Deck 19: International Business Finance

Question 1

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.

Answer 1

A

Question 2

Forward rates are quoted

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

Answer 2

D

Question 3

If the quote for a forward exchange contract is greater than the computed price,the forward contract is

A)overvalued.
B)undervalued.
C)a good buy.
D)at equilibrium.

Answer 3

A

Question 4

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)$400
C)$2,560
D)$40

Question 5

One U.S.dollar buys 101.31 yen and 12.536 Mexican pesos.What is price of pesos in yen?

A)8.0815
B).12374
C).08082
D)12.3740

Question 6

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

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

Question 7

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

A)the Si riyal.
B)the Euro.
C)the Swiss franc.
D)the Canadian dollar.

Question 8

An investor purchased Canadian dollars at an exchange rate of $0.97 U.S.to 1 Canadian dollar.The Canadian dollars cost her $1,000,000 (U.S.dollars).How many Canadian dollars did she buy?

A)$103,090
B)$970,026
C)$1,030,927
D)$97,000

Question 9

Assume that an investor owned 5,000 shares of Anheuser-Busch Corporation ordinary shares prior to the acquisition by InBev of Belgium.At the time of the acquisition,the dollar was worth 0.77 euros.Further assume that the purchase price was equal to 54 euros per share.What was the sales price of Anheuser Busch ordinary shares per share in U.S.dollars?

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

Question 10

Assume that an importer of wine were to purchase 5,000 cases of premium French Bordeaux for 700,000 euros.Further assume that the quoted exchange rates are as follows: spot rate = .770 euros to the U.S.dollar;30-day forward rate = .775 euros to the U.S.dollar;and 90-day forward rate = .778 euros 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 euros 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)$89,743
B)$909,091
C)$544,600
D)$899,743

Question 11

Suppose International Trading Enterprises purchased 25,000 kilograms of Belgian chocolate for a price of 100,000 euros.If the current exchange rate is .77000 euros to the U.S.dollar,what is the purchase price of the chocolate in dollars?

A)$19,250
B)$770,000
C)$77,000
D)$129,870

Question 12

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 13

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)swaps.
D)both A and B.

Question 14

An investor purchased 20,000,000 Japanese yen at an exchange rate of 101.31 yen to the dollar.The yen cost her ________.Round answer to the nearest dollar.

A)$202,620
B)$19,741
C)$197,414
D)$20,262,000

Question 15

An investor purchased 1,000,000 Canadian dollars at an exchange rate of 1.0309 Canadian dollars to the U.S.dollar.The Canadian dollars cost her

A)$103,090.
B)$970,026.
C)$1,030,927.
D)$97,000.

Question 16

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 17

Participants in foreign exchange trading include

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

Question 18

Trading in foreign exchange markets is dominated by

A)Australian Dollars,New Zealand Dollars,Indonesian Rupiahs.
B)Spanish Pesetas,German Marks,French Francs.
C)Chinese Yuan,Australian dollars,Pesos of various Latin American countries.
D)U.S.Dollars,the British pound,the Euro and the Yen.

Question 19

Assume that an investor purchased 200,000,000 Japanese yen in New York at an exchange rate of 101 yen to the dollar and simultaneously sold the yen in Tokyo at an exchange rate of 99 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)($400,040)loss
B)$40,004
C)($40,004)loss
D)$400,040 profit

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

You are on your way to a beautiful Mexican resort.The current exchange rate is 12 pesos to the dollar.When you arrive,you convert 1,000 US$ for how many pesos?

A)12,000 pesos
B)1,200 pesos
C)8,333 pesos
D)83.33 pesos

Question 22

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

Question 23

A foreign exchange dealer in Tokyo posts an ask price of 95.51 yen for AUD and a bid price of 95.48 yen.What is the dealer's profit on the simultaneous purchase and sale of AUD1 million?

A)(¥30)loss
B)¥30 profit
C)(¥30,000)loss
D)¥30,000 profit

Question 24

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 25

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 26

A dealer in New York offers to buy U.K.pounds for $1.60 and sell them for $1.605.The different prices are due to

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

Question 27

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

Question 28

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

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

Question 31

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

Question 32

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 33

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

Question 34

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

Question 35

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

Question 36

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 37

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 38

Assume that a buyer of Italian wine saw the following quotes: spot rate of .75 euros to the U.S.dollar;30-day forward rate of .747 euros to the U.S.dollar;90-day forward rate of .744 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 39

A trader who simultaneously bought Swiss francs in New York for .9772 and sold them in Zurich for .9774 would be practicing

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

Question 40

A foreign exchange dealer in New York posts an ask price of .01818 for Indian rupees and a bid price of .01820.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 41

A narrow bid-ask spread indicates efficiency in the spot exchange market.

