Deck 24: International Financial Management

Question 1

According to interest rate parity, the interest rate differential must be equal to the differential between forward and spot exchange rates.

Answer 1

True

Question 2

History has shown a positive relationship between higher interest rates and higher subsequent rates of inflation.

Answer 2

True

Question 3

The Toronto Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market.

Answer 3

False

Question 4

If the International Fisher effect is valid, then real interest rates in all countries should be equal.

Question 5

If the Euro is trading at a forward discount relative to the Dollar, then you'll receive fewer marks per Dollar in the future.

Question 6

The law of one price implies that the same commodity should be sold at the same price in all countries.

Question 7

The nominal interest rate is the difference between real interest rate and inflation.

Question 8

The difference in interest rates between countries is believed to be equal to the expected change in spot exchange rates.

Question 9

Forward contracts are standardized contracts sold in organized exchanges.

Question 10

By using forward contracts an importer can avoid transaction risk.

Question 11

Buying currency in the forward market is a costly way of hedging the currency risk.

Question 12

Futures contracts represent a low-cost method of buying foreign currency forward.

Question 13

The forward exchange rate for foreign currency is the rate for immediate exchanges.

Question 14

It is much easier for a firm to hedge non-contractual rather than contractual exchange rate risk.

Question 15

If real interest rates are different across countries, investors will shift their money into countries with high real interest rates.

Question 16

Forward rates are always equal to the actual future exchange rates.

Question 17

Transaction risk arises when a firm is committed either to pay or receive a known amount of foreign currency.

Question 18

Indirect quotes describe units of domestic currency bought by a unit of foreign unit.

Question 19

The direct exchange rate quotes the number of Canadian Dollars required to buy one unit of a foreign currency.

Question 20

If the interest rate of one country increases, then the value of that country's currency increases in the forward market.

Question 21

Suppose that: $$\begin{array} { | l | c | c | c | } \hline & \text { Spot Rate } & \text { 3 Month Forward Rate } & \text { 1 Year Forward Rate } \\\hline \text { sweden (krona) } & 9.3924 & 9.4554 & 9.6239 \\\hline \text { switzerland (frarc) } & 1.5231 & 1.5206 & 1.5143 \\\hline \text { Japan (Yer) } & 123.380 & 122.81 & 120.63 \\\hline\end{array}$$ What arbitrage gains can be achieved if the bank quotes a rate of 75Yen per Swiss Francs?

A)8%
B)9%
C)10%
D)11%

Question 22

If the direct quote for French Euro is $0.22/$(Canadian), then the indirect quote for French Euro will be:

A)3.55Euro/$.
B)1.22Euro/$.
C).044Euro/$.
D)4.55Euro/$.

Question 23

Consider the following spot exchange rates: $2.56/£, ¥65.62/$, DM1.0/$, and L1,263/$.Which of the following seems to violate the law of one price if gold sells for $464 per ounce in the Canada? Dollars in the exchange rates are Canadian.

A)1 troy oz.gold = £181,250
B)1 troy oz.gold = ¥30,448
C)1 troy oz.gold = DM464
D)1 troy oz.gold = L550,500

Question 24

The spot exchange rate of British Pound (£) is $2.56(Canadian)/£.The annual inflation rate in Canadian $is 4% and 8% in Britain.What will be the anticipated exchange rate at the end of the year if PPP is valid?

A)$2.4652/£
B)$2.1503/£
C)$3.0804/£
D)$2.5600/£

Question 25

The French Euro is currently worth $0.24 and it's selling in the one-year forward market at a 10% premium relative to the Canadian Dollar.Approximately what rate would you expect to pay for a one-year loan in France if the rate would be 10% in Canada?

A)10.00%
B)11.62%
C)14.55%
D)20.00%

Question 26

How many Dollars will it take for a U.S.citizen to purchase a Japanese product priced at 60,000 Yen if the indirect exchange rate is yen104/$1?

A)$577
B)$700
C)$5,769
D)$62,400

Question 27

If the direct exchange rate between U.S.Dollars and pounds sterling is 1.50/1, how much should you be willing to pay to receive 350 pounds?

