QUESTION 1 Free Trade.

There has been considerable momentum to reduce or remove trade barriers in an effort to achieve free trade. Yet one dis!runtled e"ecutive of an e"#ortin! firm stated $ree trade is not conceivable% &e are al&a's at the merc' of the e"chan!e rate. (n' countr' can use this mechanism to im#ose trade barriers. )hat does this statement mean*

+the ans&er is the teacher !ive he let us to e"#and,(NS)E- . This statement

im#lies that even if there &ere no e"#licit barriers a !overnment could attem#t to mani#ulate e"chan!e rates to a level that &ould effectivel' reduce forei!n com#etition. $or e"am#le a U.S. firm ma' be discoura!ed from attem#tin! to e"#ort to /a#an if the value of the dollar is ver' hi!h a!ainst the 'en. The #rices of the U.S. !oods from the /a#anese #ers#ective are too hi!h because of the stron! dollar. The reverse situation could also be #ossible in &hich a /a#anese e"#ortin! firm is #riced

Question 10 Usin! -e!ression (nal'sis to 1easure E"#osure. a. 2o& can a U.S. com#an' use re!ression anal'sis to assess its economic e"#osure to fluctuations in the 3ritish #ound*
(NS)E-. ( U.S. com#an' could 4uantif' its #erformance b' measurin! the #ercenta!e chan!e

in earnin!s stoc5 #rice or some other variable to be used as the de#endent variable. The inde#endent variable is the #ercenta!e chan!e in the 3ritish #ound. 6a!!ed e"chan!e rate variables could also be included as additional inde#endent variables to ca#ture an' la!!ed im#act of the #ound7s movements on the firm.

b. In usin! re!ression anal'sis to assess the sensitivit' of cash flo&s to e"chan!e rate movements &hat is the #ur#ose of brea5in! the database into sub #eriods*
currenc' is chan!in! over time.

c. (ssume the re!ression coefficient based on assessin! economic e"#osure &as much hi!her in the second sub #eriod than in the first sub #eriod. )hat does this tell 'ou about the firm7s de!ree of economic e"#osure over time* )h' mi!ht such results occur*
(NS)E-. The firm is more e"#osed to chan!e in currenc' values. This could occur if the firm hed!es currenc' #ositions less or is sim#l' increasin! its de!ree of forei!n business.

Question 8

9oes ::: Eliminate ;oncerns about 6on!<Term E"chan!e -ate -is5* :OINT. Yes. Studies have sho&n that e"chan!e rate

movements are related to inflation differentials in the lon! run. 3ased on ::: the currenc' of a hi!h<inflation countr' &ill de#reciate a!ainst the dollar. ( subsidiar' in that countr' should !enerate inflated revenue from the inflation &hich &ill hel# offset the adverse e"chan!e effects &hen its earnin!s are remitted to the #arent. If a firm is focused on lon!<term #erformance the deviations from ::: &ill offset over time. In some 'ears the e"chan!e rate effects ma' e"ceed the inflation effects and in other 'ears the inflation effects &ill e"ceed the e"chan!e rate effects. ;OUNTE-<:OINT. No. Even if the relationshi# bet&een inflation and e"chan!e rate effects is consistent this does not !uarantee that the effects on the firm &ill be offsettin!. ( subsidiar' in a hi!h< inflation countr' &ill not necessaril' be able to ad=ust its #rice level to 5ee# u# &ith the increased costs of doin! business there. The effects var' &ith

each 1N;7s situation. Even if the subsidiar' can raise its #rices to match the risin! costs there are short<term deviations from :::. The investors &ho invest in an 1N;7s stoc5 ma' be concerned about short<term deviations from ::: because the' &ill not necessaril' hold the stoc5 for the lon! term. Thus investors ma' #refer that firms mana!e in a manner that reduces the volatilit' in their

#erformance in short<run and lon!<run #eriods.

)2O IS ;O--E;T* Use the Internet to learn more about this issue. )hich ar!ument do 'ou su##ort* Offer 'our o&n o#inion on this issue.
(NS)E-. It is #ossible that inflation and e"chan!e rate effects &ill offset over the lon! run. 2o&ever man' investors &ill not be satisfied because the' ma' invest in the firm for =ust a fe& 'ears or even a shorter term. Thus the' &ill #refer that 1N;s assess their e"#osure to e"chan!e rate ris5 and attem#t to limit the ris5.

Question > )ith the !ro&th in international business over the #ast decade various international financial mar5ets have been develo#ed. $inancial mana!ers of 1ulti National ;om#anies +1N;, must understand the various

international mar5ets that are available.

-e4uired. ;riticall' anal'se the motives for usin! international financial mar5ets b' the business in order to facilitate their international business transactions.