paraphrase-and-expand-accounting-homework-help

Q 1 : One U.S. executive said that Europe was not considered as a location for DFI because of the euro’s value – interpret this statement.

the answer :

U.S. firms prefer to enter a country when the foreign country’s currency is weak. U.S. firms normally would prefer that the foreign currency appreciate after they invest their dollars to develop the subsidiary.
The executive’s comment suggests that the euro is too strong, so any U.S. investment of dollars to Europe won’t convert into enough euros to make the investment worthwhile

Q 2 :Explain why so many international transactions require international trade credit facilitated by commercial banks.

the answer :

The exporter may not trust the importer or may be concerned that the government will impose exchange controls that prevent payment to the exporter. Meanwhile, the importer may not trust that the exporter will ship the goods ordered and therefore may not pay until the goods are received. Commercial banks can help by providing guarantees to the exporter in case the importer does not pay.

Q 3 :

a. Does borrowing a portfolio of currencies offer any possible advantages over the borrowing of a single foreign currency?

ANSWER: If a firm borrows a single foreign currency, it is especially vulnerable to that currency’s exchange rate. The firm can lower its vulnerability to any single currency by borrowing a portfolio.

b. If a firm borrows a portfolio of currencies, what characteristics of the currencies will affect the potential variability of the portfolio’s effective financing rate? What characteristics would be desirable from a borrowing firm’s perspective?

ANSWER: Currencies which are volatile and highly correlated with each other could cause the effective financing rate of the portfolio to be very volatile over time. Ideally, the currencies comprising the portfolio would have a low degree of volatility or negative correlations. This would reduce the exchange rate risk of the portfolio.


*** please paraphrase and add related information

 

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