International Finance Minicase Assignment: Response to Memo
For your job as the business reporter for a local newspaper, you are asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in the foreign exchange markets by JGAR, a local firm that is the subsidiary of Daedlufetarg, a large German manufacturing firm.
Your editor would like you to address several specific questions dealing with multinational finance. Prepare a response to the following memorandum from your editor:
To: Business Reporter
From: Perry White, Editor, Daily Planet
Re: Upcoming Series on Multinational Finance
In your upcoming series on multinational finance, I would like to make sure you cover several specific points. Before you begin this assignment, I want to make sure we are all reading from the same script because accuracy has always been the cornerstone of the Daily Planet. I’d like a response to the following questions before we proceed:
- What new problems and factors are encountered in international, as opposed to domestic, financial management?
- What does the term arbitrage profit mean?
- What can a firm do to reduce exchange risk?
- What are the differences among a forward contract, a futures contract, and options?
- An American business needs to pay (a) 15,000 Canadian dollars, (b) 1.5 million yen, and (c) 55,000 Swiss francs to businesses abroad. What are the dollar payments to the respective countries?
- An American business pays $20,000, $5,000, and $15,000 to suppliers in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive?
- Compute the indirect quote for the spot and forward Canadian dollar contract.
- You own $10,000. The dollar rate in Tokyo is 216.6752. The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars?
- Compute the Canadian dollar/yen spot rate from the data in the preceding table