Question 1

Assume you can exchange C$157 with £100.Also assume you can exchange C$1.01 for $1 and $1.62 for £1.How much profit can you earn in U.S.dollars if you start out with $100?

Accepted Answer

[$100 × (C$1.01/$1)× (£100/C$157)× ($1.62/£1)] - $100 = $4.22

Question 2

Assume the spot exchange rate is £.6229.The expected inflation rate in the U.K.is 3.8 percent and in the U.S.it is 2.9 percent.What is the expected exchange rate three years from now if relative purchasing power parity exists?

Accepted Answer

E(S₂)= £.6229 × [1 + (.038 - .029)]³ = £.6399

Question 3

A coffee mug that suits your style costs $5.98 in the U.S.If absolute purchasing power parity exists,what will the same mug cost in Canada if the direct quote is 1.013?

Accepted Answer

$5.98 × C$1/$1.013 = C$5.90

Question 4

Assume the inflation rate in the U.S.is 1.8 percent.The spot rate for a foreign currency is .876 while the 1-year forward rate is .871.What is the approximate rate of inflation in the foreign country?

Accepted Answer

.871 = .876 × [1 + (h_FC - .018)]¹h_FC = .0123,or 1.23%

Question 5

A gift you want to buy costs $529 in the U.S.If absolute purchasing power parity exists,the identical gift will cost _____ in Canada if the exchange rate is C$1 = $.9876

Accepted Answer

$529 × (C$1/$.9876)= C$535.64

Question 6

You are planning a trip to Australia.The hotel will cost you A$160 per night for seven nights.You expect to spend another A$2,500 for meals,tours,and other expenses.How much will this trip cost you in U.S.dollars if the direct quote is 1.0503?

Accepted Answer

[(A$160 × 7)+ A$2,500] × $1.0503/A$1 = $3,802.09

Question 7

Assume you have £100 and can exchange C$350 for £200.Also assume you can exchange $1 for C$1.03 and £1 for $1.61.How much arbitrage profit in pounds can you earn? (Ignore transaction costs. )

Accepted Answer

[£100 × (C$350/£200)× ($1/C$1.03)× (£1/$1.61)] - £100 = £5.53

Question 8

Today,you can exchange $1 for £.6229.Last week,£1 was worth $1.61.Assume you converted £100 into dollars last week and then converted your dollars back to pounds this week.What is your net profit or loss in pounds?

Accepted Answer

[£100 × ($1.61/£1)× (£.6229/$1)] - £100 = £.2869

Question 9

Assume the inflation rate in the U.S.is 3.6 percent.The spot rate for a foreign currency is 5.872 while the 3-year forward rate is 6.084.What is the approximate rate of inflation in the foreign country?

Accepted Answer

6.084 = 5.872 × [1 + (h_FC - .036)]³h_FC = .479,or 4.79%

Question 10

Today,you can exchange $1 for €.7549.A month ago,€1 was worth $1.3077.Assume you converted €500 into dollars last month and then converted your dollars back to euros this week.What is your net profit or loss in euros?

Accepted Answer

[€500 × ($1.3077/€1)× (€.7549/$1)] - €500 = -€6.41

Question 11

How many euros can you get for $1,600 if the direct quote is1.3081?

Accepted Answer

$1,600 × (€1/$1.3081)= €1,223.15

Question 12

Assume that ¥87.04 equal $1.Also assume that 6.5614SKr equal $1.How many Japanese yen can you acquire in exchange for 4,300 Swedish krona?

Accepted Answer

4,300SKr × (¥87.04/$1)× $1/6.5614SKr = ¥57,041.49

Question 13

Currently,$1 will buy C$.9867 while $1.3081 will buy €1.What is the Canadian dollar/Euro exchange rate?

Accepted Answer

C$/Euro = C$.9867/$1 × $1.3081/€1 = C$1.2907/€1

Question 14

You just returned from some extensive traveling.You started your trip with $30,000 in your pocket.You spent €9,800 traveling throughout euroland,7,500NKr in Norway,and £8,200 in the U.K.The exchange rates were $1 = € .7645,1NKr = $.1785,and £1 = $1.6054.How many dollars did you have left by the time you returned to the U.S.?

Accepted Answer

$30,000 - (€9,800 × $1/€.7645)- (7,500NKr × ($.1785/1NKr))- (£8,200 × $1.6054/£1)= $2,678.13

Question 15

A sweater you desire costs C$95.What will the same sweater cost in the U.S.if the direct quote is1.013?

Accepted Answer

C$95 × $1.013/C$1 = C$96.24

Question 16

Assume that $1 can buy you either ¥108 or £.55.If a TV in London costs £555,what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

Accepted Answer

£555 × ($1/£.55)× (¥108/$1)= ¥108,981.82

Question 17

A fancy new coat costs SKr1,559.90.You can exchange SKr1 for $.1524 and €1 for $1.3026.How much will the identical coat cost in euros if absolute purchasing power parity exists?

Accepted Answer

SKr1,559.90 × ($.1524/SKr1)× (€1/$1.3026)= €182.50

Question 18

Assume the spot exchange rate is A$.9521.The expected inflation rate is 2.5 percent in Australia and 3 percent in the U.S.What is the expected exchange rate one year from now if relative purchasing power parity exists?

Accepted Answer

E(S₁)= A$.9521 × [1 + (.025 - .03)] = A$.9473

Question 19

You want to import $50,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $.01819?

Accepted Answer

$50,000 × (1RS/$.01819)= 2,748,763.06RS

Question 20

Assume the current spot rate is C$1.0135 and the 1-year forward rate is C$1.0132.The nominal risk-free rate in Canada is 2.5 percent while it is 2 percent in the U.S.Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.for one year.

Accepted Answer

Profit = [$1 × (C$1.0135/$1)× 1.025 × ($1/C$1.0132)] - ($1 × 1.02)= $.0053

Quiz 20: International Corporate Finance