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1. (Purchasing-power parity) A McDonald’s Big Mac costs 2.44 yuan in China but costs $4.20 in the United States. Assuming that purchasing-power parity (PPP) holds, how many Chinese yuan are required to purchase 1 U.S. dollar?

2. Mini Case

This Mini Case is available in MyFinanceLab.

For your job as an assistant cash manager at The Giordano Industries, you are asked to put together a series of internal notes on multinational finance and the international currency markets for unit managers. The Giordano Industries is located in the South of France, and is selling renewable energy solutions worldwide. Fifty percent of the sales are invoiced in foreign currencies, and it has been decided to pay more attention to foreign exchange risk after recent losses in the foreign exchange markets by SOFTEN, a subsidiary of Giordano Industries in Tunisia. Your manager would like you to address several specific questions dealing with multinational finance. Prepare a response to the following memorandum:

To: Assistant Cash Manager

In your upcoming notes on multinational finance, I would like to make sure you cover several specific points. Before you begin this assignment, I want to make sure we are all reading from the same script because accuracy has always been the cornerstone of Giordano Industries. I’d like a response to the following questions before we proceed:

a. Since the vast majority of expenses are labeled in the Euro, meanwhile Giordano’s income is highly diversified regarding currencies, what problems and factors are encountered in international financial management?

b. What can an industrial firm do to reduce exchange rate risk?

c. What are the differences among a forward contract, a futures contract, and options?

d. What are the pros and cons of hedging, arbitraging, and speculating for an industrial firm?

Then use the following data in your responses to the remaining questions:

e. The Giordano Industries needs to pay (a) 15,000 US dollars, (b) 1.5 million Tunisian Dinars, and (c) 55,000 South African Rands to businesses abroad. What are the Euro payments to the respective countries for a down payment? For a 30-day payment?

f. If the Giordano Industries pays €20,000, €5,000, and €15,000 to suppliers in the United States of America, Tunisia, and South Africa, respectively, how much, in local currencies, do the suppliers receive for a down payment? For a 90-day payment?

g. Compute the indirect quotes for the spot and forward Tunisian Dinar contracts.

h. You own €10,000. The euro rate in South Africa is 14.8752. The Rand rate in Paris is given in the preceding table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in euros?

i. Compute the Dinar/Rand spot rate from the data in the preceding table.


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