A)$175.00
B)$233.33
C)$367.50
D)$525.00

Question 28

You have decided to hedge your exchange-rate risk in your U.S.-based firm by contracting forward to buy 500,000 Swiss Francs for delivery in one year.The current exchange rate is Sf1.6/$.The forward rate is Sf1.7/$(U.S.).How much better (worse) off are you if you don't buy the forward contract and instead pay the spot rate in one year if it turns out to be Sf1.65/$?

A)($14,245)
B)($8,912)
C)$8,912
D)$27,472

Question 29

The Japanese Yen exchange rate is ¥115 = $1, while the British Pound exchange rate is £1 = $2.05.Given this information, calculate the cross-rate in terms of Yen per pound.

A)¥235.75 per £1
B)¥275.35 per £1
C)¥56.10 per £1
D)¥51.60 per £1

Question 30

What is the expected spot rate of ¥/$(Canadian) one year from now if the current spot rate is ¥66/$and the Yen is selling one-year forward at ¥70/$?

A)¥78.9/$
B)¥98.0/$
C)¥66/$
D)¥70/$

Question 31

You are hoarse from explaining to your supervisor that the cost, if any, of hedging exchange-rate risk can be thought of as an insurance premium to avoid surprises.What is the cost of hedging a €2 million commitment if the spot rate is €1.6/$, the forward rate is €1.55/$, and the expected spot rate at the end of the hedge is €1.6/$?

A)$0
B)$25,000
C)$40,323
D)$68,966

Question 32

Suppose that: $$\begin{array}{l}\begin{array} {lll } \text {U.K. (pound)}&\frac { \text { Spot Rate } } { 1.5331 }&\frac { 3 \text { Month Forward Rate } } { 1.5372 }&\frac { 1 \text { Year Forward Rate } } { 1.5502 }\end{array}\end{array}$$ If no other information is available, what will your guess about the spot rate in one year be?

A)1.5331
B)1.5372
C)1.5502
D)2.0000

Question 33

The following information is provided to you: $$\begin{array} { | l | l | } \hline \text { Spot exchange rate for Swiss franc } & = \$ 0.61 ( \mathrm { U } . ) / \mathrm { Sfr } \\\hline \text { One-year forward rate for Swiss frane } & = \$ 0.63 ( \mathrm { U } . ) / \mathrm { Sfr } \\\hline \text { One-year U.S. interest rate } & = 5 \% \\\hline\end{array}$$ What is the one-year interest rate for Swiss franc?

A)2.00%
B)1.67%
C)1.50%
D)1.33%

Question 34

Suppose that: $$\begin{array}{l}\begin{array} {lll } \text {U.K. (pound)}&\frac { \text { Spot Rate } } { 1.5331 }&\frac { 3 \text { Month Forward Rate } } { 1.5372 }&\frac { 1 \text { Year Forward Rate } } { 1.5502 }\end{array}\end{array}$$ What is the annualized percentage discount or premium of the U.K.pound on the U.S.Dollar?

A)1.10% premium
B)1.10% discount
C)2.20% premium
D)2.20% discount

Question 35

How much wealthier would you be one year from now if you exchange $100,000 (U.S.) into Hong Kong Dollars today at an indirect rate of HK$7.8/$, earn 7% on your Hong Kong investment, and exchange back at a rate of HK$8.0/$, as compared to investing in the U.S.at 4.0%?

A)$(2,600)
B)$325
C)$2,000
D)$5,744

Question 36

Suppose that: $$\begin{array}{l}\begin{array} {lll } \text {U.K. (pound)}&\frac { \text { Spot Rate } } { 1.4994 }&\frac { 3 \text { Month Forward Rate } } { 1.491 }&\frac { 1 \text { Year Forward Rate } } { 1.4658 }\end{array}\end{array}$$ If the 3-month interest rate on Dollars is 2% (effective annual rate), what do you think is the 3-month sterling (U.K.) interest rate?

A)1.07%
B)2.07%
C)3.07%
D)4.07%

Question 37

If the spot exchange rate between marks and Dollars is DM1.5/$ before the Dollar depreciates by 10%, how many Dollars will it now take a U.S.payer to remit an invoice of DM500?

