Deck 31: International Corporate Finance

Question 1

Triangle arbitrage can occur when the ________ rate between two currencies is not ________ to the ratio of the two direct rates.

A)cross; equal
B)spot; equal
C)cross; less than
D)spot; less than
E)cross; greater than

Answer 1

cross; equal

Question 2

What kind of trade involves agreeing today on an exchange rate for settlement in 90 days?

A)Spot trade
B)Market trade
C)Forward trade
D)Triangle trade
E)Complex trade

Answer 2

Forward trade

Question 3

When the Mexican peso is quoted as Ps13.93,this quote is a(n):

A)indirect rate.
B)direct rate.
C)cross rate.
D)triangle rate.
E)linear rate.

Answer 3

indirect rate.

Question 4

An agreement to exchange currencies at some point in the future using an exchange rate agreed upon today is called a ________ trade.

A)spot
B)forward
C)swap
D)floating
E)triangle

Question 5

When the Canadian dollar is quoted as $.87,this quote is a(n):

A)triangle rate.
B)indirect rate.
C)direct rate.
D)cross rate.
E)inverse rate.

Question 6

Assume the euro is selling in the spot market for $1.22.Simultaneously,in the 3-month forward market the euro is selling for $1.24.Which one of these statements correctly describes this situation?

A)The spot market is out of equilibrium.
B)The forward market is out of equilibrium.
C)The dollar is selling at a premium relative to the euro.
D)The euro is selling at a premium relative to the dollar.
E)The euro is less expensive in the forward market.

Question 7

Triangle arbitrage:

A)no longer exists due to the advanced electronic communications used in today's markets.
B)only applies to forward exchange rates.
C)helps keep the currency market in equilibrium.
D)opportunities can only be found in the spot market.
E)only involves currencies other than the U.S.dollar.

Question 8

Suppose the spot exchange rate is $1 = £.7304 and the 1-month forward rate is $1 = £.7303.Given this,you know the:

A)U.S.inflation rate is higher than the U.K.'s.
B)U.S.nominal interest rate is higher than the U.K.'s.
C)pound is selling at a discount.
D)U.S.real risk-free interest rate is higher than the U.K.'s.
E)pound is selling at a premium.

Question 9

Money deposited in a financial center outside the country whose currency is involved is called:

A)a foreign depository receipt.
B)an international exchange certificate.
C)an American Depository Receipt.
D)Eurocurrency.
E)Eurodollars.

Question 10

A security issued in the United States that represents shares of a foreign stock and allows that stock to be traded in the United States is called a(n):

A)American Depository Receipt.
B)Yankee bond.
C)Yankee stock.
D)Eurostock.
E)foreign obligation trust certificate.

Question 11

A major network for foreign transactions is operated by a Belgian non-profit cooperative known as:

A)EURX.
B)BELX.
C)SWIFT.
D)LIBOR.
E)GLOBEX.

Question 12

The implicit exchange rate between two currencies when both are quoted in some third currency is called a(n):

A)open exchange rate.
B)cross-rate.
C)backward rate.
D)forward rate.
E)interest rate.

Question 13

Which one of following statements is false?

A)Importers are participants in the foreign exchange market.
B)The foreign exchange market is an over-the-counter market.
C)There are no speculators in the foreign exchange market.
D)Exporters are participants in the foreign exchange market.
E)Portfolio managers are participants in the foreign exchange market.

Question 14

The rate most international banks charge one another for overnight Eurodollar loans is called the:

A)Eurodollar yield to maturity.
B)London Interbank Offered Rate.
C)Paris Opening Interest Rate.
D)United States Treasury bill rate.
E)international prime rate.

Question 15

The price of one country's currency expressed in terms of another country's currency is called the:

A)absolute currency rate.
B)cross inflation rate.
C)depository rate.
D)exchange rate.
E)foreign interest rate.

Question 16

An agreement to trade currencies based on the exchange rate set today for settlement within two business days is called a(n)________ trade.

