Deck 22: International Financial Management

Question 1

Motorola has a contract to deliver cellular telephones in Japan in 6 months from now and the payment for these telephones will be in Japanese yen. What type of foreign exchange risk does Motorola face?

A) economic exposure
B) operating exposure
C) transaction exposure
D) translation exposure

Answer 1

C

Question 2

When a multinational firm has one or more foreign subsidiaries with assets and liabilities denominated in a foreign currency, it faces ____ exposure.

A) economic
B) operating
C) translation
D) transaction

Answer 2

C

Question 3

Government trade policies that restrict imports into a country tend to ____ the supply of the country's currency in the foreign exchange market and tend to ____ the value of the country's currency with respect to other currencies.

A) increase, decrease
B) increase, increase
C) decrease, decrease
D) decrease, increase

Answer 3

D

Question 4

When the Federal Reserve (acting through member commercial banks) sells U.S. dollars in the foreign exchange market, it ____ the supply of U.S. dollars and hence tends to ____ the value of the U.S. dollar relative to other currencies.

A) increases, raise
B) decreases, lower
C) increases, lower
D) decreases, raise

Question 5

Which of the following actions would not tend to increase the value of a country's currency?

A) relatively low interest rates
B) government trade policies that limit imports
C) relatively low rate of inflation
D) restrictions on foreign exchange transactions

Question 6

The theory of interest rate parity states that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in ____ prevailing in the two countries.

A) inflation rates
B) interest rates
C) trade deficit rates
D) GNP growth rates

Question 7

Firms engaged in international transactions incur ____ because of fluctuations in the exchange rates among currencies.

A) credit risk
B) political risk
C) market risk
D) exchange rate risk

Question 8

Under current accounting procedures, all of the following balance sheet items are translated into dollars at the rate of exchange prevailing on the date of the balance sheet except:

A) stockholder's equity
B) fixed assets
C) current liabilities payable in a foreign currency
D) long-term liabilities payable in a foreign currency

Question 9

A high rate of inflation within a country will tend to ____ the value of its currency with respect to the currencies of other countries that are experiencing lower rates of inflation.

A) increase
B) decrease
C) have no effect on
D) cannot be determined because of insufficient information

Question 10

Which of the following is not a primary category of foreign exchange risk that multinational firms must consider?

A) economic exposure
B) operating exposure
C) translation exposure
D) transaction exposure

Question 11

Primary sources of demand for British pounds in the foreign exchange market include

A) foreign buyers of British exports who must pay for their purchases in pounds
B) foreign investors who desire to make investments in physical or financial assets in Great Britain
C) speculators who expect British pounds to increase in value relative to other currencies
D) all of these answers are correct

Question 12

A parent company's foreign investment risk exposure depends on the foreign subsidiary's net ____ position.

A) cash
B) equity
C) present value
D) working capital

Question 13

Primary sources of supply of British pounds in the foreign exchange market include:

A) British importers who need to convert their pounds into foreign currency to pay for purchases
B) foreign investors who desire to make investments in physical or financial assets in Great Britain
C) speculators who expect British pounds to increase in value relative to other currencies
D) U.S. importers who need to convert dollars to pounds to pay for purchases

Question 14

To protect itself against transaction exchange rate risk, a U.S. company that purchases automobiles from a Japanese manufacturer may use all of the following techniques except:

A) borrow U.S. funds and invest them in interest-bearing Japanese securities
B) execute a contract in the forward exchange market
C) sell yen in the spot market at the time of each transaction
D) execute a contract in the foreign exchange futures market

Question 15

Which of the following trade policies will tend to decrease the supply of the country's currency in the foreign exchange market?

A) imposition of tariffs
B) imposition of export quotas
C) financing exports with low interest loans
D) imposition of tariffs and export quotas

Question 16

The ____ states that the differences in interest rates between two countries should be offset by equal, but opposite, changes in the future spot exchange rate.

A) expectations theory
B) interest rate parity
C) purchasing power parity
D) international Fisher effect

Question 17

When interest rate parity exists, the forward rate will differ from the spot rate by just enough to ____.

A) offset the difference in the real rate of return
B) permit the buyer of a covered option to make a profit
C) offset the interest rate differential between the two currencies
D) result in a perfect interest rate arbitrage

Question 18

An increase in the value of a foreign currency relative to the U.S. dollar ____ the conversion value of the foreign subsidiary's liabilities.

