Deck 27: Managing International Risks

Question 1

The spot exchange rate for British pounds is 0.5025 (BP/$US).The one-year risk-free rates in the U.S.and Britain are 3.00% and 2.75%,respectively.What is the forward exchange rate in BP/$US?

A)0.6170
B)0.5037
C)0.5013
D)0.6050

Answer 1

0.5013

Question 2

One can describe a currency forward contract as:

A)agreeing today to buy or sell a specified amount of a currency at a later date at a price set in the future.
B)agreeing today to buy or sell a specified amount of a currency today at its current price.
C)agreeing today to buy or sell a specified amount of a currency at a later date at a price set today.
D)agreeing today to buy or sell a specified amount of a currency today at a price that will be determined at a later date.

Answer 2

agreeing today to buy or sell a specified amount of a currency at a later date at a price set today.

Question 3

Which of the following statement(s)about the currency forward market is (are)true?
I.In the forward market you buy or sell currency for future delivery at a rate set today.
II.A forward market transaction is usually a made-to-order transaction.
III.Most forward transactions are settled in six months or less.

A)I only
B)I and II only
C)II and III only
D)I,II,and III

Answer 3

I,II,and III

Question 4

The Mexican economy is predicted to average double-digit inflation over the next two years at 10% per year.The inflation forecast for the U.S.for the same period is 4% per year.If the current exchange rate is $0.091/peso,what is the expected exchange rate two years from now?

A)$0.08604/peso
B)$0.08134/peso
C)$0.1018/peso
D)$0.09625/peso

Question 5

Assume that international capital markets are competitive and that global real interest rates are the same.The one-year interest rate is 9% in the U.S.and 5% in Switzerland.If the expected inflation rate is 6% in the U.S.,what is the expected inflation rate in Switzerland?

A)5%
B)4%
C)3%
D)2%

Question 6

Which of the following statement(s)about currency futures market is (are)true?
I.Futures contracts are highly standardized.
II.Futures contracts are made-to-measure contracts.
III.Futures contracts are for specified amounts and for a limited choice of delivery dates.

A)I only
B)II only
C)I and III only
D)I,II,and III

Question 7

The spot Peso/$US exchange rate is Peso 10.9892/$US.The 3-month forward rate is Peso 11.0408/$US.What is the Peso's forward premium (or discount)on the U.S.dollar,expressed as an annual percentage?

A)0.8% premium
B)1.9% discount
C)2.1% premium
D)0.5% discount

Question 8

The spot $US/BP exchange rate is $US1.99/BP.What is the indirect quote?

A)BP 0.65/$US
B)BP 0.5025/$US
C)BP 1.2845/$US
D)BP 1.4875/$US

Question 9

The spot Yen/$US exchange rate is Yen119.795/$US,and the one-year forward rate is Yen114.571/$US.If the annual interest rate on dollar CDs is 6%,what annual interest rate would you expect on Yen CDs?

A)1.38%
B)5.32%
C)8.06%
D)17.14%

Question 10

If a Big Mac costs $C3.00 in Canada and $2.31 in the U.S.,according to purchasing power parity,what is the implied exchange rate in terms of $C/$US?

A)1.3793
B)1.2987
C)1.3276
D)0.7700

Question 11

The spot $US/Euro exchange rate is $US1.3549/Euro.The 3-month forward rate is $US1.3595/Euro.What is the Euro's forward premium (or discount)on the U.S.dollar,expressed as an annual percentage?

A)0.3% premium
B)0.3% discount
C)1.4% premium
D)1.4% discount

Question 12

The spot Yen/US dollar exchange rate is 119.795 Yen/$US.The 3-month forward rate is 118.397 Yen/$US.What is the Yen's forward premium (or discount)on the dollar,expressed as an annual percentage?

A)6.5% discount
B)4.7% premium
C)6.5% premium
D)4.7% discount

Question 13

An organized market for currency for future delivery that conducts trades on an exchange is called a(n):

A)spot market.
B)forward market.
C)futures market.
D)options market.

Question 14

The expectations theory of exchange implies that:

A)the forward rate is determined by the central bank's expectations.
B)on average,the forward rate equals the future spot rate.
C)the forward rate is determined by expectations of future spot interest rates.
D)the forward rate usually equals the future spot rate of exchange.

Question 15

Assume that both the law of one price and the expectations theory of forward rates hold.The spot rate for the Ruritanean doubloon is 0.455 doubloon/$,and the one-year forward rate is 0.476 doubloon/$.Suppose that next year's forecasted rate of inflation in Ruritania is now revised upward by 10%.How does this affect exchange rates?