A)$366.67
B)$370.37
C)$750.00
D)$825.00

Question 38

Predict the expected spot exchange rate between the Japanese Yen and U.S.Dollar, given that inflation in Japan, at 8%, is 4% higher than in the U.S.and that the current spot rate is ¥107/$.

A)¥102.72/$
B)¥103.04/$
C)¥111.12/$
D)¥111.28/$

Question 39

Yesterday the spot exchange rate of Yen-to-Canadian Dollar was 65.What is today's spot exchange rate if the Yen has appreciated 10% against the Dollar today?

A)¥58.50/$
B)¥60/$1.10
C)¥65/$
D)¥75/$1.10

Question 40

That Italian antique was priced at 3 million lire that, fortunately, does not have to be paid for three months.The Euro has a spot exchange rate of L2,000/$(U.S.) but is trading three months forward at a 5% discount.If you contract ahead now, how many U.S.Dollars will the antique cost?

A)$1,425
B)$1,429
C)$1,575
D)$1,579

Question 41

The Yen is currently trading at ¥105.89 per USD, while the forward rate is ¥102.33 per USD.Given this information, calculate the forward premium.

A)3.48%
B)5.48%
C)7.48%
D)9.48%

Question 42

Which of the following illustrates non-contractual exchange-rate risk?

A)A Canadian importer will owe £50,000 and the pound is expected to appreciate.
B)A French airplane manufacturer has suppliers in Canada and the exchange rate has been unstable.
C)A Canadian distributor of Japanese electronic goods expects the Dollar to depreciate.
D)A Canadian subsidiary of a German manufacturer transfers DM100,000 to the parent annually.

Question 43

Which of the following statements is correct?

A)A currency with higher interest rate will sell at a forward discount.
B)A currency with higher interest rate will sell at a forward premium.
C)A currency with higher interest rate will have a higher spot rate.
D)A currency with higher interest rates will have a lower spot rate.

Question 44

The Yen is currently trading at ¥109.66 per USD, while the forward rate is ¥112.96 per USD.Given this information, calculate the forward premium or discount.

A)5.92% premium
B)2.92% premium
C)5.92% discount
D)2.92% discount

Question 45

A firm intends to hedge against exchange loss, a large future payment that must be made in a foreign currency.Which of the following identifies the cost of such a hedge?

A)Difference between expected and current spot rates
B)Difference between expected and current forward rates
C)Difference between the forward premium and the forward discount
D)Difference between the forward rate and the expected future spot rate

Question 46

Which of the following is correct if the spot exchange rate on the pound sterling is $2.56 (Canadian)/£ and the one-year forward exchange rate is $2.48 (Canadian)/£? The pound is trading:

A)at a 3.13% forward discount relative to the Dollar.
B)at a 3.13% forward premium relative to the Dollar.
C)at a 3.22% forward discount relative to the Dollar.
D)at a 3.22% forward premium relative to the Dollar.

Question 47

Suppose that: $$\begin{array} { | l | c | c | c | } \hline & \text { Spot Rate } & \text { 3 Month Forward Rate } & \text { 1 Year Forward Rate } \\\hline \text { sweden (krona) } & 9.3924 & 9.4554 & 9.6239 \\\hline \text { switzerland (frarc) } & 1.5231 & 1.5206 & 1.5143 \\\hline \text { Japan (Yer) } & 123.380 & 122.81 & 120.63 \\\hline\end{array}$$ What rate do you think a Japanese bank would quote for buying or selling Swiss Francs?

A)81.01 Yen
B)83.01 Yen
C)85.01 Yen
D)87.01 Yen

Question 48

Current one-year interest rates are 4% and 8% in Canada and Spain respectively.The anticipated inflation in Canada is 2%.If international Fisher effect holds, what is the expected inflation in Spain?

A)4.00%
B)4.04%
C)5.92%
D)6.00%

Question 49

If you are a currency speculator, you will always make money by:

A)buying currency with high interest rate.
B)buying currency with low interest rate.
C)accurately predicting whether exchange rate will change more or less than the interest rate differential.
D)buying the currency with the highest interest rate differential.

Question 50

If managers intend to adjust the projections of foreign investments, it is probably better to make the adjustments in:

A)the discount rate used.
B)the cash flows projected.
C)both the discount rate and cash flows.
D)exchange rate, but never in the discount rate.

