Deck 19: International Business Finance

Question 1

Assume that an investor purchased 200,000,000 Japanese yen in New York at an exchange rate of 113 yen to the dollar and simultaneously sold the yen in Tokyo at an exchange rate of 111 Japanese yen to the dollar. Further assume that there was no cost associated with this transaction. What profit or loss did the investor make? Round your answer to the nearest dollar.

A) ($(3,189) loss
B) $31,890
C) $(31,890) loss
D) $3,189 profit

Answer 1

B

Question 2

Trading in foreign exchange markets is dominated by

A) Russian rubles, Indian rupees and Indonesian rupeas.
B) Spanish pesetas, German marks, French francs.
C) Chinese renminbis, Saudi ryals, pesos of various Latin American countries.
D) U. S. dollars, the British pound, the euro and the yen.

Answer 2

D

Question 3

Participants in foreign exchange trading include

A) importers and exporters.
B) investors and portfolio managers.
C) currency traders.
D) all of the above.

Answer 3

D

Question 4

Forward rates are quoted

A) in direct form.
B) in indirect form.
C) at a premium or discount.
D) all of the above.

Question 5

An investor purchased Canadian dollars at an exchange rate of $0.756 U.S. to the Canadian dollar. The Canadian dollars cost her $1,000,000 (U.S. dollars). How many Canadian dollars did she buy?

A) $132,275
B) $756,000
C) $1,322,751
D) $75,600

Question 6

With foreign exchange contracts, currencies are exchanged

A) at the specified future date, but at the rate agreed upon at the date of the contract.
B) immediately, but at the rate agreed upon at the date of the contract.
C) both parties must place the amount of the contract in escrow until the exercise date of the contract.
D) payment is made immediately, but the contracted currency will be delivered at the specified future date.

Question 7

One U.S. dollar buys 112 yen and 21.5 Mexican pesos. What is price of pesos in yen?

A) 5.21 yen
B) )0521 yen
C) )19 yen
D) 4.65 yen

Question 8

An attempt to profit by converting dollars to yen, yen to euros, and euros back to dollars would be an example of

A) arbitrage.
B) speculation.
C) hedging.
D) intervention.

Question 9

An investor purchased 1,000,000 Canadian dollars at an exchange rate of $0.756 U.S. to the Canadian dollar.

A) $132,275
B) $756,000
C) $1,322,751
D) $75,600

Question 10

Buying and selling in more than one market to make a riskless profit is called

A) profit maximization.
B) arbitrage.
C) international trading.
D) cannot be determined from the above information.

Question 11

What keeps foreign exchange quotes in two different countries in line with each other?

A) Cross rates
B) Forward rates
C) Arbitrage
D) Spot rates

Question 12

A spot transaction occurs when one currency is

A) deposited in a foreign bank.
B) immediately exchanged for another currency.
C) exchanged for another currency at a specified price.
D) traded for another at an agreed-upon future price.

Question 13

You are leaving Mexico and have 3,200 pesos to change into dollars. The exchange rate is 12.5 pesos to the dollar. How many dollars will you receive?

A) $256
B) You will receive $400.
C) $2,560
D) $40.00

Question 14

Suppose International Trading Enterprises purchased 25,000 kilograms of Belgian chocolate for a price of 100,000 euros. If the current exchange rate is 0.95 euro to the U.S. dollar, what is the purchase price of the chocolate in dollars?

A) $57,895
B) $26,316
C) $95,000
D) $105,263

Question 15

Assume that an importer of wine were to purchase 5,000 cases of premium French Bordeaux for 700,000 euro. Further assume that the quoted exchange rates are as follows: spot rate = .9542 euro to the U.S. dollar; 30-day forward rate = .9502 euro to the U.S. dollar; and 90-day forward rate = .9498 euro to the U.S. dollar. If the actual currency exchange rate at the time payment is due in 90 days is equal to the forward rate of .778 euro to the U.S. dollar, how much would the wine cost the importer in U.S. dollars if payment is made in 90 days? Round to the nearest dollar.

