Question 1

Which one of the following supports the idea that real interest rates are equal across countries?

Accepted Answer

The international Fisher effect (IFE) states that the difference in nominal interest rates between two countries will be equal to the expected change in their exchange rates. This implies that real interest rates (nominal rates adjusted for inflation) should be equal across countries, assuming that inflation rates are also equal. Therefore, choice C supports the idea that real interest rates are equal across countries. Choices A, B, D, and E are related to exchange rate determination and do not directly address the equality of real interest rates.

Question 2

U.S.dollars deposited in a bank in Switzerland are called:

Accepted Answer

D

Question 3

Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates?

Accepted Answer

The statement that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates is known as uncovered interest parity. Option A (unbiased forward rates condition) refers to the idea that the forward exchange rate should be an unbiased predictor of the future spot exchange rate. The international Fisher effect (option C) states that differences in nominal interest rates reflect expected differences in inflation rates between two countries. Purchasing power parity (option D) suggests that over the long run, exchange rates should adjust to equalize the prices of identical goods in different countries. Option E (interest rate parity) is related to the uncovered interest parity, stating that the expected return on a foreign currency investment should be equal to the domestic interest rate minus the expected depreciation of the foreign currency.

Question 4

Mr.Black has agreed to a currency exchange with Mr.White.The parties have agreed to exchange C$12,500 for $10,000 with the exchange occurring 4 months from now.This agreed-upon exchange rate is called the:

Accepted Answer

The agreed-upon exchange rate between Mr.Black and Mr.White that will occur 4 months from now is called the forward rate.

Question 5

Assume that an item costs $100 in the U.S.and the exchange rate between the U.S.and Canada is: $1 = C$1.27.Which one of the following concepts supports the idea that the item that sells for $100 in the U.S.is currently selling in Canada for $127?

Accepted Answer

The concept that supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127 is purchasing power parity (PPP). PPP states that the exchange rate between two currencies should adjust over time so that the same basket of goods and services will cost the same in both countries. If the item costs $100 in the U.S. and $127 in Canada, this suggests that the Canadian dollar is overvalued relative to the U.S. dollar. Therefore, the exchange rate should adjust to make the price of the item in Canada equal to $100, which would make the currencies in equilibrium according to PPP.

Question 6

A trader has just agreed to exchange $2 million U.S.dollars for $1.55 million Euros six months from today.This exchange is an example of a:

Accepted Answer

This is an example of a forward trade, as it involves an agreement to exchange currencies at a specified future date and at a predetermined exchange rate. A spot trade, on the other hand, involves an immediate exchange of currencies at the prevailing exchange rate. A currency swap involves the exchange of one currency for another, but with a simultaneous agreement to reverse the exchange at a future date. A floating swap involves the exchange of currencies at a floating exchange rate. Triangle arbitrage involves exploiting discrepancies in exchange rates between three different currencies.

Question 7

Which one of the following is the risk that a firm faces when it opens a facility in a foreign country,given that the exchange rate between the firm's home country and this foreign country fluctuates over time?

Accepted Answer

Exchange rate risk is the risk that a firm faces when it opens a facility in a foreign country, given that the exchange rate between the firm's home country and this foreign country fluctuates over time. This risk arises due to the potential impact of changes in exchange rates on the profitability and cash flows of the firm.

Question 8

You would like to purchase a security that is issued by the British government.Which one of the following should you purchase?

Accepted Answer

Gilt is a type of fixed income security issued by the British government, also known as a UK government bond. The term "gilt" comes from the original certificates issued in the 19th century, which had a gilt (or golden) edge. Gilt securities are considered a safe and stable investment, with low risk and low yield.

Question 9

Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate?

Accepted Answer

The unbiased forward rates hypothesis posits that the current forward exchange rate is an unbiased predictor of the future spot exchange rate. This means that the forward rate should, on average, equal the future spot rate.

Question 10

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

Accepted Answer

Interest rate parity is a theory that suggests the difference in interest rates between two countries is equal to the difference between the forward exchange rate and the spot exchange rate. This condition helps in understanding how interest rates and exchange rates are related and ensures no arbitrage opportunities exist due to interest rate differentials.