A)The current spot rate changes to 0.500 doubloon/$.
B)The forward rate changes to 0.524 doubloon/$.
C)Next year's expected spot rate changes to 0.501 doubloon/$.
D)The forward rate changes to 0.501 doubloon/$.

Question 16

A quotation in the form Yen 89.33/$US is called:

A)an indirect quote in the U.S.
B)a direct quote in the U.S.
C)a cross-rate in Japan.
D)none of these options.

Question 17

Important aspects of international finance include:
I.that the basic principles of corporate finance do not apply;
II.the process of foreign exchange valuation of different currencies;
III.that the NPV principle cannot be applied to foreign operations

A)I only
B)I and III only
C)II only
D)III only

Question 18

If the direct quotation for the Euro is $1.3565/Euro,what is the size of the indirect quotation?

A)0.2415
B)0.6435
C)0.7372
D)0.3565

Question 19

The spot BP/$ exchange rate is 0.5025/$,and the one-year forward rate is BP 0.5048/$.If the annual interest rate on dollar CDs is 6%,what would you expect the annual interest to be on BP CDs?

A)5.52%
B)6.49%
C)3.55%
D)8.25%

Question 20

If a Big Mac costs $2.31 in the U.S.,and in Japan 250 Yen,according to PPP,what is the implied exchange rate in Yen/$US?

A)0.00924
B)108.225
C)119.795
D)250.000

Question 21

XJ Company from the U.S.is evaluating a proposal to build a new plant in the United Kingdom.The expected cash flows in pounds are as follows: Year 0,-50; Year 1,25; Year 2,35; Year 3,40.The discount rate in BP is 14% and the discount rate in the $US is 12%.The spot rate is $US1.99/BP.Calculate the NPV in $US:

A)+25.86
B)+28.69
C)+51.46
D)+45.14

Question 22

The dollar interest rate is 6%,and the Swiss franc interest rate is 4%.If the required rate of return for a project in Switzerland is 15%,calculate the required rate of return in the U.S.for a similar project.

A)17.2%
B)12.8%
C)15%
D)8.5%

Question 23

The current spot rate is BP 0.5024/$US.The 3-month forward rate is BP 0.5040/$US.The TE Company expects a payment of BP 100 million in three months.If the firm hedges this transaction in the forward market,what is the $US amount it will receive in three months?

A)$US198.41 million
B)$US199.04 million
C)$US 50.40 million
D)$US 50.24 million

Question 24

Interest rate parity gives the relationship between the forward rate and the spot rate of exchange in terms of interest rates.

Question 25

An Australian firm is evaluating a proposal to build a new plant in the U.S.The expected cash flows in $US (in millions)are as follows: Year 0,-100; Year 1,40; Year 2,50; Year 3,65.The discount rate in $A is 10%,while the discount rate in $US is 12% and the spot rate is $US0.85/$A.
Calculate the NPV in $A:

A)+25.69
B)-21.84
C)+13.10
D)+21.84

Question 26

The beta of a firm's equity in Switzerland is 1.25.The risk-free rate is 4% and market risk premium is 8.4%.Calculate the required rate of return for the equity of this firm.

A)10.5%
B)8.4%
C)14.5%
D)9.5%

Question 27

The risk associated with unanticipated actions by the host country government or its courts towards a multinational firm is called:

A)economic risk.
B)transaction risk.
C)political risk.
D)translation risk.

Question 28

The country with the most favorable political risk score is:

A)United States
B)France
C)Finland
D)United Kingdom

Question 29

An Australian firm is evaluating a proposal to build a new plant in the U.S.The expected cash flows in $US (in millions)are as follows: Year 0,-100; Year 1,40; Year 2,50; Year 3,65.The discount rate in $A is 10%,while the discount rate in $US is 12% and the spot rate is $US0.60/$A.Calculate the NPV of the project in $US.

A)+36.40
B)-21.84
C)+13.10
D)+21.84

Question 30

Your U.S.-based firm is deciding between using currency futures contracts or a forward contract with its commercial bank in order to hedge a scheduled dividend from its subsidiary corporation in Germany.The dividend will be repatriated in July,while the currency futures contracts are only available for June or September delivery.Which of the following choices properly hedges the transaction without basis risk?

A)Long Euro future contracts
B)Short Euro future contracts
C)Enter Forward to sell Euros forward in July
D)Enter Forward to buy Euros forward in July

Question 31

In the forward exchange market,currency is traded for future delivery.

