Global firms and governance, international monetary systems, forex markets, and
ID: 2384055 • Letter: G
Question
Global firms and governance, international monetary systems, forex markets, and market parities.
Global firms and governance:
1.) How would you define and measure multinational corporations?
2.) Define greenfield investment versus foreign direct investment.
3.) ESM13, chapter 2, question 8.
Labor Unions. In Germany and Scandinavia, among others, labor unions have representation on boards of directors or supervisory boards. How might such union representation in the board be viewed under the shareholder wealth model as opposed to the stakeholder wealth model?
4.) ESM13, chapter 2, question 14.
Stock Options. How would stock options granted to a firm’s management and employees be viewed by the shareholder wealth maximization model compared to the stakeholder wealth maximization model?
5.) In 1995, a working group of French chief executive officers was set up by the Confederation of French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the French corporate governance structure. The group reported the following, among other things
“The board of directors should not simply aim at maximizing share values as in the U.K. and the U.S. Rather, its goal should be to serve the company, whose interests should be clearly distinguished from those of its shareholders, employees, creditors, suppliers and clients but still equated with their general common interest, which is to safeguard the prosperity and continuity of the company”. Evaluate the above recommendation of the working group.
6.) Japan has a higher ratio of stock market capitalization relative to GDP than the US. What would explain this?
International monetary systems
1.) ESM13, chapter 3, question 1.
The Gold Standard and the Money Supply. Under the gold standard all national governments promised to follow the “rules of the game.” This meant defending a fixed exchange rate. What did this promise imply about a country’s money supply?
2.) ESM13, chapter 3, question 9.
Mavericks. The United Kingdom, Denmark, and Sweden have chosen not to adopt the euro, but rather to maintain their individual currencies. What are the motivations of these three countries, which are also members of the European Union?
3.) ESM13, chapter 3, question 14.
Bretton Woods Failure. Why did the fixed exchange rate regime of 1945–1973 eventually fail?
4.) What lessons can economists draw from the breakdown of the Bretton Woods system?
5.) ESM13, chapter 5, question 10.
Eurozone Sovereign Debtors. Why are the sovereign debtors of the eurozone considered to have a problem that is different from these of any other heavily indebted country, like the United States?
Forex markets:
1.) ESM13, chapter 6, question 9.
Define and give an example of American and European terms of exchange rate quotation.
2.) ESM13, chapter 6, question 10.
Define and give an example of the following:
a. Direct quote between the U.S. dollar and the Mexican peso, where the United States is designated as the home country.
b. Indirect quote between the Japanese yen and the Chinese renminbi (yuan), where China is designated as the home country.
3.) The $/€ exchange rate is €1 = $1.35, and the €/SF exchange rate is SF 1 = €0.61. What is the SF/$ exchange rate?
4.) Suppose the direct quote for sterling in New York is 1.98805. How much would £500,000 cost in New York?
5.) An investor wishes to buy euros spot at $1.3480 and sell euros forward for 180 days at $1.3526. What is the annual rate of return on this (same as the forward premium on euro)? What is the forward premium on the dollar?
6.) In 2009, one dollar bought ¥125. In 2013, it bought about ¥115.
a.)By what percent has the yen risen in value between 2009 and 2013?
b.) By what percent has the dollar fallen in value between 2009 and 2013?
7.) Currently the exchange rate is 10 peso per one $. The analysts are predicting that the peso may devalue by 20%. What would be the new exchange rate if the peso devaluation occurs?
Parities:
1.) ESM13, chapter 7, question 1.
Define the following terms:
a. The law of one price.
b. Absolute purchasing power parity
c. Relative purchasing power parity.
2.) “If the law of one price holds, it follows that the PPP holds.”
Comment.
3.) An economic analysis firm has just published projected inflation rates for the U.S. and Germany for the next five years. U.S. inflation is expected to be 6% per year, and German inflation is expected to be 2% per year. If the current exchange rate is $0.95/€, what should the exchange rates be in three years?
4.) The short-term interest rate in France is 3.7%, and expected French inflation is 1.8%. What is the real interest rate in France?
5.) The oneyear interest rate is 12% on British pounds and 9% on U.S. dollars. If the current exchange rate is $1.63:£1, what is the expected future exchange rate in one year?
6.) Jason Smith is a foreign exchange trader with Citibank. He notices the following quotes.
Spot exchange rate SFr1.6627/$
Six-month forward exchange rate SFr1.6558/$
Six-month $ interest rate 3.5% per year
Six-month SFr interest rate 3.0% per year
a.) Ignoring transaction costs, is the interest rate parity holding?
b.) Is there an arbitrage possibility? If yes, what steps would be needed to make an arbitrage profit? Assuming that Jason Smith is authorized to work with $1,000,000 for this purpose, how much would the arbitrage profit be in dollars?
7.) In early 1989, Japanese interest rates were about 4 percentage points below U.S. rates. The wide difference between Japanese and U.S. interest rates prompted some U.S. real estate developers to borrow in yen to finance their projects. Comment on this strategy, and spell out the sequence of the transactions.
8.) The Fed adopts an easier monetary policy. How is this likely to affect the value of the dollar?
Explanation / Answer
Note -4 Parts of the 1st questions have been answered.
Ans 1 A multinational corporation is a business concern with operations in more than one country. They access different markets across the world either through mergers, acquiring controlling interest in existing businesses, Foreign direct investment , Joint Ventures Etc.GAAP requires the consolidation of financials statement of subsidiaries of the multinational corporation in to one single financial statement for measurement of financial position and results Ans 2 A corporation once decided to enter in to different geographical market in a different country , it may do so by foreign direct investment which is possible through acquisitions of existing target companies or by setting up the entire operational facilities in the country of proposed market, the later known as green field investment. Normally Greenfield investment is done in developed countries where tax incentives are provided by Governments to bolster the creation of employment or gaining of knowledge. Ans 3 Maximization of shareholders wealth is the objective of board of directors of an organization. However stakeholders wealth maximization model give emphasis on maximization of the wealth of all the parties( Stake holders) like Suppliers, Customers, Stockholders,Governement and Employees. It assumes that such an all-round vision ultimately increase the value of stock holders by sustaining the business over a long horizon. Ans 4 Stock Options granted to employees is an incentive for the employees to have an ownership interest in the business. Expenses in connection with option may be viewed as negatively by stock holders since it would dilute the existing stock holders earning per share. However, when viewed it from stake holders wealth maximization perspective , it motivates the key employees who are one of major stake holders and there by increase the value of organizationRelated Questions
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