A)swap
B)option
C)futures
D)forward
E)spot

Question 17

The foreign exchange market is where:

A)one country's stocks are exchanged for another's.
B)one country's bonds are exchanged for another's.
C)one country's currency is traded for another's.
D)international banks make loans to one another.
E)international businesses finalize import/export relationships with one another.

Question 18

Which one of these statements is true?

A)The exchange markets are limited to the currencies of highly developed countries.
B)Importers and exporters are key players in the foreign exchange market.
C)The trading floor of the foreign exchange market is located in London,England.
D)Foreign exchange rates are set by the governments of each country issuing a currency.
E)The foreign exchange market is the world's smallest financial market.

Question 19

Currencies that are exchanged today without any prior arrangement are exchanged at the:

A)spot rate.
B)forward rate.
C)triangle rate.
D)LIBOR.
E)discounted rate.

Question 20

The cross rate is:

A)the inverse of the direct rate.
B)an implicit rate based on two currencies and their individual relationships with a third currency.
C)the rate converting the direct rate into the indirect rate.
D)the average of the spot and forward rates.
E)the link between the spot and forward rates.

Question 21

Spot trades must be settled:

A)on the trade date.
B)within one business day.
C)within two business days.
D)within three business days.
E)within one week of the trade date.

Question 22

Absolute purchasing power parity is most apt to exist for:

A)a 4-door Ford vehicle.
B)a loaf of white bread.
C)a 2-bedroom home.
D)a new watch.
E)an ounce of silver.

Question 23

Interest rate parity:

A)eliminates covered interest arbitrage opportunities.
B)exists when spot rates are equal for multiple countries.
C)means that the nominal risk-free rate of return must be the same across countries.
D)exists when the spot rate is equal to the futures rate.
E)eliminates exchange rate fluctuations.

Question 24

Which concept states that real rates are equal across countries?

A)Uncovered interest parity
B)Relative purchasing power parity
C)Unbiased forward rates
D)Absolute purchasing power parity
E)International Fisher effect

Question 25

Covered interest arbitrage involves:

A)two spot rates.
B)two forward rates.
C)both a spot rate and a forward rate.
D)a single exchange at the current exchange rate.
E)a single exchange at a spot rate that exists in the future.

Question 26

If a foreign currency is selling at a discount relative to the dollar then the:

A)foreign currency is cheaper in the spot market than it is in the forward market.
B)cross rate is cheaper than the direct rate.
C)foreign currency is cheaper in the forward market than it is in the spot market.
D)direct rate is cheaper than the indirect rate.
E)settled rate is less than the spot rate.

Question 27

The idea that a specific hamburger should cost the same regardless of where purchased or the currency used to pay for the purchase is referred to as:

A)the unbiased forward rates condition.
B)uncovered interest rate parity.
C)the international Fisher effect.
D)absolute purchasing power parity.
E)interest rate parity.

Question 28

Which one of these statements is correct assuming exchange rates are quoted as units of foreign currency per dollar?

A)When the dollar strengthens,it takes more dollars to obtain one unit of a foreign currency.
B)If the U.S.inflation rate is lower than the inflation rate in Canada,then the U.S.dollar will depreciate relative to the Canadian dollar.
C)When a foreign currency appreciates in value it strengthens relative to the dollar.
D)As the U.S.dollar strengthens,one British pound will purchase more U.S.dollars.
E)The exchange rate is unaffected by differences in the inflation rates of the two countries.

Question 29

The condition stating that the interest rate differential between two countries is approximately equal to the percentage forward premium or discount is called:

A)the unbiased forward rates condition.
B)uncovered interest rate parity.
C)the international Fisher effect.
D)purchasing power parity.
E)interest rate parity.

Question 30

The unbiased forward rate is a:

A)condition where a future spot rate is equal to the current spot rate.
B)guarantee of a future spot rate at one point in time.
C)condition where the spot rate is expected to remain constant over a period of time.
D)relationship between the future spot rate of two currencies at an equivalent point in time.
E)predictor of the future spot rate at the equivalent point in time.