A) $949,800
B) $664,860
C) $105,285
D) $736,997

Question 16

Transactions carried out in the foreign exchange markets include

A) spot transactions.
B) forward exchange contracts which allow the exchange of one currency for another today.
C) Depositary Receipts
D) both A and B.

Question 17

Assume that an investor owned 5,000 shares of Anheuser-Busch Corporation common stock prior to the acquisition by InBev of Belgium. At the time of the acquisition, the dollar was worth .77 euro. Further assume that the purchase price was equal to 54 euros per share. What was the sales price of Anheuser Busch common stock per share in U.S. dollars?

A) $41.58
B) $54
C) $77
D) $70.13

Question 18

After the U.S. dollar, the most widely traded currency is

A) the U.K. pound
B) the euro.
C) the Swiss franc.
D) the Japanese yen.

Question 19

An investor purchased 20,000,000 Japanese yen at an exchange rate of 113.25. yen to the dollar. the yen cost her ________. Round answer to the nearest dollar.

A) $2,265,000,000
B) $17,660,044
C) $197,414
D) $176,600

Question 20

Which of the following statements about exchange rates is true?

A) Exchange rates are fixed by international agreements.
B) Exchange rates fluctuate between currencies but are fixed in terms of gold.
C) Exchange rates fluctuate constantly.
D) Are regulated by a special committee of the United Nations.

Question 21

The following are the prices in the foreign exchange market between the U.S. dollar and a foreign currency (fc). Spot 0.6335US$/fc; three-month forward 0.6375US$/fc. What was the discount or premium on three-month forward for the foreign currency?

A) 0.63% premium
B) 0.40% premium
C) 0.63% discount
D) 0.40% discount

Question 22

The exchange rate that represents the number of units of a home currency that is required to purchase one unit of a foreign currency is referred to as a(n) ________ quote.

A) forward
B) direct
C) market
D) indirect

Question 23

Assume that your firm must pay 10,000,000 rupees to an Indian firm. How much will you have to pay in U.S. dollars.

A) $1,467,780
B) $146,800
C) $681,301
D) $68,130

Question 24

The direct 6 month forward rate for the Japanese yen is 0.008853.; the yen is expected to

A) stay the same against the dollar.
B) weaken against the dollar.
C) fluctuate randomly against the dollar.
D) strengthen against the dollar.

Question 25

A dealer in New York offers to buy U.K. pounds for $1.4500 and sell them for $1.4522. The different prices are due to

A) arbitrage.
B) a tax on currency transactions.
C) the bid-ask spread.
D) supply and demand.

Question 26

A trader who simultaneously bought Swiss francs in New York for 1.0222 and sold them in Zurich for 1.0233 would be practicing

A) simple arbitrage.
B) inside trading.
C) compound arbitrage.
D) parity exploitation.

Question 27

A foreign exchange dealer in New York posts an ask price of .01468 for Indian rupees and a bid price of .01470. What is the dealer's profit on the simultaneous purchase and sale of 1 million rupees?

A) $20 profit
B) ($20 )loss
C) $200 profit
D) ($2) loss

Question 28

Forward exchange rates

A) reduce uncertainty about future value of currencies.
B) are always slightly lower than the spot rate.
C) reflect expectations about the future value of currencies.
D) both A and C.

Question 29

The exchange rate that represents the number of units of a foreign currency that can be purchased with one unit of a home currency is referred to as a(n) ________ quote.

A) forward
B) direct
C) market
D) indirect

Question 30

The direct 3 month forward rate for the U.K. pound is 1.4496; the pound is expected to

A) stay the same against the dollar.
B) weaken against the dollar.
C) fluctuate randomly against the dollar.
D) strengthen against the dollar.

Question 31

A cross rate is the computation of an exchange rate for a currency from the exchange rates of two other countries.

Question 32

You are on your way to a beautiful Mexican resort. The current exchange rate is 21 pesos to the dollar. When you arrive, you convert $1,000 for how many pesos?

