Deck 16: International Finance

Question 1

If the dollar appreciates against the Irish punt,

A)the U.S. price of Irish goods will rise.
B)the U.S. exports to Ireland will fall.
C)then the punt also appreciates against the U.S. dollar.
D)the U.S. inflation rate will have a tendency to rise.
E)the Irish exports to the U.S. should decline.

Answer 1

the U.S. exports to Ireland will fall.

Question 2

The U.S. dollar equivalent of one unit of a foreign currency is called the

A)base rate.
B)counter rate.
C)indirect rate.
D)direct rate.
E)spot rate.

Answer 2

direct rate.

Question 3

There is an indirect rate of 0.74 between the American dollar and the Canadian dollar. How many American dollars could you buy for 5,000 Canadian dollars?

A)$3,700
B)$7,432
C)$6,757
D)$5,424

Answer 3

$6,757

Question 4

In today's Wall Street Journal, you see the Greek drachma (GRD)quoted at $0.003635. Yesterday, it was quoted at $0.003521. The drachma ________ by ________.

A)depreciated; 1.14%
B)appreciated; 3.05%
C)depreciated; 3.05%
D)appreciated; 3.24%
E)depreciated; 3.24%

Question 5

What is the percentage change in price for an American importer of Indian sitar music cassettes if the Indian rupee/U.S. dollar exchange rate goes from 12 rps./$ to 14rps./$ and the price of a cassette is 50 rupees?

A)−16.7%
B)−14.4%
C)+20.2%
D)+16.5%
E)+14.2%

Question 6

________ exchange rates apply to exchanges of funds that occur at the present time.

A)Forward
B)Current
C)Spot
D)Foreign

Question 7

The amount of foreign currency that one U.S. dollar will buy is called the

A)base rate.
B)counter rate.
C)indirect rate.
D)direct rate.
E)forward rate.

Question 8

If the exchange rate makes foreign goods ________ expensive, demand will increase and imports are likely to ________.

A)less; fall
B)less: rise
C)more; fall
D)more; rise

Question 9

________ risk is the risk of loss due to exchange rates moving over time.

A)Exchange rate
B)Interest rate
C)Political
D)Reinvestment rate
E)Systematic

Question 10

Assume $1 buys .685 pounds and that $1 buys 78.342 yen. Calculate the cross rate.

A)114.38¥/£
B).01¥/£
C)53.66¥/£
D)98.25¥/£

Question 11

Foreign currency trading

A)takes place on organized exchanges.
B)mostly entails small transactions.
C)volume averages less than $1 billion per day.
D)is conducted in less-than-competitive markets.
E)takes place in markets similar to OTC stock markets.

Question 12

Why are exchange rates important?

A)They affect the relative price of domestic and foreign products.
B)They show how much stronger one country is than the other.
C)They allow you to buy products cheaper in foreign markets.
D)They provide important information about the current economic status.

Question 13

Exchange rates

A)help increase a nation's productivity level.
B)are a minor consideration for foreign investors.
C)are volatile and introduce a source of risk in international transactions.
D)are currently fixed for the world's major currencies.
E)have little effect on the prices of imports and exports.

Question 14

When buying foreign currency, you can expect to receive the rates quoted on the internet.

Question 15

Forward transactions

A)seldom benefit manufacturing firms.
B)typically only enable the buyer of the forward contract to benefit from favorable exchange rate changes, but not the seller.
C)are widely used to reduce exchange rate risk.
D)are processed by dealers, but seldom by money-center banks.
E)are executed in spot markets.

Question 16

________ is the price of one country's money quoted in terms of another country's money.

A)Arbitrage
B)PPP
C)Exchange rate
D)Direct rate
E)LIBOR

Question 17

Carol plans to visit Japan next week and wishes to convert $1,000 U.S. into yen to cover her travel expenses. If her travel agent quotes her an exchange rate of 115¥/$, how many yen will she obtain?

A)115,000
B)110,000
C)150,000
D)5.0
E)8.7

Question 18

By using a forward transaction, ________ has been transferred from the firm to a speculator in the exchange rate market.

A)exchange rate risk
B)political risk
C)foreign risk
D)market risk

Question 19

Exchange rates are reported as fractions with the ________ in the denominator and the ________ in the numerator.

A)counter rate; base rate
B)base rate; counter rate
C)foreign currency; domestic currency
D)domestic currency; foreign currency

Question 20

If you have the exchange rates for converting U.S. dollars to yen and U.S. dollars to the euro, you could convert from yen to euros by using a:

A)Spot rate
B)Indirect rate
C)Counter rate
D)Cross rate

Question 21

If the inflation rate in the United States is expected to average 4% in the future and the inflation rate in Denmark is expected to average 7%, what spot rate is expected to be in effect in three years? Assume the Danish kroner per U.S. dollar exchange rate is now $0.20.