Question 31

The forward rate is most apt to equal the spot rate when:

A)the real rate of interest is declining.
B)the inflation rates in the two countries are equal.
C)purchasing power parity exists.
D)the real rates of interest in the two countries are equal.
E)inflation rates are historically high.

Question 32

The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates between the countries is called:

A)the unbiased forward rates condition.
B)uncovered interest parity.
C)the international Fisher effect.
D)purchasing power parity.
E)interest rate parity.

Question 33

The symbol "S₀" represents the:

A)spot exchange rate expressed in dollars per unit of foreign currency.
B)forward rate expressed in foreign currency units per dollar.
C)profit that can be realized on a triangle arbitrage.
D)spot rate in foreign currency units per dollar.
E)forward rate expressed in dollars per unit of foreign currency.

Question 34

The symbol "R_FC" represents the foreign country's:

A)forward nominal market interest rate.
B)real risk-free interest rate.
C)real market interest rate.
D)forward real market interest rate.
E)nominal risk-free interest rate.

Question 35

________ holds because of the possibility of covered interest arbitrage.

A)Uncovered interest parity
B)Interest rate parity
C)The international Fisher effect
D)Unbiased forward rates
E)Purchasing power parity

Question 36

The international Fisher effect says that ________ rates are equal across countries.

A)spot
B)one-year future
C)nominal
D)inflation
E)real

Question 37

The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate is called:

A)the unbiased forward rates condition.
B)uncovered interest rate parity.
C)the international Fisher effect.
D)purchasing power parity.
E)interest rate parity.

Question 38

"The change in exchange rates is determined by the difference in the inflation rates of the two countries." This statement expresses the concept of:

A)absolute purchasing power parity.
B)relative purchasing power parity.
C)the international Fisher effect.
D)unbiased forward rates.
E)interest rate parity.

Question 39

Suppose the one-year forward rate is £.6390.Given no arbitrage opportunities,this implies that traders expect the spot rate to be:

A)£.6390 in one year.
B)greater than £.6390 in one year.
C)less than £.6390 in one year.
D)greater than or equal to £.6390 in one year.
E)less than or equal to £.6390 in one year.

Question 40

For absolute purchasing power parity to hold:

A)transaction costs must be observable.
B)interest rates must be uniform on a nominal basis.
C)inflation rates must be uniform in all markets.
D)tariffs must be imposed on all imported goods.
E)products must be identical in all markets.

Question 41

Remitting funds to a parent firm from a foreign subsidiary is referred to as:

A)recommitting.
B)reshipping.
C)repatriating.
D)returning.
E)reshaping.

Question 42

An international firm which imports raw materials can reduce its ________ exposure to ________ rate risk by entering into a forward contract.

A)long-term; inflation
B)short-term; inflation
C)short-run; exchange
D)long-run; exchange
E)total; interest

Question 43

Which one of these statements is correct?

A)Borrowing money in the country in which operations are located reduces long-run exchange rate risk.
B)Accounting translation gains are recorded on the income statement as other income.
C)In multidivisional firms,exchange rate risk should be managed at the division level.
D)The usage of forward rates can help reduce the long-run exposure to exchange rate risk.
E)Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

Question 44

All the following are political risks associated with international investing except:

A)nationalization.
B)decreasing consumer demand.
C)blocking of funds.
D)tax law changes.
E)contract abrogation.

Question 45

Assume that ¥106.83 equals $1.Also assume that SKr8.2941 equals $1.How many Japanese yen can you acquire in exchange for 5,000 Swedish krona?

A)¥388.19
B)¥314.77
C)¥41,710.99
D)¥56,756.67
E)¥64,401.20

Question 46

The Tax Cut and Jobs Act of 2017 allows untaxed foreign profits held as cash or as securities to be:

A)used to purchase U.S.fixed assets after a one-time tax of 8 percent.
B)repatriated at a one-time tax rate of 15.5 percent.
C)returned to the U.S.at the new corporate tax rate of 15 percent.
D)repatriated at a one-time tax rate of 8 percent.
E)returned to the U.S.as tax-free income.

