International Finance: SOLUTIONS TO Chapter 11(a) PROBLEMS

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  1. On January 1, the U.S. dollar: Japanese yen exchange rate is $1 = ¥250. During the year, U.S. inflation is 4% and Japanese inflation is 2%. On December 31, the exchange rate is $1 = ¥235. What are the likely competitive effects of this exchange rate change on Caterpillar Tractor, the American earth‑moving manufacturer, whose toughest competitor is Japan’s Komatsu?
  1. In 1990, General Electric acquired Tungsram Ltd., a Hungarian light bulb manufacturer. Hungary’s inflation rate was 28% in 1990 and 35% in 1991, while the forint (Hungary’s currency) was devalued 5% and 15%, respectively, during those years. Corresponding inflation for the U.S. was 6.1% in 1990 and 3.1% in 1991.
  1. What has happened to the competitiveness of GE’s Hungarian operations during 1990 and 1991? Explain.
  1. In early 1992, GE announced that it would cut back its capital investment in Tungsram. What might have been the purpose of GE’s publicly announced cutback?
  1. Assess the likely consequences of a declining dollar on Fluor Corporation, the international construction‑ engineering contractor based in Irvine, California. Most of Fluor’s value‑added involves project design and management; most of its costs are for U.S. labor in design, engineering, and construction‑management services.
  1. The Edmonton Oilers (Canada) of the National Hockey League are two‑time defending Stanley Cup champions. (The Stanley Cup playoff is hockey’s equivalent of football’s Super Bowl or baseball’s World Series.) As is true of all NHL teams, most of the Oilers’ players are Canadian. How are the Oilers affected by changes in the Canadian dollar/U.S. dollar exchange rate?
  1. South Korean companies such as Goldstar, Samsung, and Daewoo have captured more than 10% of the U.S. color TV market with their small, low‑priced TV sets. They are also becoming more significant exporters of videocassette recorders and small microwave ovens. What currency risk do these firms face?
  1. Black & Decker Manufacturing Co. of Towson, Maryland, has roughly 45% of its assets and 40% of its sales overseas. How does a soaring dollar affect its profitability, both at home and abroad?
  1. The shipbuilding industry is facing a worldwide capacity surplus. Although Japan currently controls about 50% of the world market, it is facing severe competition from the South Koreans. Japanese shipyards are extraordinarily productive, but at current price levels were just about breaking even with an exchange rate of ¥240 = $1. What are the likely effects on Japanese shipbuilders of a yen appreciation to ¥180 = $1? The South Korean won has maintained its dollar value.
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