Deck 23: International Corporate Finance

Question 1

One British pound can be purchased for $1.80. What is the exchange rate in terms of pounds per dollar?

A)£0.451
B)£0.491
C)£0.526
D)£0.556

Answer 1

£0.556

Question 2

What are the timings of the foreign exchange market?

Answer 2

The foreign exchange market, also known as FX or forex market, is open 24 hours a day.

Question 3

________ are players in the foreign exchange market.

A)Global investment banks
B)Large multinational firms
C)Central banks
D)all of the above

Answer 3

all of the above

Question 4

The supply and demand for a currency is driven by ________.

A)firms trading goods
B)investors trading securities
C)actions of central banks in each country
D)all of the above

Question 5

Even though a project may generate foreign currency cash flows, the firm cares about the home currency value of the project.

Question 6

One British pound can be purchased for $1.65. What is the exchange rate in terms of pounds per dollar?

A)£0.551
B)£0.606
C)£0.626
D)£0.645

Question 7

You have just landed in Paris with $750 in your wallet. At the foreign exchange booth, you see that euros are being quoted at $1.34/€. How many euros can you exchange for your $750?

A)1,005 euros
B)559.70 euros
C)750.00 euros
D)179.56 euros

Question 8

You firm needs to pay its British supplier £1,000,000. If the exchange rate is $1.61/ £, how many dollars will you need to pay the British supplier?

A)$1,610,000
B)$621,118
C)$385,787
D)$1,000,000

Question 9

Firms that have a considerable amount of earnings abroad do not face any risk from changes in exchange rates.

Question 10

Which two currencies account for more than half of all the trading volume in the foreign exchange market?

A)Euro and Chinese yuan
B)U.S. dollar and the British pound
C)Euro and the British pound
D)U.S. dollar and the euro

Question 11

The ________ market is where currencies are traded twenty-four hours a day and with a large turnover.

A)foreign exchange
B)bond
C)stock
D)none of the above

Question 12

How are exchange rates quoted in the Wall Street Journal?

Question 13

The spot exchange rate is the current rate at which one currency can be converted into another today.

Question 14

One British pound can be purchased for $1.90. What is the exchange rate in terms of pounds per dollar?

A)£0.451
B)£0.491
C)£0.526
D)£0.543

Question 15

Multinational firms often use currency forward contracts and currency options to hedge foreign exchange rate risk.

Question 16

Suppose a firm imports goods from Europe and the import price is denominated in euros, then ________.

A)the exporter bears foreign exchange risk
B)Central Bank faces foreign exchange risk
C)the importer bears foreign exchange risk
D)none of the above

Question 17

What is foreign exchange market?

Question 18

The ________ rate is a price for a currency denominated in another currency.

A)marginal
B)foreign exchange
C)interest
D)reversion

Question 19

Hedging with currency options involves a commitment by a firm to buy currency at a fixed rate.

Question 20

A ________ exchange rate means that the rate changes constantly depending on the quantity supplied and demanded for the currency.

A)fixed
B)floating
C)banded
D)none of the above

Question 21

A ________ strategy replicates the forward contract by borrowing in one currency, converting to the other currency and investing in the new currency.

A)cash-and-carry
B)futures
C)forward
D)none of the above

Question 22

Assume IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.90/euro one year from today. If the spot exchange rate is $2/euro one year later, what is the dollar amount that IBM must pay to receive the euros?

A)$300,000
B)$325,000
C)$380,000
D)$400,000

Question 23

Assume IBM enters into a forward contract to purchase 100,000 euros at a rate of $1.60/euro one year from today. If the spot exchange rate is $2/euro one year later, what is the dollar amount that IBM must pay to receive the euros?

A)$100,000
B)$160,000
C)$200,000
D)$300,000

Question 24

________ give a firm a right, but not an obligation, to exchange currency at a given rate.

A)Currency forwards
B)Currency options
C)Currency futures
D)Currency exchanges

Question 25

The spot exchange rate for the British pound is 0.5 pounds/dollar. The one-year interest rate in the United States is 4% and the one-year interest rate in Britain is 5%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?

A)0.606 pounds/dollar
B)0.612 pounds/dollar
C)0.617 pounds/dollar
D)0.505 pounds/dollar

Question 26

The one-year forward exchange rate is Rupees 45/$. If the one-year interest rate in the United States is 5% and in India is 8%, what is the spot exchange rate so as to preclude arbitrage?

A)Rupees 43.23/$
B)Rupees 43.75/$
C)Rupees 43.99/$
D)Rupees 44.32/$

Question 27

Firms use forward foreign exchange contracts rather than a cash-and-carry strategy because ________.