A)$0.245
B)$0.219
C)$0.177
D)$0.192
E)$0.206

Question 22

Each of the following is a factor that affects exchange rates EXCEPT:

A)Domestic economy
B)Supply and demand of currency
C)Relative price of goods
D)Returns on international investments in securities

Question 23

As long as the flow of currencies is ________, the exchange rate can remain ________.

A)out of balance; constant
B)equal; in flux
C)there is no relationship between the two
D)equal; constant

Question 24

If the U.S. dollar currently buys more Brazilian goods than the Brazilian real buys American goods,

A)purchasing power parity holds at this moment.
B)the real should appreciate.
C)the dollar should appreciate.
D)Brazilian prices should fall.
E)U.S. prices should rise.

Question 25

If the price of wheat is $25/bushel in the United States and $20/bushel in Canada, all of the following would tend to equalize prices EXCEPT:

A)when the U.S. imposes a tariff on Canadian wheat.
B)the Canadian dollar will appreciate.
C)when the domestic price of U.S. wheat falls.
D)the U.S. dollar will depreciate.
E)when the domestic price of Canadian wheat rises.

Question 26

According to relative purchasing power parity, if Belgian prices are increasing 10% faster than Japanese prices,

A)the yen should fall 10% versus the Belgian franc.
B)the yen should rise 10% versus the Belgian franc.
C)prices in Belgium should fall 10%.
D)prices in Japan should rise 10%.
E)prices in Japan will rise 5% and the yen will rise 5%.

Question 27

Two homogeneous products from Germany and Brazil are being purchased by an American trader. The product from Germany is cheaper than the product from Brazil. According to ________, the trader will purchase the products from Germany until the increased demand for the German product equalizes the price.

A)Arbitrage
B)Purchasing power parity
C)Law of one price
D)Exchange rate arbitrage

Question 28

The ________ states that two identical products produced in two different countries should cost the same to traders in any other country.

A)Law of one price
B)Relative purchasing power parity
C)Absolute purchasing power parity
D)Arbitrage

Question 29

According to the theory of purchasing power parity, if the price of haircuts in the United States is lower than those in Mexico,

A)U.S. exports should increase.
B)there would be little effect in both currency and services markets.
C)the value of the peso should fall by a large amount.
D)the value of the dollar should rise by a large amount.
E)Mexican imports should rise.

Question 30

Assume that you have $900,000 to invest. The current spot rate of the Australian dollar is $0.62, and the 180-day forward rate of the Australian dollar is $0.64. Furthermore, the 180-day interest rate in the United States is 3.5% and the 180-day interest rate in Australia is 3.0%. What is the net income you will have realized after 180 days if you conduct interest rate arbitrage?

A)$61,548.39
B)$56,903.23
C)$27,000.00
D)$31,500.00
E)$52,632.94

Question 31

The foreign exchange market is ________ and functions much like a ________ market.

A)noncompetitive; decentralized
B)competitive; centralized
C)noncompetitive; centralized
D)competitive; decentralized

Question 32

Which of the following is NOT true with respect to interest rate arbitrage?

A)Interest rate arbitrage maintains the interest rate parity relationship.
B)To arbitrage, you buy and sell something so that you have a positive investment and then earn a return on the transaction.
C)It is rare that similar risk investments in one country earn more than another country after converting money to and from the foreign currency using spot and forward exchange rates.
D)Arbitrageurs help exchange rates adjust to their correct levels rapidly and accurately.
E)All of the above are true.

Question 33

Low ________ for homogeneous commodities, such as oil, lets traders take advantage of price differences that may emerge.

A)Exchange rates
B)Arbitrage
C)PPP
D)Transportation costs

Question 34

________ exports can be caused by a(n)________ currency, which can cause slower growth.

A)Decreasing; appreciating
B)Decreasing; depreciating
C)Increasing; appreciating
D)Increasing; depreciating

Question 35

Governments become very concerned with their exchange rates because they directly affect the:

A)Foreign economy
B)Demand of currency
C)Domestic economy
D)Supply of currency

Question 36

According to relative purchasing power parity, if the inflation rate in Italy was 8% and the inflation rate in Israel was 6%,

A)the Italian lira should fall 6%.
B)the Italian lira should fall 8%.
C)the Italian lira should fall 2%.
D)the Italian lira should rise 2%.
E)the Italian lira should rise 8%.