Question 47

How many euros can you get for $2,500 if the USD equivalent is 1.2195?

A)€2,147.08
B)€2,050.02
C)€2,309.11
D)€3,048.75
E)€2,921.00

Question 48

All the following,except one,tend to hinder funds from foreign subsidiaries being remitted to their home country parent firm.Which one of these is the exception?

A)Foreign exchange remittance controls
B)Repatriation taxes
C)Active exchange rate market
D)Blocking controls
E)Expropriation taxes

Question 49

You want to import $56,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $.01606?

A)Rs3,015,030
B)Rs2,666,667
C)Rs3,486,924
D)Rs3,008,001
E)Rs2,847,319

Question 50

The changes in the relative economic conditions between countries are referred to as the:

A)international Fisher effect.
B)international exchange rate effect.
C)translation exposure to exchange rate risk.
D)long-run exposure to exchange rate risk.
E)the interest rate parity risk.

Question 51

Assume $1 will buy Can$1.2803 while $1.2195 will buy €1.What is the Can$/€ exchange rate?

A)Can$.9709 = €1
B)Can$.9525 = €1
C)Can$1.0499 = €1
D)Can$1.3624 = €1
E)Can$1.5613 = €1

Question 52

The home currency approach:

A)generally produces more reliable results than those found using the foreign currency approach.
B)requires an applicable exchange rate for every time period for which there is a cash flow.
C)uses the current risk-free nominal rate to discount all the cash flows related to a project.
D)stresses the use of the real rate of return to compute the net present value (NPV)of a project.
E)converts the foreign-denominated NPV into the dollar-denominated NPV.

Question 53

The foreign currency approach to capital budgeting analysis:

A)is computationally harder to use than the home currency approach.
B)utilizes the uncovered interest parity relationship.
C)computes the NPV in both the foreign and the domestic currency.
D)is solely dependent upon purchasing power parity.
E)produces superior results as compared to the home currency approach.

Question 54

Financial Accounting Standards Board Statement No.52 requires that most assets and liabilities be translated at the current exchange rate.Translation gains and losses are recorded:

A)in the shareholder's equity section of the balance sheet.
B)as a normal income item on the income statement.
C)as an extraordinary item on the income statement.
D)as a footnote to the financial statements.
E)only on income tax returns.

Question 55

Monies earned by foreign subsidiaries that have not yet been taxed under U.S.law can be used to:

A)purchase U.S.government bonds.
B)purchase U.S.stocks.
C)pay dividends.
D)invest in new capital overseas.
E)invest in new U.S.plants and equipment.

Question 56

The home currency approach:

A)discounts all a project's foreign cash flows using the current spot rate.
B)employs uncovered interest parity to project future exchange rates.
C)computes the net present value (NPV)of a project in the foreign currency and then converts that NPV into U.S.dollars.
D)utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency.
E)utilizes the international Fisher effect to compute the relevant exchange rates needed to compute the NPV of foreign cash flows in U.S.dollars.

Question 57

Lisa is planning a trip to Australia where a hotel will cost A$165 per night for seven nights.She expects to spend another A$2,200 for meals,tours,souvenirs,and so forth.How much will this trip cost her in U.S.dollars if the USD equivalent is .7752?

A)$2,600.80
B)$3,599.49
C)$2,782.02
D)$3,969.47
E)$4,327.92

Question 58

A foreign subsidiary can remit funds to the parent firm in the all the following ways except by means of:

A)dividends.
B)management fees for central services.
C)royalties on the use of trade names.
D)royalties on the use of patents.
E)nationalization.

Question 59

Assume the official USD equivalent of one Canadian dollar is .7813 and the USD equivalent of the U.K.pound is 1.3699.Further assume you have 100 pounds and have been offered Can$180 for them.If you use triangle arbitrage and the entire £100,you can earn a profit of:

A)£1.56.
B)£2.66.
C)£.87.
D)£1.09.
E)£2.03.