A)of lower transaction costs
B)of inability to borrow in different currencies
C)of higher interest costs if credit quality is poor
D)all of the above

Question 28

If a firm hedges a future purchase of euros by purchasing a call option, the firm ________ the potential cost but will benefit if the euro ________.

A)fixes, depreciates
B)fixes, appreciates
C)caps, depreciates
D)caps, appreciates

Question 29

The importer-exporter dilemma is caused by ________.

A)changing interest rates
B)increases in inflation
C)fluctuating exchange rates
D)deflation

Question 30

A Brazilian firm owes you $2,000,000, payable in three months, however, they insist on paying in Brazilian Reals. The current spot exchange rate is $0.59305/Real. The three-month forward exchange rate is $0.61255/Real. How many Real should you demand in a forward contract to receive $2,000,000 in three months to hedge the exchange rate risk?

A)1,186,100 Real
B)3,372,397 Real
C)3,265,040 Real
D)1,225,100 Real

Question 31

The one-year forward exchange rate is Rupees 40/$. If the one-year interest rate in the United States is 4% and in India is 7%, what is the spot exchange rate so as to preclude arbitrage?

A)Rupees 38.88/$
B)Rupees 39.01/$
C)Rupees 39.23/$
D)Rupees 39.32/$

Question 32

A firm wants to hedge a potential transaction but is also concerned about a possibility that it may not take place. In this case it is better to hedge potential risks using ________.

A)options
B)forwards
C)futures
D)none of the above

Question 33

Assume IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.50/euro one year from today. If the spot exchange rate is $2/euro one year later, what is the dollar amount that IBM must pay to receive the euros?

A)$200,000
B)$225,000
C)$400,000
D)$300,000

Question 34

The one-year forward exchange rate is Rupees 50/$. If the one-year interest rate in the United States is 5% and in India is 8%, what is the spot exchange rate so as to preclude arbitrage?

A)Rupees 47.23/$
B)Rupees 48.61/$
C)Rupees 48.99/$
D)Rupees 49.32/$

Question 35

________ asserts that because a forward contract and a cash-and-carry strategy accomplish the same conversion, they must result in the same exchange rate.

A)Covered interest parity
B)Forward premium puzzle
C)Forward discount puzzle
D)None of the above

Question 36

Assuming Covered Interest Parity holds, a(n)________ in the domestic interest rate will ________ the forward rate, all other things held constant.

A)increase, increase
B)increase, decrease
C)decrease, decrease
D)decrease, have no effect on

Question 37

A ________ exchange rate is the rate that a firm can tie in for a future transaction date.

A)fixed
B)forward
C)floating
D)none of the above

Question 38

A ________ is written between a firm and a bank and it fixes the currency exchange rate for a transaction that will occur at a future date.

A)currency forward contract
B)currency options contract
C)currency call option
D)currency put option

Question 39

The spot exchange rate for the British pound is 0.65 pounds/dollar. The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 7%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?

A)0.646 pounds/dollar
B)0.652 pounds/dollar
C)0.662 pounds/dollar
D)0.674 pounds/dollar

Question 40

The spot exchange rate for the British pound is 0.6 pounds/dollar. The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 6%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?

A)0.606 pounds/dollar
B)0.612 pounds/dollar
C)0.617 pounds/dollar
D)0.624 pounds/dollar

Question 41

Consider the following equation: Spot Rate × [(Foreign Cash Flow)/ (1 + r_FC] = (F × Foreign Cash Flow)/ (1 + r_$)
The term F in this equation is ________.

A)the future spot exchange rate
B)the current spot exchange rate
C)the amount of foreign currency
D)the forward exchange rate

Question 42

What is cash-and-carry strategy?

Question 43

A(n)________ market is one where an investor can exchange any currency in any amount at the spot rate or forward rate and is free to purchase or sell any security in any amount in any country at their current market prices.

A)financial
B)limit order
C)internationally integrated capital
D)over-the-counter

Question 44

With internationally integrated capital markets the value of an investment depends on the currency used in the analysis.

Question 45

A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100,000 euros after one year. If the one-year forward exchange rate is $1.35/euro and the dollar cost of capital is 10%, what is the present value (PV)of the project cash flows?

A)$122,675
B)$122,727
C)$127,150
D)$128,209

Question 46

Use the information for the question(s)below.
You are a U.S. investor who is trying to calculate the present value (PV)of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and the forward rate is F₁ = $1.8862/£. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
You are a U.S. investor who is trying to calculate the present value (PV)of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F₁ = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the dollar cash inflow computed by first converting the £ into dollars and then discounting the dollars?