Question 37

A theory stating that changes in inflation rates between two countries cause exchange rates to adjust is

A)interest rate parity.
B)exchange rate parity.
C)relative purchasing power parity.
D)absolute purchasing power parity.
E)None of the above

Question 38

In the short run, relative purchasing power parity does not explain changes in exchange rates well.

Question 39

For the law of one price to hold, all of the following are necessary EXCEPT:

A)transportation costs must be negligible.
B)exchange rates must be fixed.
C)tariffs must not be levied by any country.
D)all goods and services must be tradable.
E)traded goods must be homogeneous.

Question 40

The theory of relative purchasing power parity

A)can be used to explain differences in real interest rates among countries.
B)holds extremely well in the short run.
C)does not hold well in the long run.
D)is used to explain the difference between U.S. and foreign treasury security yields.
E)seeks to explain changes in purchasing power parity over time.

Question 41

Traders take advantage of deviations from purchasing power parity by buying cheap goods and selling expensive ones. This trading causes the price of goods to ________ and exchange rates to ________.

A)fall; fall
B)rise; rise
C)fall; rise
D)rise; fall

Question 42

The theory that exchange rates must adjust so that there is no reason for funds to flow from one country just to take advantage of better returns in another is part of:

A)Purchasing power parity
B)Purchasing power arbitrage
C)Interest rate parity
D)Interest rate arbitrage

Question 43

If ________ didn't hold, the price of goods would change because merchants would buy cheap goods and avoid the expensive ones.

A)Purchasing power parity
B)Arbitrage
C)Exchange rates
D)Law of one price

Question 44

Strict PPP requires a good that has ________ transportation costs and is ________ substitutable.

A)zero; perfectly
B)zero; not
C)high; perfectly
D)high; not

Question 45

All of the following are reasons money will adhere to PPP accurately EXCEPT

A)Electronic transfers
B)Universal value
C)Easily determined price
D)Not substitutable

Question 46

The main conclusion drawn from the theory of interest rate parity is that

A)a single currency will increase economic welfare.
B)arbitrage opportunities may persist for long periods of time.
C)investors can seldom earn higher returns from foreign investments than from domestic ones.
D)exchange rates adjust slowly to their proper levels.
E)fixed exchange rates are superior to flexible ones.

Question 47

Understanding interest rate parity requires that we first understand:

A)Purchasing power parity
B)Interest rate arbitrage
C)Spot Rates
D)Purchasing power arbitrage

Question 48

Futures contracts may help firms hedge against exchange rate risk by

A)enabling the hedger to offset foreign currency losses by profiting from the sale of the futures contract.
B)giving the owner of the contract the right to swap one currency for another at a later date.
C)giving the holder of the contract the ability to purchase foreign currencies at a predetermined exchange rate at a future date.
D)providing riskless arbitrage opportunities.
E)paying the holder of the contract in the event of a loss, much like an insurance policy.

Question 49

All of the following are necessary for arbitrage to take place EXCEPT

A)no transactions costs.
B)no sales or transfer taxes.
C)the means to execute trades quickly.
D)a willingness to undertake a substantial net investment.
E)different prices in different locations.

Question 50

Which of the following is a risk unique to businesses practicing business internationally?

A)Financial risk
B)Investment risk
C)Political risk
D)Compliance risk

Question 51

You can borrow $25,000 at 1% interest for 1 year. The exchange rate for Australia is 1.25AUS/1US. The Australian Treasury is offering 2.5% risk free investments. What is the total profit you can make in 1 year?

A)$625
B)$450
C)$250
D)$375
E)$425

Question 52

The ________ represents a best guess as to what the spot rate will be in the future.

A)PPP
B)Arbitrage
C)Exchange rate
D)Forward rate

Question 53

________ is the act of trading to profit from a violation of the law of one price.

A)Relative purchasing power parity
B)Arbitrage
C)Absolute purchasing power parity
D)Purchasing power arbitrage

Question 54

What is the maximum net profit to a speculator with $1 million if interest rates on 1-year Treasuries are 6% in France, 4% in the United States and the exchange rate is expected to change from today's rate of 2Fr/$ to 2.1Fr/$ in 1 year?

A)$1,060,000
B)$1,005,683
C)$1,040,000
D)$1,050,000
E)$1,009,524

Question 55

Insisting the contracts be denominated in the U.S. dollar can help avoid ________.

