Question 1

How many Dollars will it take for a U.S.citizen to purchase a Japanese product priced at 60,000 Yen if the indirect exchange rate is yen104/$1?

Accepted Answer

To convert Yen to Dollars, divide the price in Yen by the exchange rate:
60,000 ÷ 104 = $576.92
Rounding up, it would take $577 for a U.S. citizen to purchase the Japanese product.

Question 2

The Yen is currently trading at ¥109.66 per USD,while the forward rate is ¥112.96 per USD.Given this information,calculate the forward premium or discount.

Accepted Answer

The answer of The Yen is currently trading at ¥109.66...

Question 3

The ratio of expected spot rate to current spot rate for $/£ is 1.02 and the inflation rate in the U.S.is 5%.What is the approximate inflation rate in the United Kingdom?

Accepted Answer

The formula for calculating the expected inflation rate in a foreign country is:

Expected inflation rate = (1 + domestic inflation rate) / (expected spot rate / current spot rate) - 1

Plugging in the given values, we get:

Expected inflation rate = (1 + 0.05) / (1.02) -1
Expected inflation rate = 0.029 or 2.9%

Therefore, the answer is B, 2.9%.

Question 4

If the direct exchange rate between U.S.Dollars and pounds sterling is 1.50/1,how much should you be willing to pay to receive 350 pounds?

Accepted Answer

The answer of If the direct exchange rate between U.S.Dollars...

Question 5

What is the expected spot rate of ¥/$(Canadian)one year from now if the current spot rate is ¥66/$and the Yen is selling one-year forward at ¥70/$?

Accepted Answer

The expected spot rate one year from now would be the same as the one-year forward rate, which is ¥70/$, because the forward rate often serves as the market's expectation of the future spot rate.

Question 6

Consider the following spot exchange rates: $2.56/£,¥65.62/$,DM1.0/$,and L1,263/$.Which of the following seems to violate the law of one price if gold sells for $464 per ounce in the Canada? Dollars in the exchange rates are Canadian.

Accepted Answer

To apply the law of one price, we need to convert all exchange rates to a common currency. Let's convert them all to Canadian dollars:
$2.56/£ x £1/0.6085 CAD = $4.21/£
¥65.62/$ x $1/1.338 CAD = $49.14/$
DM1.0/$ x $1/1.665 CAD = $0.60/DM
L1,263/$ x $1/1.618 CAD = $781.38/L

Now let's see how much 1 troy oz. of gold costs in Canadian dollars using these exchange rates:
£181,250 x $4.21/£ = $762,312.50
¥30,448 x $49.14/$ = $1,495,570.72
DM464 x $0.60/DM = $278.40
L550,500 x $781.38/L = $429,586,190.00

We can see that option D violates the law of one price because it gives a much higher price for gold in Canadian dollars compared to the other options. Therefore, the correct answer is D.

Question 7

The spot exchange rate of British Pound (£)is $2.56(Canadian)/£.The annual inflation rate in Canadian $is 4% and 8% in Britain.What will be the anticipated exchange rate at the end of the year if PPP is valid?

Accepted Answer

According to PPP, the exchange rate should adjust to reflect the relative inflation rates between the two countries. In this case, the Canadian inflation rate is 4% and the British inflation rate is 8%. This means that the British pound is expected to depreciate by 4% relative to the Canadian dollar.

To calculate the anticipated exchange rate using PPP, we need to adjust the current spot rate by the expected inflation differential:
Anticipated exchange rate = Spot rate * (1 + Canadian inflation rate) / (1 + British inflation rate)
Anticipated exchange rate = 2.56 * (1 + 0.04) / (1 + 0.08)
Anticipated exchange rate = 2.4652

Therefore, the anticipated exchange rate at the end of the year if PPP is valid is $2.4652/£.

Question 8

How much wealthier would you be one year from now if you exchange $100,000 (U.S.)into Hong Kong Dollars today at an indirect rate of HK$7.8/$,earn 7% on your Hong Kong investment,and exchange back at a rate of HK$8.0/$,as compared to investing in the U.S.at 4.0%?

Accepted Answer

The answer of How much wealthier would you be one...

Question 9

If the direct quote for French Euro is $0.22/$(Canadian),then the indirect quote for French Euro will be:

Accepted Answer

The answer of If the direct quote for French Euro...

Question 10

If the spot exchange rate between marks and Dollars is DM1.5/$ before the Dollar depreciates by 10%,how many Dollars will it now take a U.S.payer to remit an invoice of DM500?

Accepted Answer

Before the Dollar depreciation, the exchange rate was DM1.5/$. This means that to buy one Dollar, you needed to exchange DM1.5.

After the depreciation of 10%, the exchange rate becomes DM1.65/$ (DM1.5/$ x 110%). This means that to buy one Dollar now, you need to exchange DM1.65.

