Deck 22: International Corporate Finance

Question 1

A 'currency options contract' 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.

Answer 1

False

Question 2

One British pound can be purchased for $1.85. What is the exchange rate in terms of pounds per dollar?

A)0.526
B)0.491
C)0.541
D)0.451

Answer 2

0.541

Question 3

The foreign exchange market, also known as FX or forex market, is open 18 hours a day.

Answer 3

False

Question 4

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

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

Question 5

The US dollar and the Chinese Yuan account for more than half of all the trading volume in the foreign exchange market.

Question 6

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

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

Question 7

One British pound can be purchased for $1.78. What is the exchange rate in terms of pounds per dollar?

A)0.543
B)0.491
C)0.451
D)0.562

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

The stock market is where currencies are traded 24 hours a day and with a large turnover.

Question 13

One British pound can be purchased for $1.58. What is the exchange rate in terms of pounds per dollar?

A)0.645
B)0.633
C)0.551
D)0.626

Question 14

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

Question 15

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

Question 16

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

Question 17

You have just landed in Paris with AU$1 000 in your wallet. At the foreign exchange booth, you see that euros are being quoted at $1.54/€. How many euros can you exchange for your $1 000?

A)644.52 euros
B)1 005.99 euros
C)645.16 euros
D)654.61 euros

Question 18

The foreign exchange market, also known as FX or forex market, is the market where currencies are traded.

Question 19

________ are one of the players in the foreign exchange market.

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

Question 20

A 'cash-and-carry strategy' replicates the forward contract by borrowing in one currency, converting to the other currency and investing in the new currency.

Question 21

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

A)43.99
B)43.75
C)43.23
D)44.32

Question 22

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

Question 23

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

Question 24

The 'covered interest parity' asserts that because a forward contract and a cash-and-carry strategy accomplish the same conversion, they must result in the same exchange rate.

Question 25

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)$300 000
C)$225 000
D)$400 000

Question 26

The spot exchange rate for the British pound is 0.5 pounds/dollar. The one-year interest rate in Australia is 6% 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)0.495
B)0.499
C)0.484
D)0.512

Question 27

The 'importer-exporter dilemma' is caused by

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

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

Question 29

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

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

Question 30

The supply and demand for a currency is driven by

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

Question 31

Currency options give a firm an obligation to exchange currency at a given rate.

Question 32

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

A)39.01
B)39.32
C)38.88
D)39.23

Question 33

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

Question 34

The spot exchange rate for the British pound is 0.65 pounds/dollar. The one-year interest rate in Australia 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
B)0.662
C)0.652
D)0.674

Question 35

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

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

Question 36

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

Question 37

The spot exchange rate for the British pound is 0.55 pounds/dollar. The one-year interest rate in Australia is 6% 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)0.512
B)0.555
C)0.524
D)0.552

Question 38

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

A)47.23
B)48.99
C)49.32
D)48.61

Question 39

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

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

Question 40

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

Question 41

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 42

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 43

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%.
What is a 'currency timeline'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 44

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)over-the-counter
D)internationally integrated capital

Question 45

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%.
What is 'cash-and-carry'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 46

Consider the following equation: The term in this equation is

A)the appropriate cost of capital from the standpoint of an Australian investor.
B)the appropriate cost of capital from the standpoint of a foreign investor.
C)the risk-free rate for an Australian investor.
D)the risk-free rate for a foreign investor.

Question 47

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%.
What is 'covered interest parity'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 48

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 firm will probably face a different tax rate in the foreign country and will be subject to both foreign and domestic tax codes.
C)The project will most likely generate home currency cash flows, although the firm cares about the foreign currency value of the project.
D)Under internationally integrated capital markets, the value of an investment does not depend on the currency we use in the analysis.

Question 49

What are internationally integrated capital markets?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 50

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%.
What is 'floating rate'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 51

Consider the following equation: The term S in this equation is

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

Question 52

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%.
What is a 'currency forward contract'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 53

An Australian 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)$137 287
B)$138 889
C)$145 349
D)$132 675

Question 54

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

Question 55

An Australian 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)$128 209
B)$122 727
C)$127 150
D)$122 675

Question 56

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)$1.8961/£
C)$1.9161/£
D)$1.8764/£

Question 57

Consider the following equation: The term in this equation is

A)the risk-free rate for an Australian investor.
B)the appropriate cost of capital from the standpoint of a foreign investor.
C)the appropriate cost of capital from the standpoint of an Australian investor.
D)the risk-free rate for a foreign investor.

Question 58

Consider the following equation: The term F in this equation is

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

Question 59

An Australian 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)$245 198
B)$256 881
C)$232 981
D)$268 880

Question 60

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

Question 61

Consider the following equation: The term r_¥ 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 in terms of dollars.
D)the cost of capital for the firm in terms of yen.

Question 62

The present value (PV)of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:

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

Question 63

Consider the following equation: The term r_$ 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 cost of capital for the firm in terms of yen.
D)the risk-free rate of interest on the dollar.

Question 64

Which of the following statements is FALSE?

A)Under Australian tax law, multinational corporations may use any excess tax credits generated in high-tax foreign countries to offset their net Australian tax liabilities on earnings in low-tax foreign countries.
B)Firms can lower their taxes by pooling multiple foreign projects and accelerating the repatriation of earnings.
C)If the Australian tax rate exceeds the combined tax rate on all foreign income, it is valid to assume that the firm pays the same tax rate on all income no matter where it is earned.
D)If the foreign tax rate exceeds the Australian tax rate, because the Australian tax credit exceeds the amount of Australian taxes owed, no tax is owed in Australia.

Question 65

Under Australian tax law, a multinational corporation may not use any excess tax credits generated in high-tax foreign countries to offset its net Australian tax liabilities on earnings in low-tax foreign countries.

Question 66

Suppose the domestic cost of capital for an Australian-based company is 8%. Also, the Australian 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)10.51%
C)11.12%
D)10.98%

Question 67

Consider the following equation: The term in this equation refers to

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

Question 68

Luther Industries, an Australian 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)7.8%
C)12.3%
D)18.5%

Question 69

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

Question 70

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

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

Question 71

You are an Australian 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)$23 367 640
C)$23 186 792
D)$23 278 575

Question 72

Australian 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.

Question 73

Generally, Australian tax liabilities are ________ until the foreign subsidiary profits are repatriated to Australia.

A)accrued
B)incurred
C)not incurred
D)none of the above

Question 74

You are an Australian 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 75

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

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

Question 76

Pooling of all foreign tax liabilities on earnings allows corporations to reduce their overall taxes.

Question 77

Consider the following equation: The term in this equation refers to

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

Question 78

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

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

Question 79

Which of the following statements is FALSE?

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

Question 80

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)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.
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)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.