Question 32

Currency risk exposure can be categorized as:

A)transaction exposure
B)economic exposure
C)none of these options
D)all of these options

Question 33

Political risk is can be thought of as:

A)unanticipated changes in exchange rates.
B)unanticipated actions by the host government affecting the cash flows of a project.
C)unanticipated actions by the World Bank affecting the cash flows of a project.
D)all of these options.

Question 34

XJ Company from the U.S.is evaluating a proposal to build a new plant in the United Kingdom.The expected cash flows in pounds are as follows: Year 0,-50; Year 1,25; Year 2,35; Year 3,40.The discount rate in BP is 14% and the discount rate in $US is 12%.The spot rate is $US1.99/BP.Calculate the NPV of the project in BP.

A)+28.69
B)+25.86
C)+42.67
D)+22.68

Question 35

If the peso is traded at a forward discount relative to the U.S.dollar,then the U.S.dollar is also trading at a discount relative to the peso.

Question 36

The phrase "stronger currency" implies a forward premium.Given a Euro-U.S.dollar exchange rate of $1.45/Euro,which of the following values for the forward rate shows the strongest dollar?

A)1.55
B)1.65
C)1.35
D)1.25

Question 37

Suppose that the G Company knows that in one month it must pay ≤7 million for goods that its U.S.subsidiary will receive in Britain.The current exchange rate is $1.99/≤.The risk that the corporate treasurer faces is that:

A)The $US/pound exchange rate falls in a month's time,i.e.,the pound weakens.
B)The $US/pound exchange rate rises in a month's time,i.e.,the pound strengthens.
C)The $US/pound exchange rate does not change from its current position.
D)The pound exchange rate falls in a month's time,i.e.,the pound strengthens.

Question 38

If a government were to seize the assets of a multinational company and not provide adequate compensation to its owners,the government would be following which practice?

A)WTO resolution
B)expropriation
C)repatriation
D)terrorism

Question 39

If the U.S.dollar interest rate is 4% and the peso interest rate is 7%,what is the likely one-year forward rate if the spot dollar-peso rate is peso 11/$US?

A)11.54
B)11.32
C)10.68
D)10.23

Question 40

The current spot rate is $US0.8543/$A.The one-year forward rate is $US0.8475/$A.A U.S.exporter denominates its exports to Australia in $A and expects to receive $A600,000 in one year.What is the value of these exports in one year in $US given that the firm executes a forward hedge?

A)$US 508,500
B)$US 512,580
C)$US 707,965
D)$US 702,329

Question 41

If the price of a Big Mac in the U.S.is $2.56,and in Japan it is Yen 300,then the implied exchange rate is Yen 117.19/$US.

Question 42

The Big Mac exchange rate matches official exchange rate quotes for different currencies.

Question 43

When a currency gets stronger,the forward rate of that currency must have increased against all currencies.

Question 44

Project financing is often designed to reduce a foreign government's incentive to expropriate capital investment.

Question 45

Briefly explain the concept of purchasing power parity.

Question 46

The true cost of hedging foreign currency risk is the difference between the forward rate and the expected spot rate.

Question 47

Purchasing power parity provides a better long-run indicator for future price changes than short-run indicator.

Question 48

The strength of a currency is directly related to its interest rate and inflation expectations.

Question 49

Purchasing power parity implies that any differences in inflation rates will be offset by a change in the exchange rate.

Question 50

When estimating the cash flows and NPV for a foreign project,there is no need to forecast exchange rates for the life of the project.

Question 51

For a project's cost of capital measured in Swiss francs,one should use Swiss interest rates and beta with respect to Swiss market.

Question 52

In general,the countries with the highest interest rates also have the highest inflation rates.

Question 53

Briefly explain the concept of interest rate parity.

Question 54

Briefly explain the term transaction exposure.

Question 55

The true cost of hedging foreign currency risk is the difference between the forward rate and today's spot rate.

Question 56

The risk that an unfriendly government might expropriate a firm's assets is called political risk.

Question 57

The terms transaction exposure and economic exposure are two names for the same foreign exchange risk.

Question 58

Briefly describe the different types of currency markets.

Question 59

Briefly describe what happens in foreign exchange markets.

Question 60

Briefly explain the expectations theory of forward exchange rates.

Question 61

What is wrong with the following news report? "Today the dollar ended the trading session stronger."

Question 62

Briefly explain the term economic exposure.

Question 63

Briefly explain why a currency forecast is not necessarily required when a multinational firm estimates the cash flows from an international project?

Question 64

Briefly explain the term political risk.