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 JPY104 = USD1?

Accepted Answer

60,000¥ × ($ / 104¥) = $577

Question 2

The nominal interest rate is the difference between the real interest rate and inflation.

Accepted Answer

The nominal interest rate includes the impact of inflation, therefore it is not the difference between the real interest rate and inflation. The real interest rate is the nominal interest rate minus inflation.

Question 3

If purchasing power parity holds,what will happen to the currency of a country with high inflation?

Accepted Answer

Purchasing power parity suggests that exchange rates should adjust so that the same basket of goods has the same cost in different countries. If a country has high inflation, it means that goods in that country are becoming more expensive compared to goods in other countries. Thus, the currency will depreciate to offset the higher prices and maintain the parity of purchasing power.

Question 4

High inflation rates are usually associated with:

Accepted Answer

High inflation rates typically lead to high nominal interest rates as lenders demand higher returns to compensate for the decreased purchasing power of money.

Question 5

You can value overseas investments using the NPV of the cash flows.Which of the following adjustment is necessary to calculate the NPV?

Accepted Answer

To calculate the NPV of overseas investments, the foreign cash flows need to be converted into the domestic currency using the spot exchange rate. Once the cash flows have been converted, the domestic opportunity cost of capital can be used to discount the cash flows. This adjustment accounts for any potential currency risk and ensures that the investment is evaluated on a consistent basis with other domestic investments. Adjusting the cost of capital by the forward exchange rate (A) is not necessary as it would assume a specific exchange rate in the future, which may not be accurate. Using the domestic discount rate (C) would result in an incorrect evaluation of the investment as it would not account for any foreign currency risk. Using the foreign cost of capital (D) would also result in an incorrect evaluation as it would not account for the cost of capital in the domestic currency.

Question 6

Buying currency in the forward market is a common method of hedging currency risk.

Accepted Answer

Buying currency in the forward market allows a company to lock in an exchange rate for a future date, reducing the risk of currency fluctuations. Therefore, it is a common method of hedging currency risk.

Question 7

If the exchange rate of euros/U.S.dollars is USD1.351 = EUR1,then:

Accepted Answer

The exchange rate of euros/U.S. dollars is USD1.351 = EUR1, meaning one U.S. dollar is worth 1/1.351 or approximately €0.74.

Question 8

An indirect quote is the rate of one unit of foreign currency expressed in U.S.dollars.

Accepted Answer

The answer of An indirect quote is the rate of...

Question 9

Suppose the spot rate for the Canadian dollar is CAD1.034 = USD1,the 3-month forward rate is CAD1.036 = USD1,and the 1-year forward rate is CADS1.039.= USD1.If no other information is available,what will be your guess about the spot rate in 1 year?

Accepted Answer

Since the 1-year forward rate is higher than the current spot rate and the 3-month forward rate, we can infer that the market expects the Canadian dollar to appreciate against the US dollar over the next year. Therefore, the best guess for the spot rate in 1 year would be the 1-year forward rate of CAD1.039 = USD1.

Question 10

Country A has a higher inflation rate than Country B. In this case Country A will have the:

Accepted Answer

When a country has a higher inflation rate than another, its currency tends to depreciate in value relative to the other country's currency. This is because the higher inflation rate erodes the purchasing power of the currency, making it less attractive to hold. As a result, investors may sell off the currency, causing its value to decline.

Question 11

If real interest rates are different across countries,investors will shift their money into countries with high real interest rates.

Accepted Answer

This is known as the "carry trade" strategy, where investors borrow money at low interest rates in one country and invest it in another country with higher interest rates to earn a profit from the interest rate differential. As a result, capital flows into countries with higher real interest rates, pushing up exchange rates and potentially leading to inflationary pressures.

Question 12

Suppose the 1-year interest rate in Canada is 4% while it is 3% in the U.S.The indirect spot rate is CAD1.02 = USD1.What is the indirect 1-year forward rate?

Accepted Answer

1-year forward rate = C$1.02 × (1.04 / 1.03) = C$1.0299

Question 13

Suppose that a bank quotes the following rates: JPY 58.00 = CHF1
CHF1.52 = USD1
JPY123.38 = USD1
Which of the following transactions would produce an arbitrage profit for a US investor?

Accepted Answer

$1 buys 123.38 yen, which can be converted into 123.38 / 58.00 = 2.127 francs, which in turn buys 2.127 / 1.52 = $1.40.

Question 14

If the interest rate in one country increases,then the value of that country's currency increases in the forward market.

Accepted Answer

The answer of If the interest rate in one country...

Question 15

Suppose that the spot exchange rates against the US dollar are: SEK9.3924 = USD1
CHF1.5231 = USD1
JPY123.380 = USD1
What rate do you think a Japanese bank would quote for exchanging Swiss francs into Swedish krone?

Accepted Answer

Cross-rate = SEK9.3924 = CHF1.5231SEK6.167 = CHF1

Question 16

If the direct exchange rate between U.S.dollars and pounds sterling is USD1.50 = GBP1,how much should you be willing to pay to receive £350?

Accepted Answer

₤350 × 1.50 = $525.00

Question 17

If the international Fisher effect holds,what will be the effect of an increase of a country's nominal interest rates on the country's currency?

Accepted Answer

According to the international Fisher effect, an increase in a country's nominal interest rates will lead to a depreciation of its currency. This is because higher nominal interest rates are often associated with higher expected inflation, which can reduce the currency's value.

Question 18

The main purpose in contracting to purchase foreign currency in the forward market is to:

Accepted Answer

The main purpose of contracting to purchase foreign currency in the forward market is to lock into a future currency price now. This helps businesses and investors to hedge against potential future currency fluctuations and protect themselves from unexpected losses. It also provides greater certainty in financial planning and budgeting. The other options - earning a premium on the exchange, taking advantage of future price reductions, and avoiding more expensive spot rates - are not the main purposes of forward contracting.

Question 19

If the international Fisher effect is valid,then expected real interest rates in all countries should be equal.

Accepted Answer

The international Fisher effect states that differences in nominal interest rates between two countries should be reflected in their exchange rate over time, as investors seek higher returns in the country with the higher nominal interest rate. This means that if two countries have the same expected inflation rate, their real interest rates should be the same. Therefore, the statement is true.

Question 20

A sandwich costs $6.79 in the U.S.The exchange rate is CAD0.98 = USD1 dollar.What does the identical sandwich have to cost in Canada for the law of one price to exist?

Accepted Answer

$6.79 × (C$0.98 / $1) = C$6.65

Quiz 22: International Financial Management