Question 11

A large U.S.company has £500,000 in excess cash from its foreign operations.The company would like to exchange these funds for U.S.dollars.In which of the following markets can this exchange be arranged?

Accepted Answer

The exchange of foreign currency for U.S. dollars can be arranged in the foreign exchange market. This market is specifically designed for trading currencies and allows for the exchange of one currency for another at an agreed-upon exchange rate. ADR, national registry, national discount window, and Eurobond market do not deal specifically with currency exchange, making them inappropriate choices for this transaction.

Question 12

International bonds issued in a single country and denominated in that country's currency are called:

Accepted Answer

International bonds issued in a single country and denominated in that country's currency are called foreign bonds. Treasury bonds, gilts, and Brady bonds are all specific types of bonds, while Eurobonds are issued in one country but denominated in another currency.

Question 13

The price of one Euro expressed in U.S.dollars is referred to as a(n):

Accepted Answer

The price of one Euro expressed in U.S. dollars is known as the exchange rate, so the correct choice is D. ADR rate is a depositary receipt that is typically traded on a U.S. stock exchange and represents ownership in a foreign company. Cross inflation rate is a term that does not relate to currency exchange rates. Depository rate refers to the interest rate paid by banks to their depositors. Foreign interest rate refers to the interest rate offered by banks in foreign countries.

Question 14

Assume that $1 is equal to ¥98 and also equal to C$1.21.Based on this,you could say that C$1 is equal to: C$1(¥98/C$1.21)= ¥80.99.The exchange rate of C$1 = ¥80.99 is referred to as the:

Accepted Answer

The exchange rate of C$1 = ¥80.99 is referred to as the cross-rate because it is calculated by using the exchange rates between two other currencies (¥ and C$). The other options are not applicable in this context - open exchange rate refers to the market exchange rate, backward rate and forward rate refer to the rates used in foreign exchange options contracts, and interest rate is not relevant to this calculation.

Question 15

Party A has agreed to exchange $1 million U.S.dollars for $1.21 million Canadian dollars.What is this agreement called?

Accepted Answer

This agreement is called a currency swap, where Party A is exchanging one currency for another at a predetermined exchange rate.

Question 16

George and Pat just made an agreement to exchange currencies based on today's exchange rate.Settlement will occur tomorrow.Which one of the following is the exchange rate that applies to this agreement?

Accepted Answer

The spot exchange rate is the current exchange rate at which currencies can be exchanged for immediate settlement. Since settlement in this scenario is happening tomorrow, it is based on the current spot exchange rate.

Question 17

Trader A has agreed to give 100,000 U.S.dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £0.62.The traders agree to settle this trade within two business day.What is this exchange called?

Accepted Answer

This exchange is called a spot trade, as it involves the immediate exchange of currencies at the current exchange rate. Swaps, option trades, futures trades, and forward trades all involve agreements to exchange currencies at a future date or based on certain conditions.

Question 18

On Friday evening,Bank A loans Bank B Eurodollars that must be repaid the following Monday morning.Which one of the following is most likely the interest rate that will be charged on this loan?

Accepted Answer

The London Interbank Offer Rate (LIBOR) is the most commonly used benchmark for short-term interest rates in the international interbank market. Since Bank A is lending Eurodollars to Bank B, it is most likely that they will use the LIBOR as the interest rate for the loan. The other options listed are not as relevant to this type of transaction.

Question 19

International bonds issued in multiple countries but denominated solely in the issuer's currency are called:

Accepted Answer

Eurobonds are issued in multiple countries but denominated in the issuer's currency. This allows for greater flexibility in attracting investors and funding sources. The other options listed are specific to bonds issued in one particular country or market.

Question 20

Which one of the following securities is used as a means of investing in a foreign stock that otherwise could not be traded in the United States?

Accepted Answer

American Depository Receipts (ADRs) are securities issued by U.S. banks that represent ownership of a specified number of shares of a foreign company. ADRs provide investors with an easy and convenient way to invest in foreign companies that would otherwise be difficult or impossible to trade on U.S. exchanges. Yankee bonds are debt securities issued by foreign governments or corporations in the United States. Yankee stocks and gilts are not used for investing in foreign stocks. LIBOR, on the other hand, is an interest rate index used by lenders and borrowers globally.

Quiz 21: International Corporate Finance