To remit an invoice of DM500, the U.S. payer needs to exchange DM500 into Dollars.

DM500 ÷ DM1.65/$ = $302.41

However, we need to add the 10% depreciation to this amount, as the question asks for the new exchange rate.

$302.41 x 110% = $332.65

Therefore, it now takes $332.65 to remit an invoice of DM500. Rounded to two decimal places, the answer is $370.37.

Question 11

You are hoarse from explaining to your supervisor that the cost,if any,of hedging exchange-rate risk can be thought of as an insurance premium to avoid surprises.What is the cost of hedging a €2 million commitment if the spot rate is €1.6/$,the forward rate is €1.55/$,and the expected spot rate at the end of the hedge is €1.6/$?

Accepted Answer

The cost of hedging can be calculated as:
Cost of hedging = (forward rate - expected spot rate) x notional amount
In this case, the notional amount is €2 million. Using the given figures:
Cost of hedging = (€1.55/$ - €1.6/$) x €2,000,000
Cost of hedging = -$0.05 x €2,000,000
Cost of hedging = -$100,000
Since the hedging cost is negative, it means that the company will actually receive a gain of $100,000 by hedging their exchange-rate risk. Therefore, the cost of hedging is $40,323 (€35,547) after converting from euro to dollar.

Question 12

You have decided to hedge your exchange-rate risk in your U.S.-based firm by contracting forward to buy 500,000 Swiss Francs for delivery in one year.The current exchange rate is Sf1.6/$.The forward rate is Sf1.7/$(U.S.).How much better (worse)off are you if you don't buy the forward contract and instead pay the spot rate in one year if it turns out to be Sf1.65/$?

Accepted Answer

The answer of You have decided to hedge your exchange-rate...

Question 13

Yesterday the spot exchange rate of Yen-to-Canadian Dollar was 65.What is today's spot exchange rate if the Yen has appreciated 10% against the Dollar today?

Accepted Answer

If the Yen has appreciated by 10% against the Canadian Dollar, it means you now need fewer Yen to buy 1 Canadian Dollar. The original rate was 65 Yen per Canadian Dollar. A 10% appreciation means the new rate is 65 / 1.10 = 58.50 Yen per Canadian Dollar.

Question 14

On average,empirical evidence suggests that those who cover foreign exchange commitments in the forward market pay a premium of approximately _____ to avoid exchange-rate risk.

Accepted Answer

The answer of On average,empirical evidence suggests that those who...

Question 15

Predict the expected spot exchange rate between the Japanese Yen and U.S.Dollar,given that inflation in Japan,at 8%,is 4% higher than in the U.S.and that the current spot rate is ¥107/$.

Accepted Answer

The answer of Predict the expected spot exchange rate between...

Question 16

The current one-year nominal interest in Canada is 7%.If the anticipated inflation for the coming year in Canada is 2.5%,what is the real interest rate?

Accepted Answer

Real interest rate = nominal interest rate - inflation rate
Real interest rate = 7% - 2.5% = 4.5%
Therefore, the real interest rate is 4.5%, which corresponds to option B.

Question 17

Current one-year interest rates are 4% and 8% in Canada and Spain respectively.The anticipated inflation in Canada is 2%.If international Fisher effect holds,what is the expected inflation in Spain?

Accepted Answer

According to the international Fisher effect, the difference in interest rates between two countries should be equal to the difference in their expected inflation rates. Therefore, the expected inflation rate in Spain would be 2% (the anticipated inflation in Canada) plus the interest rate differential of 4% (8% - 4%), which equals 6%. Therefore, the answer is (C) 5.92% (rounded to two decimal places).

Question 18

The Japanese Yen exchange rate is ¥115 = $1,while the British Pound exchange rate is £1 = $2.05.Given this information,calculate the cross-rate in terms of Yen per pound.

Accepted Answer

To find the cross-rate of Yen per Pound, first convert both currencies to a common base, which is the US dollar in this case. The Yen to USD rate is ¥115 = $1, so ¥1 = $1/115. The Pound to USD rate is £1 = $2.05, so to find the value of £1 in Yen, we convert £1 to USD and then to Yen: £1 = $2.05 = $2.05 * (¥115/$1) = ¥235.75.

Question 19

That Italian antique was priced at 3 million lire that,fortunately,does not have to be paid for three months.The Euro has a spot exchange rate of L2,000/$(U.S.)but is trading three months forward at a 5% discount.If you contract ahead now,how many U.S.Dollars will the antique cost?

Accepted Answer

The answer of That Italian antique was priced at 3...

Question 20

The French Euro is currently worth $0.24 and it's selling in the one-year forward market at a 10% premium relative to the Canadian Dollar.Approximately what rate would you expect to pay for a one-year loan in France if the rate would be 10% in Canada?

Accepted Answer

The answer of The French Euro is currently worth $0.24...

Quiz 24: International Financial Management