Question 1

Relative purchasing power parity states that exchange rates vary in response to:

Accepted Answer

Relative purchasing power parity states that exchange rates vary in response to differences in inflation rates between countries. This means that if one country experiences a higher rate of inflation than another, its currency will depreciate relative to the other country's currency. This is because the country with the higher inflation rate will have a lower purchasing power for its currency, making its goods and services relatively more expensive compared to the other country.

Question 2

Which one of these is a suggested means of reducing short-run exposure to exchange rate risk?

Accepted Answer

The answer of Which one of these is a suggested...

Question 3

An international firm that imports raw materials can reduce its _____ exposure to _______ rate risk by entering into a forward contract.

Accepted Answer

A forward contract is a financial contract between two parties who agree to transact at a predetermined future date and at a predetermined price. In this case, the international firm can enter into a forward contract to buy or sell foreign currency at a future date, thereby reducing its exposure to exchange rate risk. Since the firm is importing raw materials, it is likely to have a short-term exposure to exchange rate risk, which can be hedged with a short-run forward contract. Therefore, option D, short-run exchange, is the best choice.

Question 4

For accounting purposes,the translation gains and losses that affect a firm's balance sheet are:

Accepted Answer

The answer of For accounting purposes,the translation gains and losses...

Question 5

The cross rate is the:

Accepted Answer

The cross rate is the implicit exchange rate between two currencies when both are quoted in a third currency. For example, if the exchange rates for USD/EUR and USD/GBP are known, the cross rate for EUR/GBP can be calculated without direct quotes.

Question 6

The home currency approach:

Accepted Answer

The answer of The home currency approach:
...

Question 7

The international Fisher effect says that _____ rates are equal across countries.

Accepted Answer

The international Fisher effect states that real interest rates are equal across countries.

Question 8

The foreign currency approach to capital budgeting analysis:
I.is computationally easier to use than the home currency approach.
II.produces the same results as the home currency approach.
III.utilizes the uncovered interest parity relationship.
IV.computes the net present value of a project in both the foreign and in the domestic currency.

Accepted Answer

The answer of The foreign currency approach to capital budgeting...

Question 9

Suppose the spot exchange rate is 2 U.S.dollars per British pound.The forward exchange rate is 1.9 dollars per pound.Which one of the following is true?

Accepted Answer

The forward exchange rate is lower than the spot exchange rate, which indicates that the foreign currency (British pound) is selling at a discount. In other words, the U.S. dollar is expected to appreciate against the British pound. This could be due to a higher demand for the U.S. dollar or lower demand for the British pound in the future. The other options are not necessarily true based on the given information.

Question 10

Which of the following are means of repatriating funds from a foreign operation?
I.Royalties on patents and trade names
II.Central office management fees
III.Interest payments on foreign debt
IV.Dividend payments

Accepted Answer

Royalties on patents and trade names, central office management fees, and dividend payments are all means of repatriating funds from a foreign operation, while interest payments on foreign debt are not. Therefore, option D (I, II, and IV only) is the best choice.

Question 11

The home currency approach:

Accepted Answer

The home currency approach requires an applicable exchange rate for every time period for which there is a cash flow. This method involves converting all cash flows into the home currency and then applying the appropriate discount rate to compute the net present value (NPV) of a project. It also provides a net project value in the home currency.

Question 12

The changes in the relative economic conditions between countries are referred to as the:

Accepted Answer

The answer of The changes in the relative economic conditions...

Question 13

Which of the following conditions exist if absolute purchasing power parity exists?
I.Goods are identical
II.Goods have equal economic values
III.Transaction costs are equal to zero
IV.Trade barriers are nonexistent

Accepted Answer

The answer of Which of the following conditions exist if...

Question 14

According to the unbiased forward rate theory,the current 90-day forward rate should fairly accurately predict the:

Accepted Answer

The unbiased forward rate theory posits that the forward exchange rate should be an unbiased predictor of the future spot exchange rate. Therefore, the current 90-day forward rate should predict the spot rate 90 days from now.

Question 15

The forward rate market is dependent upon:

Accepted Answer

The forward rate market is based on the expectation that forward rates will equal the actual future spot rates on average over time, reflecting the market's collective forecast of future exchange rates.

Question 16

Assume that the Euro is selling in the spot market for $1.10.Simultaneously,in the 3- month forward market the Euro is selling for $1.12.Which one of the following statements correctly describes this situation?
I.The euro is selling at a premium relative to the dollar.
II.The dollar is selling at a premium relative to the euro.
III.The dollar is selling at a discount relative to the euro.
IV.The euro is selling at a discount relative to the dollar.

Accepted Answer

The euro is selling at a premium in the forward market compared to the spot market, indicating that the euro is expected to strengthen against the dollar. Therefore, the dollar is selling at a discount relative to the euro.

Question 17

Interest rate parity:

Accepted Answer

Interest rate parity is a theory that suggests the difference in interest rates between two countries will be equal to the difference between the forward exchange rate and the spot exchange rate. This condition helps to eliminate covered interest arbitrage opportunities, where an investor seeks to exploit differences in interest rates between countries while hedging against exchange rate risk.

Question 18

Up-Town Markets exchanged their floating-rate payments with Downtown Markets' fixed rate payments.This exchange is referred to as a:

Accepted Answer

The exchange described in the question is a type of swap, specifically an interest rate swap where two parties exchange cash flows based on different interest rates.

Question 19

Which one of the following statements is correct assuming that exchange rates are quoted as units of foreign currency per dollar?

Accepted Answer

The answer of Which one of the following statements is...

Question 20

Which of the following statements are correct?
I.The usage of forward rates can help reduce the short-run exposure to exchange rate risk.
II.Accounting translation gains are recorded on the income statement as other income.
III.The long-run exchange rate risk faced by an international firm can be reduced if the firm borrows money in the foreign country where it has operations.
IV.Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

Accepted Answer

The answer of Which of the following statements are correct?
I.The...

Quiz 20: International Corporate Finance

Relative purchasing power parity states that exchange rates vary in response to:

Which one of these is a suggested means of reducing short-run exposure to exchange rate risk?

An international firm that imports raw materials can reduce its _ exposure to ___ rate risk by entering into a forward contract.

For accounting purposes,the translation gains and losses that affect a firm's balance sheet are:

The cross rate is the:

The home currency approach:

The international Fisher effect says that _____ rates are equal across countries.

Suppose the spot exchange rate is 2 U.S.dollars per British pound.The forward exchange rate is 1.9 dollars per pound.Which one of the following is true?

Which of the following are means of repatriating funds from a foreign operation? I.Royalties on patents and trade names II.Central office management fees III.Interest payments on foreign debt IV.Dividend payments

The home currency approach:

The changes in the relative economic conditions between countries are referred to as the:

Which of the following conditions exist if absolute purchasing power parity exists? I.Goods are identical II.Goods have equal economic values III.Transaction costs are equal to zero IV.Trade barriers are nonexistent

According to the unbiased forward rate theory,the current 90-day forward rate should fairly accurately predict the:

The forward rate market is dependent upon:

Interest rate parity:

Up-Town Markets exchanged their floating-rate payments with Downtown Markets' fixed rate payments.This exchange is referred to as a:

Which one of the following statements is correct assuming that exchange rates are quoted as units of foreign currency per dollar?