International Finance

May 6, 2018 General Studies

S. dollar deposited in a bank outside the United States. __F__ 8. LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U. S. corporations. Comment: LIBOR is the interest rate offered by the largest and strongest London-based banks on large deposits. __T__ 9. Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company’s currency, will be worth less than was originally projected because of exchange rate changes. ___F_ 10.

Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis. Comment: Political risk refers to potential actions by a host government that would reduce the value of a company’s investment. It includes at one extreme the expropriation without compensation of the subsidiary’s assets, but it also includes less drastic actions that reduce the value of the parent firm’s investment in the foreign subsidiary, including higher taxes, tighter repatriation or currency controls, and restrictions on prices charged.

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However, companies can take several steps to reduce the potential loss from expropriation: (1) finance the subsidiary with local capital, (2) structure operations so that the subsidiary has value only as a part of the integrated corporate system, and (3) obtain insurance against economic losses due to expropriation from a source such as the Overseas Private Investment Corporation (OPIC). ___T_ 11. Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure.

Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate. __T__ 12. If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate. ___T_ 13. If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate. ___T_ 14. A foreign currency will, on average, depreciate against the U.


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