Question 60

You just returned from some extensive traveling.You started your trip with $10,000 in your pocket.You spent 1.32 million pesos in Chile where Ps1 = $.001642.You spent Ps36,000 in Uruguay where Ps1 = $.03526.Then on the way home,you spent Ps29,000 in Mexico where $1 = Ps18.8709.How many dollars did you have left by the time you returned to the U.S.?

A)$3,889.07
B)$4,001.84
C)$4,110.27
D)$5,026.44
E)$4,299.03

Question 61

You are considering a project in Norway with an initial cost of NKr135,000.The project is expected to return a one-time payment of NKr200,000 at the end of Year 5.Assume the risk-free rate of return is 2.6 percent in the U.S.and 3.1 percent in Norway.Assume the inflation rate is 1.6 percent in the U.S.and 2.3 percent in Norway.Lastly,assume the current exchange rate is $1 = NKr7.9271.Approximately how much will the payment at the end of 5 Years be worth in U.S.dollars?

A)$24,609
B)$24,108
C)$26,472
D)$25,870
E)$26,006

Question 62

Assume the current spot rate is Can$1.2803 and the one-year forward rate is Can$1.2745.Also assume the nominal risk-free rate in Canada is 4.8 percent while it is 4.2 percent in the U.S.Using covered interest arbitrage,you can earn a profit of ________ for every $1 invested over the next year.

A)$.0163
B)$.0108
C)−$.0040
D)−$.0088
E)−$.0840

Question 63

Angie has been offered Can$1.75 for £1.How much profit can she earn on a triangle arbitrage if the official rate is $1 = Can$1.2834 and the USD equivalent of £1 is $1.3699? Assume she currently has $100 in cash.

A)$.46
B)$.73
C)$1.09
D)$1.37
E)$.57

Question 64

Assume $1 = ¥106.83 = £.7309.If a TV in London costs £430,what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

A)¥32,411.02
B)¥34,666.67
C)¥62,849.77
D)¥58,001.28
E)¥82,880.09

Question 65

Assume a risk-free asset in the U.S.is currently yielding 2.7 percent while a Canadian risk-free asset is yielding 2.8 percent and the current spot rate is Can$1.2849 = $1.What is the approximate 6-month forward rate if interest rate parity holds?

A)Can$1.2855
B)Can$1.2838
C)Can$1.2843
D)Can$1.2862
E)Can$1.2836

Question 66

Assume the spot rate for the British pound currently is £.7287 per dollar and the one-year forward rate is £.7304.A risk-free asset in the U.S.is currently earning 3 percent.If interest rate parity holds,approximately what rate can you earn on a one-year risk-free British security?

A)3.16 percent
B)3.03 percent
C)2.92 percent
D)2.84 percent
E)3.24 percent

Question 67

Assume the current spot rate for the Norwegian krone is $1 = NKr7.9323,the expected inflation rate in Norway is 2.1 percent and 1.2 percent in the U.S.Also assume a risk-free asset in the U.S.is yielding 3.7 percent.What nominal risk-free rate of return should you expect on a Norwegian security?

A)2.9 percent
B)4.6 percent
C)4.2 percent
D)3.1 percent
E)3.8 percent

Question 68

Assume today you can exchange $100 for either Can$128 or Ps1,892.Also assume that last year,$100 was worth Can$126 or Ps1,847.Which one of the following statements is correct given this information?

A)$100 invested in Canadian dollars last year would now be worth Ps1,824.09.
B)$100 invested in Mexican pesos last year would now be worth $98.47.
C)$100 invested in Mexican pesos last year would now be worth $101.63.
D)$100 invested in Canadian dollars last year would now be worth $99.52.
E)$100 invested in Canadian dollars last year would now be worth Ps1,862.44.

Question 69

Assume the current spot rate for the Norwegian krone is $1 = NKr7.93,the expected inflation rate in Norway is 2.4 percent while it is 2.6 percent in the U.S.Also assume a risk-free asset in the U.S.is yielding 4.5 percent.What real rate of return should you expect on a risk-free Norwegian security?