Question 51

If the spot indirect exchange rate of Mexican Pesos for U.S.Dollars is 9.8/1 and the peso is trading at a forward premium of 3%, then a Canadian trader will receive:

A)more than 9.8 Pesos per Dollar in the future.
B)less than 9.8 Pesos per Dollar in the future.
C)9.83 Pesos per Dollar in the future.
D)10.09 Pesos per Dollar in the future.

Question 52

On average, empirical evidence suggests that those who cover foreign exchange commitments in the forward market pay a premium of approximately _____ to avoid exchange-rate risk.

A)0.0%
B)3.1%
C)5.0%
D)7.3%

Question 53

Your firm, which operates in Canada and has a contractual payment of £1 million due in three months.Which of the following methods would be considered speculative regarding your exchange-rate risk?

A)Buy 1 million pounds now at the current spot rate.
B)Buy 1 million pounds in three months at the current spot rate.
C)Contract forward to buy 1 million pounds in three months.
D)Borrow Dollars, convert to pounds at spot, invest for three months.

Question 54

How much would you expect to receive for a nominal interest rate in Holland if funds can be invested in the Canada at a rate of 7% when inflation is expected to be 4% in the Canada and 8% in Holland?

A)5.19%
B)7.93%
C)9.08%
D)11.11%

Question 55

The ratio of expected spot rate to current spot rate for $/£ is 1.02 and the inflation rate in the U.S.is 5%.What is the approximate inflation rate in the United Kingdom?

A)1.3%
B)2.9%
C)4.1%
D)7.0%

Question 56

If the exchange rate of German marks/Canadian Dollars is 2.04/1, then:

A)it takes $2.04 to buy each mark.
B)the mark is worth more than one Canadian Dollar.
C)each mark is worth approximately 49 cents.
D)20 cents will purchase one mark.

Question 57

What is the expected German inflation rate if 3% inflation is expected in Canada, the spot exchange rate is €1.5/$and the expected spot rate is €1.6/$?

A)2.81%
B)7.10%
C)9.87%
D)11.43%

Question 58

You are importing TV sets worth ¥10,000,000 from a Japanese manufacturer, and this amount is payable after six months.You can hedge your exchange risk by doing one of the following.

A)Buying Japanese Yen in the forward market.
B)Selling Japanese Yen in the forward market.
C)Borrowing Japanese Yen.
D)Do nothing.

Question 59

The current one-year nominal interest in Canada is 7%.If the anticipated inflation for the coming year in Canada is 2.5%, what is the real interest rate?

A)4.21%
B)4.39%
C)4.50%
D)7.18%

Question 60

Arbitrageurs are said to look for riskless profits by:

A)contracting in the forward exchange markets.
B)buying at the spot rate and selling at the forward rate.
C)buying in one market and selling in another to take advantage of different prices for the same good.
D)buying short-term bonds and converting them to long-term bonds.

Question 61

What would you expect to be the relationship between real rates of interest in Japan and Canada if inflation is expected to be 3% in Japan and 6% in Canada?

A)Japan's real interest rate should be 3% higher than in Canada.
B)Japan's real interest rate should be 3% lower than in Canada.
C)Japan's real interest rate should be half as high as in Canada.
D)Real interest rates should be equal in both countries.

Question 62

Which of the following would you expect to be nearly equal across countries?

A)Nominal interest rates
B)Real interest rates
C)Inflation rates
D)Forward premium

Question 63

One of the drawbacks of using forward contracts to hedge foreign-exchange risk is that the:

A)transaction costs in the forward market are high.
B)forward rates are always lower than spot rates.
C)hedged currency could appreciate during the period.
D)hedged currency could depreciate during the period.

Question 64

An indirect exchange rate can be converted to a direct exchange rate by:

A)dividing the indirect rate by number of U.S.Dollars required to purchase one unit of the other currency.
B)dividing the indirect rate by 100.
C)multiplying the indirect rate by the spot rate.
D)taking the inverse of the indirect rate.

Question 65

Where would you prefer to invest, and why, if nominal rates are 10% in Canada and 25% in Holland, while the expected rates of inflation are 5% and 19% respectively? Assume investments of equal risk.

