British pounds: Strike price $1.71 (out-of-the money) 1.0% premium  Dayton’s foreign exchange advisory service forecasts that the spot rate in there months will be $1.76 per British pound. Like many manufacturing firms, Dayton operates on relatively narrow margins. Although Ms. Finch and Dayton would be very happy if the pound appreciated versus the dollars, concerns center on the possibility that the pound will fall. When Ms. Finch budgeted this specific contract, she determined that the minimum acceptable margin was at a sale price of $1,700,000. The budget rate, the lowest acceptable dollar per pound exchange rate, was therefore established at $1.70 per British pound. Any exchange rate below would result in Dayton actually losing money on the transaction. Four alternatives are available to Dayton to manage the exposure: 1. Remain un-hedged. 2. Hedge in the forward market. 3. Hedge in the money market. 4. Hedge in the options market. What should Dayton do?

17. Country Risk and Global Capital Budegeting Strategy:

Your corporation has an opportunity to make a major investment in China of $100 million to develop an offshore manufacturing facility. When this plant is fully developed and becomes operational in two years the corporation can close down its current manufacturing facility in the United States and shift operations to China. At present, the expected annual savings in labor and benefit cost is expected to be $20 million. You are asked to develop a proposal to identify the potential risk of this proposal and ‘advantages’ and ‘problems’ of this opportunity. Explain how you would proceed. i. What are the inherent risks in this opportunity? ii. What economic data would you need for your analysis? Why (How would you use them)? iii. What potential factors that affect exchange rates between China and US ? How would you protect against that risk? iv. What other strategies do you recommend before your corporation implements this proposal?

18. Global Economy Development Strategey The BRIC countries, as per Goldman Sachs study, are expected to be dominant economies in the world in the next 25 years and are projected to challenge the existing world economic order. What are the economicl and financial implications of this for U.S. financial managers with respect to the following:  International Trade Transactions  International Securities Transactions What exciting opportunities and critical challenges such a development pose for multinational corporations and U.S. citizens?  How do we benefit from it?

19. Theoretical Relationship 6: Relationship between Spot and Forward Prices

Illustrate the concept of “Spot-Forward pricing parity” relationship with a numerical example. What are the implications of this for Foreign Exchange Market?

20. Bond Market Indexation Strategy

Illustrate the need for, motivation, and concept of Indexation with an example to protect against Inflation in the Global Debt Markets.

21. Global Markets Investment Strategy:

a. Why should investors consider investing overseas?

b. What are the potential advantages and perils?

c. What is Market Efficiency? What are the implications of Market Efficiency, in a global capital market, for a manager for the pricing of securities and investing corporations’ money?

d. Why is psychology important in global setting? 22. Current Hot Topic: European Sovereign Debt Crisis

Currently PIIGS [Portuagal, Ireland, Italy, Greece and Spain] countries have a Soveriegn Debt problem.  What are the ultimate causes for the current crisis?  What are the potential implications of this problem for Euro-Currency and European Monetary Integration. What should Europe do to address this problem now and what are the potential perils?  What are the Implications of this problem for USA?

23. Electronic Fraud:

“World wide an increasing percentage of population is adopting the Internet and the Global Financial Transactions are increasingly Electronic. Under such a scenario, the greatest threat to Global Finances is Cyber Security. A breach could have catastrophic consequences”

 What are the positive aspects of increasing adoption of E-Finance globally?  What are the major challenges due to the increasing use of E-Finance?  What should Governments and Financial institutions do to preserve and protect global citizens and ensure that they are not exploited by vested interests in the cyber world?