A)4.3 percent
B)4.7 percent
C)1.9 percent
D)2.1 percent
E)2.4 percent

Question 70

You are expecting a payment of Can$138,000 two years from now.Assume the risk-free rate of return is 2.7 percent in Canada and 3.1 percent in the U.S.Also assume the current exchange rate is Can$1.2903 = $1.Approximately how much will the payment two years from now be worth in U.S.dollars?

A)$108,319
B)$106,101
C)$107,813
D)$107,381
E)$108,169

Question 71

Assume you can exchange $1 for £.7347 today.Assume that last week,£1 was worth $1.3613.If you had converted £100 into dollars last week and then exchanged your dollars back into pounds today,you would now have a:

A)profit of $.048.
B)loss of $.42.
C)profit of £.101.
D)loss of $.068.
E)profit of £.015.

Question 72

Assume the expected inflation rate in Finland is 2 percent while it is 4 percent in the U.S.Also assume a risk-free asset in the U.S.is yielding 4.5 percent.What nominal rate of return should you expect on a risk-free Finnish security?

A)2.0 percent
B)1.5 percent
C)3.0 percent
D)2.5 percent
E)4.0 percent

Question 73

Assume the spot market exchange rate for $1 is currently A$1.2902.Also assume the expected inflation rate is 3.3 percent in Australia compared to the U.S.rate of 2.8 percent.What is the expected exchange rate one year from now if relative purchasing power parity exists?

A)A$1.2837
B)A$1.2062
C)A$1.2286
D)A$1.2967
E)A$1.1484

Question 74

Suppose the spot rate on the Canadian dollar is C$1.2797.Also assume the risk-free nominal rate in the U.S.is 3.8 percent while it is only 3.3 percent in Canada.Which one of the following three-year forward rates best establishes the approximate interest rate parity condition?

A)C$1.2733
B)C$1.2606
C)C$1.2861
D)C$1.2990
E)C$1.1918

Question 75

Assume the spot rate for the Japanese yen currently is ¥106.83 per dollar while the one-year forward rate is ¥107.20.Also assume a risk-free asset in Japan is currently earning 4.6 percent.If interest rate parity holds,approximately what rate can you earn on a one-year risk-free U.S.security?

A)4.24 percent
B)5.08 percent
C)4.62 percent
D)4.78 percent
E)4.96 percent

Question 76

Assume the current spot rate is Can$1.2811 and the one-year forward rate is Can$1.2767.Also assume the nominal risk-free rate in Canada is 3.2 percent while the U.S.rate is 3.5 percent.Using covered interest arbitrage you can earn an extra profit of ________ for every $1 invested over the next year.

A)$.0018
B)$.0015
C)$.0011
D)$.0006
E)$.0002

Question 77

Assume the spot rate of $1 is £.7347.Also assume the expected inflation rate in the U.K.is 2.1 percent while the U.S.inflation rate is 3.6 percent.What is the expected exchange rate three years from now if relative purchasing power parity exists?

A)£.7237
B)£.6306
C)£.7683
D)£.7021
E)£.7667

Question 78

The camera you want to buy costs $399 in the U.S.If absolute purchasing power parity exists,the identical camera will cost ________ in Australia if the exchange rate is A$1 = $.7752.

A)A$309.30
B)A$393.23
C)A$435.09
D)A$514.71
E)A$506.67

Question 79

Suppose the spot rate on the Indian rupee is Rs65.2203,the risk-free nominal rate in the U.S.is 4.6 percent,and the Indian risk-free nominal rate is 6.2 percent.Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?

A)Rs64.1768
B)Rs66.2638
C)Rs62.8840
D)Rs63.0733
E)Rs67.8420

Question 80

A new sweater costs SF67 in Switzerland.Assume SF1 = $1.0563 and €1 = $1.2195.How much will the identical sweater cost in euros if absolute purchasing power parity exists?

A)€58.03
B)€43.08
C)€77.35
D)€58.25
E)€60.75