A) 21,000 pesos
B) 2,100 pesos
C) 476 pesos
D) 4,760 pesos

Question 33

The price of the British pound in Swiss francs rate is

A) 1.4173 Swiss francs to the British pound.
B) 1.4842 Swiss francs to the British pound.
C) )7056 Swiss francs to the British pound.
D) )6738 Swiss francs to the British pound.

Question 34

The number of pounds you can purchase per U.S. dollar is

A) 1.4504
B) 6.895
C) 0.6895
D) 14..51

Question 35

The price of a Swiss franc in British pounds is

A) 1.4842 British pounds to the Swiss franc.
B) 1.4173 British pounds to the Swiss franc.
C) )7056 British pounds to the Swiss franc.
D) )6738 British pounds to the Swiss franc

Question 36

Assume that a firm purchases foreign currency in order to complete the purchase of raw material from an overseas supplier. The currency is purchased today at an exchange rate that is good only for today. This transaction is referred to as a(n) ________ transaction.

A) forward
B) arbitrage
C) spot
D) hedge

Question 37

Assume that a buyer of Italian wine saw the following quotes: spot rate of .9505 euros to the U.S. dollar; 30-day forward rate of .9497 euro to the U.S. dollar; 90-day forward rate of .9482 euros to the U.S. dollar. What does this information imply?

A) The forward euro is selling at a premium as compared with the spot euro.
B) The dollar is expected to maintain the same value in the near future relative to the euro.
C) The forward euro is selling at a discount as compared with the spot euro.
D) None of the above.

Question 38

Assume that your firm must pay $4,000 to a Swiss firm. In Swiss francs , the Swiss firm will receive

A) 391 Swiss francs.
B) 49,300 Swiss francs.
C) 4,903 Swiss francs.
D) 3,909 Swiss francs.

Question 39

The international currency system that presently exists is best described as a ________ rate currency system.

A) parity
B) fixed
C) multinational
D) floating

Question 40

To buy one Indian Rupee you would need

A) 1.468 cents.
B) 68.13 cents
C) 14.68 cents.
D) 6.813 cents

Question 41

Forward rates, like spot rates, are quoted in both direct and indirect form.

Question 42

Spot exchange markets have the potential for arbitrage opportunities for a long period of time.

Question 43

Arbitrage eliminates forward discounts and premiums across the markets of a single currency.

Question 44

The foreign exchange market is similar in form to the New York Stock Exchange.

Question 45

Forward contracts are usually quoted for periods greater than one year.

Question 46

Spot exchange markets are efficient due to arbitrage forces.

Question 47

The asked rate is the price a customer will receive from a foreign currency trader when selling a foreign currency.

Question 48

Arbitrage is the process of buying and selling in one market in order to make a riskless profit.

Question 49

The forward rate is the same as the spot rate that will prevail in the future.

Question 50

The major advantage of the forward market is risk reduction.

Question 51

The difference between the asked price and the bid price is known as the spread.

Question 52

The foreign exchange market provides a physical entity that transfers the purchasing power from one currency to another.

Question 53

Transactions carried out in the foreign exchange markets can include direct or indirect exchange rate quotes.

Question 54

When banks transact in foreign currencies, the direct bid quote is greater than the direct asked quote.

Question 55

The efficiency of foreign currency markets is ensured, in large measure, by the process of arbitrageurs.

Question 56

A direct quote in Bombay tells one how many British pounds can buy one Indian rupee.

Question 57

Spot transactions are made immediately in the market place at the market price.

Question 58

Foreign exchange transactions carried out in the spot market entails an agreement today to deliver a specific number of units of currency on a future date in return for a specified number of units of another currency.

Question 59

The bid rate (also called the offer rate) is the number of units of home currency paid to a customer in exchange for their foreign currency.

Question 60

A narrow spread indicates efficiency in the spot exchange market.

Question 61

Forward contracts benefit only the customer due to a reduction in uncertainty.

Question 62

The 1 year interest rate in the U.S. is 2%. The spot exchange rate for yen is 113.25 to the dollar. The 6 months forward rate is 112.96 to the dollar. These prices indicate that the 6 month risk-free rate in Japan is

A) 1.74%.
B) 2.26%.
C) 4.31%.
D) 1.99%.