A)$23,275,505
B)$23,186,792
C)$23,278,575
D)$23,367,640

Question 47

Consider the following equation: S × [(Foreign Cash Flow)/ (1 + r_FC] = (Forward Rate × Foreign Cash Flow)/ (1 + r_$)
The term S in this equation is ________.

A)the forward exchange rate
B)the amount of foreign currency
C)the future spot exchange rate
D)the current spot exchange rate

Question 48

Use the information for the question(s)below.
You are a U.S. investor who is trying to calculate the present value (PV)of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and the forward rate is F₁ = $1.8862/£. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
You are a U.S. investor who is trying to calculate the present value (PV)of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F₁ = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the £ cash inflow computed by first discounting the £ and converting them into dollars?

A)$23,275,505
B)$23,186,792
C)$23,367,640
D)$23,278,575

Question 49

What is floating rate?

Question 50

A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100,000 euros after one year. If the one-year forward exchange rate is $1.50/euro and the dollar cost of capital is 8%, what is the present value (PV)of the project cash flows?

A)$132,675
B)$145,349
C)$137,287
D)$138,889

Question 51

What is a currency timeline?

Question 52

A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 200,000 euros after one year. If the one-year forward exchange rate is $1.40/euro and the dollar cost of capital is 9%, what is the present value (PV)of the project cash flows?

A)$232,981
B)$245,198
C)$256,881
D)$268,880

Question 53

What are internationally integrated capital markets?

Question 54

What is covered interest parity?

Question 55

Use the information for the question(s)below.
You are a U.S. investor who is trying to calculate the present value (PV)of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and the forward rate is F₁ = $1.8862/£. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
The present value (PV)of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to ________.

A)$8,961,420
B)$8,950,495
C)$8,954,615
D)$8,943,695

Question 56

Use the information for the question(s)below.
You are a U.S. investor who is trying to calculate the present value (PV)of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and the forward rate is F₁ = $1.8862/£. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
The present value (PV)of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to ________.

A)$8,950,495
B)$8,954,615
C)$8,943,695
D)$8,961,420

Question 57

Consider the following equation: S × [(Foreign Cash Flow)/ (1 + r_FC] = (Forward Rate × Foreign Cash Flow)/ (1 + r_$)
The term r_$ in this equation is ________.

A)the dollar discount rate
B)the risk-free rate for a foreign investor
C)the risk-free rate for a U.S. investor
D)the foreign currency discount rate

Question 58

Consider the following equation: S × [(Foreign Cash Flow)/ (1 + r_FC] = (Forward Rate × Foreign Cash Flow)/ (1 + r_$)
The term r_FC in this equation is ________.

A)the risk-free rate for a foreign investor
B)the risk-free rate for a U.S. investor
C)the foreign currency discount rate
D)the dollar discount rate

Question 59

Which of the following statements regarding international projects is FALSE?

A)Interest rates and costs of capital will likely be different in the foreign country as a result of the macroeconomic environment.
B)The project will most likely generate foreign currency cash flows, although the managers and shareholders care about the foreign currency value of the project.
C)Under internationally integrated capital markets, the value of an investment does not depend on the currency we use in the analysis.
D)The firm will probably face a different tax rate in the foreign country and will be subject to both foreign and domestic tax codes.

Question 60

What is a currency forward contract?

Question 61

Suppose the domestic cost of capital for a U.S.-based company is 10%. Also, the U.S. interest rate is 6% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?

A)11.04%
B)11.26%
C)11.51%
D)11.98%

Question 62

Consider the following equation: = (1 + )- 1 The term r_$ in this equation refers to ________.

A)the cost of capital for the firm in terms of yen
B)the cost of capital in terms of dollars
C)the risk-free rate of interest on the dollar
D)the risk-free rate of interest on the yen

Question 63

If a foreign project is owned by a domestic corporation, managers and shareholders need to determine the home currency value of the foreign currency cash flows.

Question 64

Suppose the domestic cost of capital for a U.S.-based company is 8%. Also, the U.S. interest rate is 4% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?

A)9.58%
B)11.12%
C)10.51%
D)10.98%

Question 65

The amount of taxes paid by a foreign subsidiary does not depend on the amount repatriated back to the home country.

Question 66

The Law of One Price asserts that we will obtain the same valuation of a project whether
(a)we use the domestic cost of capital of the domestic currency equivalent cash flows at the forward exchange rates or
(b)we use the corresponding foreign cost of capital and then convert the present value (PV)of the foreign currency value of the cash flows at the spot rate.

