FIN 46064 – International Business Finance College of Business Administration – Kent State University Instructor: Tom Hanson, [email protected] Homework #1, due Thursday, Feb. 5, 2014 1. (15 points) Assume that Canada and Japan each have 1,000 production units available to them. With each unit, Canada is able to produce either 8 bicycles or 2 books, while Japan can produce 3 bicycles or 6 books. When no trade takes place, Canada allocates 700 units to bicycles and 300 to books, and Japan allocates 400 units to bicycles and 600 to books. a. Create a table showing total production for the two countries with no trade. b. Create a table that assumes total specialization. What is the effect on total production? c. What are the two extreme (relative) prices that are possible for trade in this situation and whom does each extreme favor? (Note: You do not need to create a table showing the entire trade scenario. Simply identify the price ratios, their sources, and who benefits from them.) 2. (15 points) The table below shows the earnings and tax information for three international reporting segments of an international company for 2013. a. What is the total consolidated after tax earnings for the company? (Hint: Taxes are paid in the foreign country, before any currency exchanges occur.) b. If the U.S. dollar had depreciated by 10% over the year, what would the appropriate exchange rates be? c. What would be the new after tax earnings for the company given the new exchange rates from part b? d. By what percent did after tax earnings decrease or increase due to the 10% depreciation of the U.S. dollar? USA Canada Japan Earnings before taxes $3,800 C$7,800 JPY93,750 Income tax rate 34% 42% 20% Average exchange rate C$0.98/US$ JPY74/US$ 3. (5 points) The table below gives approximate currency quotes that were available for spot trades on January 12, 2014. Make each of the requested conversions. USD/EUR 1.37 USD/GBP 1.65 CAD/USD 1.09 JPY/USD 104 a. Convert $1,250,000 into euros b. Convert £1,500,000 (GBP) into U.S. dollars c. Convert CAD 2,000,000 into JPY 4. (10 points) Assume that over the course of 30 days, the following changes occur in the equilibrium prices of the currencies: the dollar appreciates 7% against the euro and 9% against the British pound, but falls 4% against the Canadian dollar and falls 6% against the Japanese yen. Using these new quotes, make the same three conversions as before: a. Convert $1,250,000 into euros b. Convert £1,500,000 (GBP) into U.S. dollars c. Convert CAD 2,000,000 into JPY 5. (5 points) Calculate the forward premium/discount on the dollar (which is your home currency) as well as the premium/discount on the euro if the spot rate is €0.73/$ and the three-month forward rate is €0.81/$. (Note: Label clearly which percent is for the dollar and which one is for the euro.)
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