Deck 21: International Corporate Finance

Question 1

Foreign bonds often have more stringent disclosure rules than domestic bonds.

Answer 1

True

Question 2

Suppose the direct exchange rate for the Canadian dollar and U.S. dollar is 1.11, this means that you
can buy $1 U.S. for $1.11 Canadian.

Answer 2

True

Question 3

Eurobond is another name for a foreign bond.

Answer 3

False

Question 4

Foreign bonds are usually denominated in the currency of the country in which they are issued.

Question 5

The trading floor of the foreign exchange market is located in London, England.

Question 6

The foreign exchange market is the world's largest financial market.

Question 7

The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the
British pound, the Canadian dollar, and the Euro.

Question 8

According to The National Post, the spot exchange rate for the Euro is Euro 1 = $0.63. The six-
month forward exchange rate is Euro 1 = $0.67. Based on these quotes, the Euro is selling at a
discount relative to the dollar, and the dollar is selling at a premium relative to the Euro.

Question 9

Suppose the direct exchange rate for the Canadian dollar and U.S. dollar is 1.11, this means that you
can buy $1.11 U.S. for $0.90 Canadian.

Question 10

The foreign exchange market is an example of an organized exchange with a specific physical
location for trading.

Question 11

Suppose the direct exchange rate for the Canadian dollar and U.S. dollar is 1.11, this means that you
can buy $1.11 U.S. for $1 Canadian.

Question 12

Triangle arbitrage helps keep the currency market in equilibrium.

Question 13

Foreign bonds are issued in a single country.

Question 14

Triangle arbitrage only involves currencies other than the Canadian dollar.

Question 15

Triangle arbitrage opportunities can exist in either the spot or the forward market.

Question 16

According to The National Post, the spot exchange rate for the Euro is Euro 1 = $0.63. The six-
month forward exchange rate is Euro 1 = $0.67. Based on these quotes, the Euro is selling at a
premium relative to the dollar, and the dollar is selling at a discount relative to the Euro.

Question 17

For absolute purchasing power parity to exist, there must be no trade barriers.

Question 18

Importers and exporters are key players in the foreign exchange market.

Question 19

Triangle arbitrage is a profitable situation involving three separate currency exchange transactions.

Question 20

Suppose the direct exchange rate for the Canadian dollar and U.S. dollar is 1.11, this means that you
can buy $0.90 U.S. for $1 Canadian.

Question 21

For absolute purchasing power parity to exist, the products must be identical.

Question 22

According to the relative purchasing power parity theory, high inflation in country A and low
inflation in country B will cause the value of country A's currency to appreciate relative to that of
country

Question 23

Covered interest arbitrage involves an exchange of currency A for currency B at the spot rate.

Question 24

Assume that the inflation rate in Canada is 3 percent over the next four years while the rate in the
U.S. is 4 percent for the same time period. Given this, the U.S. dollar will appreciate relative to the
Canadian dollar.

Question 25

For absolute purchasing power parity to exist, transaction costs must be equal to zero.

Question 26

Covered interest arbitrage involves a forward contract to exchange currency B for currency

Question 27

For absolute purchasing power parity to exist, the goods must be identical.

Question 28

For absolute purchasing power parity to exist, no trade barriers can exist

Question 29

International Pooch is headquartered in Canada, but is considering the construction of a plant in
Japan. If they use the home currency approach to calculating the NPV, they will:[LINE][LINE]1)
Convert all dollar cash flows into yen;[LINE]2) Discount the cash flows at the firm's required return
for Japanese denominated cash flows;[LINE]3) Compute the NPV in yen.

Question 30

International Pooch is headquartered in Canada, but is considering the construction of a plant in
Japan. If they use the home currency approach to calculating the NPV, they will[LINE][LINE]1)
Convert all yen cash flows into dollars;[LINE]2) Discount the cash flows at the firm's required return;
[LINE]3) Compute the NPV in dollars.

Question 31

For absolute purchasing power parity to exist, goods must have equal economic values.

Question 32

For absolute purchasing power parity to exist, forward exchange rates must equal the spot rates

Question 33

For absolute purchasing power parity to exist, transaction costs must be zero.

Question 34

International Pooch is headquartered in Canada, but is considering the construction of a plant in
Japan. If they use the foreign currency approach to calculating the NPV, they will:[LINE][LINE]1)
Convert all yen cash flows into dollars;[LINE]2) Discount the dollar cash flows at the firm's required
return for dollar denominated cash flows;[LINE]3) Compute the NPV in yen.

Question 35

International Pooch is headquartered in Canada, but is considering the construction of a plant in
Japan. If they use the foreign currency approach to calculating the NPV, they will:[LINE][LINE]1)
Discount yen cash flows at the required return on yen investments;[LINE]2) Compute the NPV in
yen;[LINE]3) Convert the yen NPV to a dollar NPV.