A)Invest in Holland due to higher nominal rate.
B)Invest in Canada; real return is 1.1% higher.
C)Invest in Canada; real return is 0.1% higher.
D)Invest in Holland; real return is 0.28% higher.

Question 66

If interest rates are higher in Italy than in Canada, the market expects that the Euro will:

A)appreciate against the Canadian Dollar.
B)depreciate against the Canadian Dollar.
C)offer a higher real rate of return than the Canadian Dollar.
D)be selling at a forward discount.

Question 67

If prices in the U.S.rise less rapidly than in Canada, which of the following would be expected according to purchasing power parity?

A)The value of the Canadian Dollar will decline, relative to the U.S.Dollar
B)The value of the U.S.Dollar will decline, relative to the Canadian Dollar
C)Inflation will increase in Canada
D)The price of gold will decline

Question 68

If exchange rates adjust to reflect inflation differentials across countries, then:

A)the law of one price will always hold.
B)no one will use forward currency markets.
C)interest rates will be equal across countries.
D)PPP is said to hold.

Question 69

What do you expect to happen to prices in Japan, given nominal interest rates of 10% in Canada and 6% in Japan, and expected Canadian inflation of 6%?

A)Expected Japanese inflation is 1.79%
B)Expected Japanese inflation is 2.15%
C)Expected Japanese inflation is 6.22%
D)Expected Japanese inflation is 10.00%

Question 70

If Purchasing Power Parity is holding, what will happen to the currency of a country with high inflation?

A)Currency will appreciate.
B)Currency will depreciate.
C)No significant change in exchange rate.
D)Currency will sell at a forward premium.

Question 71

Which of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?

A)The countries have equal nominal interest rates.
B)The spot rate is expected to change.
C)Expected inflation is less than the nominal rate.
D)Both currencies are selling at a premium relative to the other.

Question 72

High inflation rates are usually associated with:

A)low nominal interest rates.
B)high nominal interest rates.
C)high real interest rates.
D)low real interest rates.

Question 73

According to the theory of purchasing power parity, exchange rates will adjust so that differences in:

A)interest rates across countries are offset.
B)forward rates across countries are offset.
C)expected inflation across countries is offset.
D)international Fisher rates are offset.

Question 74

What can be said about the spot exchange rate of Dollars for pounds if nominal interest rates are higher in Canada than in Great Britain?

A)It should exceed the forward rate of Dollars for pounds
B)It should be less than the forward rate of Dollars for pounds
C)It is expected to increase
D)It is expected to remain constant

Question 75

The six-month forward quote for German Euro is E1.6/US$, and the spot price of German Euro is €1.7/US$.Which of the following statements is true?

A)Forward discount on German Euro is 6.25%
B)Forward premium on German Euro is 6.25%
C)Forward discount on US$ is 7.25%
D)Forward premium on US$ is 6.25%

Question 76

Assuming that the international Fisher effect is holding, what will be the effect of an increase in nominal interest rate on the currency?

A)Currency will appreciate.
B)Currency will depreciate.
C)No significant change in exchange rate.
D)Currency will sell at a forward premium.

Question 77

During the 1980s, the Japanese Yen appreciated against the U.S.Dollar.As a result of this, the Japanese products became less price competitive in the U.S.This is an example of:

A)contractual risk.
B)non-contractual risk.
C)exchange rate risk.
D)forward premium.

Question 78

The international Fisher effect is valid in the long run, because:

A)inflation rates are equal in different countries.
B)investors will move their money into countries with high real interest rates.
C)investors will move their money into countries with high nominal interest rates.
D)investors will move their money into countries with low inflation.

Question 79

If the indirect exchange rate between French Francs and U.S.Dollars is 6.8/1, then the direct exchange rate between these currencies is:

A)$.1471/FFr
B)$/6.8FFr
C)FFr/$6.8
D)FFr/$.1471

Question 80

According to the expectations theory of exchange rates, what change is expected in the future spot exchange rate if the current spot rate is 8% lower than the forward exchange rate?

A)Future spot rate is expected to increase by 8%
B)Future spot rate is expected to decrease by 8%
C)Future spot rate is expected to decrease by 4%
D)No change is expected in the future spot rate