A)Exchange rate risk
B)Arbitrage
C)Political risk
D)PPP

Question 56

You have equal amounts of money invested in a risk-free dollar-denominated investment and borrowed at the rate paid on the British pound. If you can earn a return during this, you have shown:

A)Interest rate arbitrage.
B)Interest rate parity
C)Purchasing power arbitrage
D)Purchasing power parity

Question 57

1 year ago $1 would buy 6.5 pesos. Today $1 buys 7.5 pesos. If the US had an inflation rate of 3%, calculate Mexico's inflation rate.

A)3.1%
B)18.38%
C)4.2%
D)7.8%

Question 58

The idea behind ________ is that exchange rates must adjust over time to maintain the law of one price.

A)Arbitrage
B)Purchasing power arbitrage
C)Purchasing power parity
D)Exchange rate risk

Question 59

PPP will not hold if the goods are not transportable or ________.

A)Close substitutes
B)Unique
C)Expensive
D)Cheap

Question 60

It is more difficult to deal with political risk than exchange rate risk.

Question 61

The increased risk of doing business in a foreign country can be offset by:

A)Lack of growth.
B)Arbitrage.
C)Diversification.
D)Expropriation.

Question 62

All of the following are possible complicating factors for evaluating foreign investments EXCEPT:

A)Estimating foreign cash flows
B)Little experience to draw on
C)Lack of comparable firms
D)New methods to learn

Question 63

XY Corp has a plant in a small country with a friendly, though unstable government. A new government takes over before XY Corp is able to move any assets out of the country. The new government chooses to not recognize XY's ownership and takes control of the company's assets. This is an example of

A)Arbitrage.
B)Exchange rate risk.
C)Nationalization.
D)Hostile takeover.

Question 64

Large companies may reduce political risk through

A)Nationalization.
B)Expropriation.
C)Joint Ventures.
D)Tariffs.

Question 65

Tariffs imposed by a foreign government are an example of

A)Exchange rate risk
B)Foreign risk
C)Policy risk
D)Political risk

Question 66

The seizure of a firm's assets by a foreign government is called

A)misappropriation.
B)rationalization.
C)expropriation.
D)extortion.
E)confiscation.

Question 67

Eurodollars are

A)currencies that will disappear once the euro is adopted.
B)funds created by the International Monetary Fund to be transferred among the world's central banks.
C)dollar-denominated deposits held in European banks.
D)European currencies deposited in U.S. banks.
E)dollar-denominated deposits held in foreign banks.

Question 68

All of the following are sources of political risk EXCEPT

A)tax holidays.
B)change in government.
C)tariff increases.
D)labor law changes.

Question 69

Political risk may be hedged with

A)higher operating leverage.
B)lower breakeven points.
C)forward contracts.
D)futures contracts.
E)alliances developed with foreign governments.

Question 70

Evaluating foreign investment opportunities involves different principles used to evaluate domestic projects.

Question 71

The ________ is as close to a worldwide currency as there is.

A)British pound
B)U.S. Dollar
C)Euro
D)Canadian Dollar

Question 72

The usual sources of capital for investing projects include all of the following EXCEPT:

A)LIBOR.
B)Retained Earnings.
C)Bank Loans.
D)Domestically Marketed Stocks and Bonds.

Question 73

The increased risk of foreign investments is most often incorporated in capital budgeting models by

A)international diversification.
B)hedging with financial derivatives.
C)reducing market risk.
D)calculating certainty equivalents.
E)adjusting the discount rate.

Question 74

It is possible to reduce risk of the portfolio by adding a ________ risk investment if it is ________ correlated with other investments.

A)high; negatively
B)low; negatively
C)high; positively
D)low; positively

Question 75

What can companies use to lock in exchange rates to set up a risk-free arbitrage for interest rates?

A)Expropriation
B)Forward markets
C)Counter rates
D)Futures contracts

Question 76

Eurobonds

A)may be denominated in dollars or in the currency of another country.
B)are always denominated in U.S. dollars.
C)are always denominated in the foreign currency.
D)may not be split so that part of it is denominated in one currency and the balance is in another.

Question 77

Which of the following is not a possible political risk when practicing business internationally?

A)Loss of using own specialized labor
B)Fewer opportunities for growth
C)Limited ability to convert currency
D)Additional taxes

Question 78

Expropriation is another name for:

A)Arbitrage
B)Hedging
C)Parity
D)Nationalization

Question 79

The primary advantage of Eurobonds is

A)the fact that LIBOR is set in competitive markets and enables firms to borrow funds at lower interest rates.
B)more favorable tax treatment of earnings compared with the U.S.
C)the relative lack of regulation compared with similar markets in the U.S.
D)their greater degree of acceptability worldwide.

Question 80

The interest rate on Eurodollar loans tends to be based on

A)Eurobonds
B)Forward rates
C)Spot rates
D)LIBOR