Question 36

If absolute purchasing power parity is said to hold for some good, then it must be true that there are
no transactions costs.

Question 37

Assume that the inflation rate in Canada is 3 percent over the next four years while the rate in the
U.S. is 4 percent for the same time period. Given this, the U.S. dollar will depreciate relative to the
Canadian dollar.

Question 38

The passage of the North American Free Trade Agreement (NAFTA) in 1994 sharply reduced trade
barriers between Canada and Mexico. All else equal, the absolute PPP theory predicts that the
exchange rate between the dollar and the peso will adjust to make the cost of goods in Mexico
cheaper than the cost of identical goods in Canada.

Question 39

If absolute purchasing power parity is said to hold for some good, then it must be true that there are
no significant barriers to trading the good.

Question 40

If absolute purchasing power parity is said to hold for some good, then it must be true that the good
in question is standardized, and virtually identical in the markets being considered.

Question 41

Your firm buys plumbing products in Asia and sells them in Canada at a substantial discount to
plumbing products manufactured in Canada. However, the strengthening economies in Asia have
increased Asian demand for their own plumbing products, pushing up local prices and damaging
your ability to undercut your Canadian competitors. The following was an example of a short run
exchange rate risk.

Question 42

The usage of forward rates can help reduce the short-run exposure to exchange rate risk.

Question 43

Remitting profits to the parent company from a foreign subsidiary more frequently is a method of
reducing the long-run exposure risks of foreign exchange.

Question 44

The following describes a long-run exposure of exchange rate risk. Your firm buys plumbing
products in Asia and sells them in Canada at a substantial discount to plumbing products
manufactured in Canada. However, the strengthening economies in Asia (projected to continue into
the next decade) have increased Asian demand for their own plumbing products, pushing up local
prices and damaging your ability to undercut your Canadian competitors.

Question 45

The following describes a translation exposure of exchange rate risk. Your firm buys plumbing
products in Asia and sells them in Canada at a substantial discount to plumbing products
manufactured in Canada. However, the strengthening economies in Asia (projected to continue into
the next decade) have increased Asian demand for their own plumbing products, pushing up local
prices and damaging your ability to undercut your Canadian competitors.

Question 46

The following describes a translation exposure of exchange rate risk. Your firm has subsidiaries
throughout the world. Due to the recent depreciation of the dollar against most foreign currencies,
the dollar value of your foreign sales has declined as reflected on the parent's financial statements,
even though sales growth is strong.

Question 47

The use of management fees is a method by which a foreign subsidiary can remit cash to its parent
company.

Question 48

The foreign currency approach to capital budgeting analysis utilizes the uncovered interest parity
relationship.

Question 49

The following describes a translation exposure of exchange rate risk. You sell custom-designed
refrigerators in Canada. The refrigerators are manufactured in Mexico and it takes about 60 days
from the time you agree to a sale and accept payment in Canada until you take delivery of the
refrigerator and pay the Mexican firm. Your profit, therefore, is affected by changes in the
dollar/peso exchange rate between the order and delivery dates.

Question 50

The use of royalties is a method by which a foreign subsidiary can remit cash to its parent company.

Question 51

You sell custom-designed refrigerators in Canada. The refrigerators are manufactured in Mexico
and it takes about 60 days from the time you agree to a sale and accept payment in Canada until
you take delivery of the refrigerator and pay the Mexican firm. Your profit, therefore, is affected by
changes in the dollar/peso exchange rate between the order and delivery dates. The following was
an example of a short run exchange rate risk.

Question 52

The foreign currency approach to capital budgeting analysis produces the same results as the
home currency approach.

Question 53

The use of dividends is a method by which a foreign subsidiary can remit cash to its parent
company.

Question 54

Unexpected changes in economic conditions are classified as short-run exposure to exchange rate
risk.

Question 55

The foreign currency approach to capital budgeting analysis is computationally easier to use than
the home currency approach.

Question 56

Your firm has subsidiaries throughout the world. Due to the recent depreciation of the dollar against
most foreign currencies, the dollar value of your foreign sales has declined as reflected on the
parent's financial statements, even though sales growth is strong. The following was an example of
a short run exchange rate risk.

Question 57

The following describes a long-run exposure of exchange rate risk. You sell custom-designed
refrigerators in Canada. The refrigerators are manufactured in Mexico and it takes about 60 days
from the time you agree to a sale and accept payment in Canada until you take delivery of the
refrigerator and pay the Mexican firm. Your profit, therefore, is affected by changes in the
dollar/peso exchange rate between the order and delivery dates.

