FIRE 416 Final Exam Review:

1) Explain the importance of international business activity to large corporations. What are the types of opportunities sought by aspiring multinational companies? What are the risks faced by these firms which are specific to the international nature of their business activities?

2) Given the following Euro to $ Exchange rate of 1.46, what is the information contained in this quote? If the Purchasing Power Parity Theory is correct, what is true about the relationship between the US dollar & the Euro at this exchange rate?

3) A US multinational company is required to report its financial results in US dollars. How does this create currency exchange risk for the company? What is the term which most accurately describes this particular risk?

4) Identify & describe the ways in which a US company can participate in international commerce.

5) The price of a currency forward contract is determined by the relationship between interest rates of the two countries in question & the time period covered by the contract. Is this statement exactly true, partly true or false. Explain your response.

6) Company ABC commits to sell $10 million of its product (produced in the US with raw materials from the US) to a Japanese customer delivered within 60 days from today with payment to be received 90 days from today in yen. What are the risks faced by ABC? What are the events in the currency markets which would erode the profitability of this sale? How can ABC protect itself from the adverse consequences of currency market fluctuations?

7) Distinguish between forward contracts, futures, options, caps, collars & swaps as currency risk management tools.

Forward contracts currencyfutures,109,110,112–122,125, 128–131,214–218,249–251,277 currencyoptionscompared,135 customized,109,118,119,250 hedgingcurrencyrisk,214–218,242,243, 247–251 synthetic(homemade),251

Options,135,158,438,439.SeealsoCurrency options;Realoptions

8) What are the advantages of futures contracts as compared to currency forward agreements?

9) Citibank US plans to lend $100 million US to a Canadian customer. The borrower will repay the loan in Canadian dollars. Describe in detail how the risks of this loan differ from those of lending $10,000,000 in the US. What are the ways that a US bank can manage the risks of lending in Canada.

10)Identify & explain at least four factors which affect currency exchange rates.

11)Discuss at least 2 risk factors for firms in inter’l commerce beyond currency exchange rate risk.

12)International business activities are inherently more attractive to large companies in mature markets than to small high growth US companies. True or false. Why or why not.

13)International activities & their risk elementsa. Exportb. Importc. Investmentd. Overseas operations

14)Discuss the method of determining the “fair value” for forward, futures & options contracts.

15)Be able to explain the importance of Efficient Market Hypothesis 94–96,519-520, Arbitrage Pricing Theory 569 – 571,

Purchasing Power Parity 73–75, 87,89, 91, 93,96-97, 266, 269, 280, 356, 563, 567-568, 583 & Interest Rate Parity 88 in currency markets.

16)Distinguish between option, forwards & futures as hedging tools in the currency markets.

17)Be able to explain the differences between OTC & Exchange Traded markets.

18)Be able to write a brief overview of global currency market structure.

19)Be able to discuss a range of arbitrage issues as they relate to

20)Explain the differences between gross & net currency risk exposures for a multinational corp.

21)Give a brief description of political risk. Describe the range of ways in which political risk can adversely affect the performance of multinational corporations.

22)Describe the basic characteristics of currency hedging tools: forwards, futures, swaps, options & more complex options (caps, floors, collars), as well as “natural hedges” on a firm’s balance sheet.

23)Discuss the importance of exchange rate forecasting for hedging currency exposure.

24)Currency exposures are generally more difficult to identify & measure than to hedge. React to this statement. Is it true or false & why.

25)Describe the primary ways to protect against the adverse consequences of political risk.

26)Be able to describe how capital budgeting is different for multinational operations as contrasted to capital budgeting for domestic projects.

27)Describe project finance as a tool to mitigate the adverse effects of political risk & other country specific risks.

28)Be able to compare valuation models for single country vs multinational corporations.

29)Be able to discuss how taxation affects cost of capital for multinational companies & how taxation can affect capital allocation decisions.

30)Be able to discuss the nature of the taxation landscape for multinational corporations. What factors create tax opportunities & tax traps for companies.

31)Discuss tax return filing & legal entity structures as a tool for managing tax exposure.

32)What are tax havens & how can they be utilized? What are the pitfalls of using tax havens.

33)Define transfer pricing.

34)Describe the tax & nontax uses of transfer pricing.

35)Describe the general parameters of defensible transfer pricing schemes.

36)What are the capital structure, capital budgeting & capital allocation effects of international taxes?

37)How does international tax management affect corporate valuation?

38)Describe the trigger event for US tax liability for an unconsolidated foreign subsidiary.

39)How can tax management be used to influence cost of capital for a multinational corporation?

40)Why do US multinational corporations hold $trillions of retained earnings in their foreign subsidiaries? Are taxes the only (or the primary) reason for the decision to not repatriate those retained earnings?

41)What is meant by “repatriating” earnings.

42)Be able to discuss the impact of the Financial Market Collapse of 2008 on financial risk management for multinational corporations.

43)Describe the tools available to MNC’s to evaluate bank solvency & banking system safety.

44)Explain why the possible failure of Citi Group was so important to governments & corp’s in 2008.

45)Be able to discuss at least three important differences between GAAP & IFRS.

46)Discuss the benefits & challenges for US based MNC’s of IFRS adoption by the SEC & FASB.

47)Be able to discuss the ways in which the evolution of payment systems has affected international financial management.

48)Describe the important features of Enterprise Resource Planning (ERP) systems & explain how adoption of ERP changes financial management activities.

49)Discuss the advantages & challenges of ERP adoption for multinational corporations.

50)Discuss the difficulties of executing successful M&A transactions domestically & internationally.

51)In what ways is corporate governance more difficult for US multinational companies than for US domestic corporations? Define corporate governance.