Question 42

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 43

The major advantage of the forward market is risk reduction.

Question 44

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 45

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

Question 46

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 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

Spot exchange markets are efficient due to arbitrage forces.

Question 52

One U.S.dollar buys 12.9923 Mexican pesos and .7585 euros.What is the peso/euro exchange rate?

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

The difference between the dealer's sell price and the buy price is known as the bid-ask spread.

Question 58

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

Question 59

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

Question 60

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

Question 61

If a currency's forward price in U.S.dollars is lower than the spot price,interest rates are higher in the foreign country than they are in the U.S.

Question 62

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 63

The 1-year interest rate in the U.S.is 1%.The spot exchange rate for yen is 84.81 to the dollar.The 6 months forward rate is 84.78 to the dollar.These prices indicate that interest rates in Japan,on an annualised basis,are about

A).07% lower.
B).07% higher.
C).035% higher.
D).7% lower.

Question 64

If a currency's forward price in U.S.dollars is higher than the spot price,interest rates are higher in the foreign country than they are in the U.S.

Question 65

Which of the following statements is true?

A)Interest rate parity indicates that the forward premium or discount should be greater than the differences in the national interest rates for securities of the same maturity.
B)Purchasing power parity indicates that,in the long run,exchange rates adjust to reflect international differences in inflation so that the purchasing power of each currency tends to remain the same.
C)The International Fisher Effect indicates that the nominal interest rate should be the same all over the world at all times if the market is efficient.
D)Both B and C.

Question 66

The nominal rate of interest in Russia is 9.5% and the inflation rate is 8%.The nominal rate of interest in Canada is 2.5% and the inflation rate is zero.We would expect

A)the ruble to strengthen against the dollar.
B)the exchange rate between the Canadian dollar and the ruble to stay the same because of interest rate parity.
C)the exchange rate between the Canadian dollar and the ruble to stay the same because of purchasing price parity.
D)the Canadian dollar to strengthen against the ruble.

Question 67

A barrel of oil currently costs $85 in U.S.dollars.The current exchange rate is $1.32 U.S.to the euro.If purchasing power parity prevails,what is the price of a barrel of oil in euros?

A)71.43 euros
B)145.29 euros
C)112.20 euros
D)64.39 euros

Question 68

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 69

Assume that in 1990 a Toyota Corolla sold for 1,476,000 yen in Japan and $8,200 in the U.S.The car still sells for the same amount of yen today,but the current exchange rate is 85 yen per dollar,what is the car selling for today in U.S.dollars?

A)$14,760
B)$17,365
C)$18,204
D)$9,647

Question 70

The nominal rate of interest in Russia is 9.5% and the inflation rate is 8%.The nominal rate of interest in Spain is 3% and the inflation rate is 1%.Which country has the higher real rate of interest?

A)Russia
B)Spain
C)There is no difference.
D)There is not enough information.

Question 71

The current spot exchange rate between the Japanese yen and the U.S.dollar is 84.61 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)87.99 Y/US$
C)81.36 Y/US$
D)103.08 Y/US$

Question 72

Purchasing price parity is more likely to be the case for common commodities than for personal services.

Question 73

Which of the following is a conceptual method for keeping the foreign currency market in equilibrium?

A)The purchasing power parity mechanisms
B)The balance of trade mechanisms
C)Government intervention through central banks
D)The interest rate parity mechanisms

Question 74

10,000 bushels of corn currently sells in the U.S.for $57,300.The current exchange rate is 55.02 rupees to the dollar.If purchasing power parity prevails,what is the price of 10,000 bushels of corn in rupees?

A)2,152,646 rupees
B)10,414.44 rupees
C)55,020 rupees
D)215,265 rupees

Question 75

The spot exchange rate for Canadian dollars is .1.007 to the U.S.dollar.The 6 months forward rate is 1.0068 to the U.S.dollar.The interest rate in Canada (annual)is 1.02%.What is the U.S.interest rate?

A)1.00%
B)1.04%
C)1.08%
D).9800%

Question 76

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

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

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

The 1-year interest rate in the U.S.is 1%.The spot exchange rate for Canadian dollars 1.007 to the U.S.dollar.The 6 months forward rate is 1.0068 to the U.S.dollar.These prices indicate that interest rates in Canada,on an annualised basis,are about

A).08% lower.
B).08% higher.
C).04% higher.
D).8% lower.

Question 79

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 80

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%.