A) decreases
B) increases
C) has no effect on
D) is an average of

Question 19

A euro is a

A) monetary unit used in transactions between European central banks
B) monetary unit used in providing capital to the World Bank
C) monetary unit used in transactions between Common Market countries
D) composite currency whose value is based on the weighted value of several European currencies

Question 20

A U.S. company that purchases goods on credit from a German supplier can protect itself against transaction exchange risk by

A) executing a contract in the forward exchange market
B) borrowing U.S. funds and investing in interest-bearing German securities
C) borrowing German funds and investing in interest-bearing U.S. securities
D) executing a contract in the forward exchange market, and by borrowing U.S. funds and investing in interest-bearing German securities

Question 21

What is the real rate of return if the risk-free rate is 4 percent and the expected rate of inflation is 2.5 percent?

A) 0.43%
B) 1.50%
C) 6.35%
D) 1.46%

Question 22

If the annual nominal interest rate on 5-year U.S. Government Treasury bonds is 7 percent, and the annual nominal interest rate on 5-year Canadian bonds is 5.5 percent, what is the expected future spot rate in 5 years given that the current spot exchange rate between U.S. dollars and Canadian dollars is $0.587?

A) $0.595
B) $0.547
C) $0.578
D) $0.630

Question 23

The theory that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in interest rates in the two countries is known as

A) covered interest arbitrage
B) inflation
C) hedging
D) interest rate parity

Question 24

If the annual nominal interest rate on 5-year U.S. Government Treasury bonds is 7 percent and the annual nominal interest rate on 5-year Canadian bonds is 7.75%, what is the expected future spot rate in 5 years given that the current spot exchange rate between U.S. dollars and Canadian dollars is $0.739?

A) $0.734
B) $0.714
C) $0.765
D) $0.733

Question 25

If U.S. prices are expected to rise by 3 percent over the coming year and prices in Switzerland are expected to rise by 7 percent during the same time, what is the expected spot rate in one year of the Swiss franc given that the current spot exchange rate is $0.168

A) $0.1612
B) $0.1613
C) $0.1617
D) $0.1745

Question 26

If the 182-day interest rate is 1.75 percent in the U.S. and 2.625 percent in Germany, and the current spot exchange rate between dollars and euros is $0.583, what will the 180-day forward rate be if IRP holds?

A) $0.578
B) $0.588
C) $0.573
D) $0.581

Question 27

In general, when a foreign subsidiary's assets are ____ than its liabilities, ____ will occur when the exchange rate on the currency of the country in which the foreign subsidiary operates loses value.

A) greater, currency exchange gains
B) greater, currency exchange losses
C) less, nothing
D) greater, nothing

Question 28

Today, short-term interest rates in Australia are 8.50% and the corresponding U.S. rate is 6.0%. The current discount on forward Australian dollars is 2.0%. Can a U.S. trader use covered interest arbitrage to take advantage of this situation? If so what is the net effect?

A) No. Lose 1/2%
B) No. Lose 2 1/2%
C) Yes. Gain 1/2%
D) Yes. Gain 2 1/2%

Question 29

Basic hedging techniques include all of the following except

A) money market hedge
B) forward market hedge
C) primary market hedge
D) none, because all are basic hedging techniques

Question 30

Crown Honda purchased one of its most popular models for 965,600 yen. The exchange rate for the yen was 142 yen per U.S. dollar at the time of purchase but then rose to 171.8 yen by the time payment was made. What was the dealer's gain or loss on the change in rates?

A) gain of $1,180
B) loss of $1,427
C) loss of $1,180
D) gain of $1,427

Question 31

If one year U.S. nominal interest rates are 4 percent, one year Canadian nominal interest rates are 7.5 percent, and the current spot exchange rate, S?, is $0.587, then the expected spot rate in one year will be:

A) $0.568
B) $0.607
C) $0.564
D) $0.573

Question 32

If U.S. prices are expected to rise by 3.5 percent over the coming year and prices in Great Britain are expected to rise by 5.25 percent during the same time, what is the expected spot rate in one year given that the current spot exchange rate is $1.497?