Question 67

Suppose the domestic cost of capital for a U.S.-based company is 9%. Also, the U.S. interest rate is 5% and the European interest rate is 5%. What is the foreign denominated cost of capital for the company?

A)7%
B)8%
C)9%
D)10%

Question 68

Consider the following equation: = (1 + )- 1 The term in this equation refers to ________.

A)the cost of capital in terms of dollars
B)the risk-free rate of interest on the yen
C)the risk-free rate of interest on the dollar
D)the cost of capital for the firm in terms of yen

Question 69

Pooling of all foreign tax liabilities on earnings allows corporations to ________.

A)reduce income
B)repatriate income
C)reduce their overall taxes
D)none of the above

Question 70

Consider the following equation: = (1 + )- 1 The term in this equation refers to ________.

A)the risk-free rate of interest on the dollar
B)the risk-free rate of interest on the yen
C)the cost of capital for the firm in terms of yen
D)the cost of capital in terms of dollars

Question 71

Consider the following equation: = (1 + )- 1 The term r_¥ in this equation refers to ________.

A)the cost of capital for the firm in terms of yen
B)the risk-free rate of interest on the dollar
C)the cost of capital in terms of dollars
D)the risk-free rate of interest on the yen

Question 72

Use the information for the question(s)below.
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r_$, is 5.35% and the risk-free interest rate on pounds, r_£, is 4.80%.
Using the covered interest parity condition, the calculated one-year forward rate F₁ is closest to ________.

A)$1.8568/£
B)$1.8764/£
C)$1.9161/£
D)$1.8961/£

Question 73

Which of the following statements is FALSE?

A)If the foreign tax rate exceeds the U.S. tax rate, companies must pay this higher rate on foreign earnings.
B)U.S. tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed, so this extra tax credit is not wasted.
C)If the foreign tax rate is less than the U.S. tax rate, the company pays total taxes equal to the U.S. tax rate on its foreign earnings.
D)A full tax credit is given for foreign taxes paid up to the amount of the U.S. tax liability.

Question 74

Which of the following statements is FALSE?

A)If the foreign project is owned by a domestic corporation, managers and shareholders need to determine the home currency value of the foreign currency cash flows.
B)The most obvious difference between a domestic project and a foreign project is that the foreign project will most likely generate cash flows in a foreign currency.
C)The risk of the foreign project is unlikely to be exactly the same as the risk of domestic projects (or the firm as a whole), because the foreign project contains residual exchange rate risk that the domestic projects often do not contain.
D)In an internationally integrated capital market, two equivalent methods are available for calculating the net present value (NPV)of a foreign project: Either we can calculate the net present value (NPV)in the foreign country and convert it to the local currency at the forward rate, or we can convert the cash flows of the foreign project into the local currency and then calculate the net present value (NPV)of these cash flows.

Question 75

________ is a term used to describe the transfer of profits from a foreign subsidiary to the home country.

A)Repatriation
B)Depreciation
C)Privatization
D)Reversion

Question 76

Use the information for the question(s)below.
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r_$, is 5.35% and the risk-free interest rate on pounds, r_£, is 4.80%.
Luther Industries, a U.S. firm, is considering an investment in Japan. The dollar cost of equity for Luther is 12%. The risk-free interest rates on dollars and yen are r_$ = 5.5% and r_¥ = 1.5%, respectively. Luther industries is willing to assume that capital markets are internationally integrated. Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates. The yen cost of equity for Luther Industries is closest to ________.

A)14.0%
B)12.3%
C)7.8%
D)18.5%

Question 77

Under U.S. tax law, a multinational corporation may use any excess tax credits generated in high-tax foreign countries to offset its net U.S. tax liabilities on earnings in low-tax foreign countries.

Question 78

Which of the following statements is FALSE?

A)U.S. tax policy requires U.S. corporations to pay taxes on their foreign income at the same rate as profits earned in the United States.
B)The home government gets an opportunity to tax the income from a foreign project to the domestic firm.
C)The general international arrangement prevailing with respect to taxation of corporate profits is that the home country gets the first opportunity to tax income.
D)The home government must establish a tax policy specifying its treatment of foreign income and foreign taxes paid on that income.

Question 79

U.S. tax liabilities are ________ until the foreign subsidiary profits are repatriated to the United States.

A)not incurred
B)incurred no matter
C)accrued
D)none of the above

Question 80

Use the information for the question(s)below.
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r_$, is 5.35% and the risk-free interest rate on pounds, r_£, is 4.80%.
Using the covered interest parity condition, the calculated three-year forward rate F₃ is closest to ________.

A)$1.8568/£
B)$1.9161/£
C)$1.8961/£
D)$1.8764/£