Question 63

What is the difference between forward rates and spot rates? What is the purpose of forward contracts?

Question 64

A theory that relates the ratios of spot and forward exchange to differences in interest rates in two countries or currency zones is known as

A) interest rate parity.
B) purchasing power parity.
C) market efficiency.
D) forward/spot equivalence hypothesis.

Question 65

What is the role of arbitrage in the foreign exchange markets?

Question 66

Which of the following statements is true?

A) The forward rate is the same as the spot rate that will prevail in the future.
B) Only the forward rate is known.
C) An indirect quote is the exchange rate that indicates the number of units of the home currency required to buy one unit of foreign currency.
D) Both B and C.

Question 67

According to the domestic Fisher effect, if the inflation rate is 5%, and the nominal rate of interest is 7%, the real rate of interest is

A) 2.00%.
B) 1.904%.
C) 4.65%.
D) 0.5252%.

Question 68

A barrel of oil currently costs $60 in U.S. dollars. The current exchange rate is $1.1256 U. S. to the euro. If purchasing power parity prevails what is the price of a barrel of oil in euros?

A) 71.43 euro
B) 58.36 euro
C) 73.16 euro
D) 53.30 euro

Question 69

As December 26, 2012, the spot rate for Swiss francs was 1.0917. The 3 month forward rate was 1.0939.
Compute the annualized percentage rate premium or discount for Swiss francs.

Question 70

The current spot exchange rate between the Japanese yen and the U.S. dollar is 113.25 Y/US$. The yen is expected to appreciate by 4% against the dollar over the next year. What do you expect the spot exchange rate between the yen and the dollar to be one year from now?

A) 91.51 Y/US$
B) 106.72 Y/US$
C) 108.89 Y/US$
D) 98.54 Y/US$

Question 71

According to the domestic Fisher effect, if the inflation rate is 3% and the real rate of interest is 2%, the nominal rate of interest will be

A) 5.06%.
B) 5.00%.
C) 6%.
D) 8.15%.

Question 72

The 6 month interest rate in the U.S. is 2%. The spot exchange rate for Australian dollars is 1.4063 to the U.S.dollar. The 6 months forward rate is 1.4259 to the U.S. dollar. These prices indicate that the 6 month risk-free rate in Australia is

A) 6.00%.
B) 0.34%.
C) 0.60%.
D) 3.42%.

Question 73

According to the international Fisher effect, if the nominal interest rate in Russia is 9.5% and the inflation rate is 8%, the real rate of interest is approximately

A) 18.26%.
B) 6.5%.
C) 1.5%.
D) -1.5%.

Question 74

The 6 month interest rate in Australia is 0.6%. The spot exchange rate for Australian dollars is 1.4063 to the U.S.dollar. The 6 months forward rate is 1.4259 to the U.S. dollar. These prices indicate that the 6 month risk-free rate in the U.S. is

A) 6.00%.
B) 3.02%.
C) 3.42%.
D) 2.00%.

Question 75

What is the difference between and "ask" quote and a "bid" quote?

Question 76

One U.S. dollar buys 21.9923 Mexican pesos and .8885 euro. What is the peso/euro exchange rate?

Question 77

The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the

A) purchasing power parity theory.
B) balance of payments quantum theory.
C) interest rate parity theory.
D) arbitrage markets theory.

Question 78

A dealer in London posts an ask rate of .6238 and a bid rate of .6237. How much, in U.K. pounds, would it cost to purchase $100,000. For how much in pounds could you sell $100,000?

Question 79

The purchasing power parity theory is least likely to apply to the price of

A) oral surgery.
B) smart phones.
C) crude oil.
D) cane sugar.

Question 80

10,000 bushels of corn currently sells in the U. S. for $57,300. The current exchange rate is 68.13 rupees to the dollar. If purchasing power parity prevails, what is the price of 10,000 bushels of corn in rupees?

A) 3,903,849 rupees
B) 8,410,392 rupees
C) 68,130 rupees
D) 1,467,782 rupees