A) $1.522
B) $1.470
C) $1.472
D) $1.499

Question 33

Vroom Vroom Motors purchased several Mercedes Benz automobiles from its West German broker. The contract was for 10,000,000 euros, due in 180 days. The present exchange rate is $0.51 per euro and the 180 day forward rate is $0.514. If the rate actually goes to $0.50 in 180 days, what is the dollar gain or loss incurred if no hedge is taken relative to a hedged position?

A) $392,157 gain
B) $ 40,000 loss
C) $100,000 gain
D) $140,000 gain

Question 34

What is the nominal interest rate in Canada if the real rate of return is 2.5% and the expected inflation rate was 4.5%

A) 7.00%
B) 6.89%
C) 7.11%
D) 7.07%

Question 35

What is the real rate of return if the risk-free rate is 3.25 percent and the expected rate of inflation is 2.75 percent?

A) 0.50%
B) 0.51%
C) 0.487%
D) 1.49%

Question 36

If the annual nominal interest rate on 10-year U.S. Government Treasury bonds is 7.35 percent and the annual nominal interest rate on 10-year Japanese bonds is 5.75 percent, what is the expected future spot rate in 10 years given that the current spot exchange rate between U.S dollars and Japanese yen is $0.00959?

A) $0.00834
B) $0.01114
C) $0.00973
D) $0.00946

Question 37

If the spot rate (in U.S. dollars) for the Australian dollar is $0.559 and the 180 day forward rate is trading at a premium of 2.86%, then the 180 day forward rate is:

A) $0.551
B) $0.567
C) $0.575
D) $0.583

Question 38

Firms transacting business with foreign companies can lower exchange rate risk exposure by

A) limiting transaction exposure
B) hedging
C) purchasing LIBORs
D) using the PPP to make exchange rate forecasts

Question 39

The (6 month) interest rate on 180 day U.S. Treasury bills is 7.64%. In the foreign exchange markets, the spot rate between U.S. dollars and British pounds is 1 pound = $1.5525. The 180-day (6 month) forward rate is 1 pound = $1.5188. Determine the expected rate of interest on 6 month British government debt securities, assuming interest rate parity between the dollar and pound exists.

A) 13.52%
B) 5.47%
C) 7.31%
D) 10.03%

Question 40

The 6 month interest rate on 180 day U.S. Treasury Bills is 7.5 percent. In the foreign exchange markets, the spot rate between U.S. dollars and Australian dollars is 1 Australian dollar = $0.452 and the 180 day (6 month) forward rate is 1 mark = $0.46. Determine the expected rate of interest on 6 month Australian government debt securities, assuming that the interest rate parity between the U.S. dollar and Australian dollar exists.

A) 7.35%
B) 1.77%
C) 5.63%
D) 3.82%

Question 41

In considering purchasing power parity, the relationship is:
I) not applicable due to tariffs.
II) is applicable in spite of trade barriers.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 42

According to Fisher, in the absence of government interference and holding risk constant, real rates of return across countries will be equalized through a process of _______________.

A) margining accounts
B) transaction transference
C) arbitrage
D) equalization of costs

Question 43

Name the factors that affect exchange rates.

Question 44

A less restrictive form of purchasing power parity is:

A) Omnipotent purchasing power parity
B) Relative purchasing power parity
C) Absolute purchasing power parity
D) Exchange parity

Question 45

The law of one price, an economic principle, means that the price of a product in different markets should be:

A) the same if the raw materials were obtained from a single source..
B) the same if adjusted for inflation.
C) the same if taxes are adjusted based on a single currency.
D) the same if there are no significant costs associated with moving between markets.

Question 46

All of the following items are needed to compute relative purchasing power parity EXCEPT:

A) spot price
B) home country interest rate
C) benchmark tax rate
D) expected foreign country inflation rate

Question 47

The international Fisher effect theory states that differences in interest rates between two countries will be offset by equal but opposite changes in ________________

A) the future spot rate
B) the future interest rate
C) the American dollar
D) the euro

Question 48

What are two hedging techniques that a U.S. company might use to protect itself against foreign exchange risk with regard to transaction exposure?

Question 49

There are two methods used to forecast future exchange rates. What are they and how do companies use them to protect against risk?

Question 50

How does a firm manage economic exposure due to changes in exchange rates?

Question 51

How do market forces support the relative purchasing power parity?