Question 58

The following describes a long-run exposure of exchange rate risk. Your firm has subsidiaries
throughout the world. Due to the recent depreciation of the dollar against most foreign currencies,
the dollar value of your foreign sales has declined as reflected on the parent's financial statements,
even though sales growth is strong.

Question 59

The long-run exchange rate risk faced by an international firm can be reduced if the firm borrows
money in the foreign country where they have operations.

Question 60

The foreign currency approach to capital budgeting analysis computes the net present value of a
project in both the foreign and in the domestic currency.

Question 61

You are considering a project in Poland, which has an initial cost of 250,000PLN. The project is expected to return a one-time payment of 400,000PLN 5 years from now. The risk-free rate of
Return is 3 percent in Canada and 4 percent in Poland. The inflation rate is 2 percent in Canada and
5 percent in Poland. Currently, you can buy 375PLN for $100. How much will the payment 5 years
From now be worth in dollars?

A) $101,490
B) $142,060
C) $1,462,350
D) $1,489,025
E) $1,576,515

Question 62

Peter discovered an arbitrage opportunity based on the following exchange rates:[LINE]$1US = EUR 1.1257[LINE]$1US = £.6928[LINE]1£ = EUR 1.65[LINE]If you start with $1, how much of a profit can you
Earn in U.S. dollars by exchanging currencies given these rates?

A) $.013
B) $.015
C) $.019
D) $.021
E) $.023

Question 63

The current spot rate is C$1.1578 and the one-year forward rate is C$1.1397. The nominal risk-free rate in Canada is 7 percent while it is 6.5 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.

A) $.0022
B) $.0025
C) $.0220
D) $.0239
E) $.0250

Question 64

A Canadian firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost £16 million and will generate cash inflows of £7.6 million per year at the end of each of the next three
Years. After that, the company will be worthless. The current exchange rate is £0.83 British pounds
Per $1. The Canadian inflation rate is expected to be 4% over this period. The current risk-free rate
Of interest in Canada is 5% and the risk-free rate in Great Britain is 8%.[LINE][LINE]What is the cost of
The project in Canadian dollars?

A) $13.28 million
B) $14.63 million
C) $19.28 million
D) $21.53 million
E) $23.03 million

Question 65

[LINE][LINE]Jeanine started on vacation in the U.S. with a total of $5,000US to spend. She went to London where she exchanged her $5,000 for British pounds. The exchange rate was $1 = £.69.
Jeanine spent half of her money while touring the U.K. She then left the UK and traveled to
Germany where she exchanged her remaining British pounds into Euros. The exchange rates at the
Time were $1 = £.70 and EUR 1.07 = $1. How many Euros does Jeanine have?

A) $2,129
B) $2,303
C) $2,370
D) $2,637
E) $5,538

Question 66

The current spot rate is C$1.1578 and the one-year forward rate is C$1.1397. The nominal risk-free rate in Canada is 5 percent while it is 6 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.

A) $.0033
B) $.0067
C) $.0084
D) $.0633
E) $.0667

Question 67

[LINE][LINE]A pair of ReMo athletic shoes is currently selling for $89 in the U.S. Assume purchasing power parity holds and all else is constant. What is the price of the same shoes in Australia?

A) $46.28
B) $69.42
C) $135.28
D) $158.27
E) $171.15

Question 68

57. The nominal risk-free return is 5.5 percent in the U.K. and 4.5 percent in Canada. The return relevant to the project is 9 percent in the U.K. and 10.5 percent in Canada. Assume that uncovered
Interest rate parity exists. What is the net present value of this project in Canadian dollars?

A) -$10,144
B) $1,206
C) $11,418
D) $13,711
E) $16,009

Question 69

The 60-day forward rate for Japanese Yen is ¥108.02 per $1. The spot rate is ¥103.09 per $1. In 60 days you expect to receive ¥1,500,000. If you agree to a forward contract, how many dollars will
You receive in 60 days?

A) $13,886
B) $14,550
C) $15,312
D) $154.635 million

Question 70

You are considering a project in Poland which has an initial cost of 325,000PLN. The project is expected to return a one-time payment of 515,000PLN four years from now. The risk-free rate of
Return is 4 percent in the U.S. and 3.5 percent in Poland. The inflation rate is 3 percent in the U.S.
And 2 percent in Poland. Currently, you can buy 291PLN for 100USD. How much will the payment
Four years from now be worth in U.S. dollars?

A) $159,217
B) $180,560
C) $1,460,350
D) $1,468,901
E) $1,528,828

Question 71

You are considering a project in Poland which has an initial cost of 375,000PLN. The project is expected to return a one-time payment of 500,000PLN 4 years from now. The risk-free rate of
Return is 4 percent in Canada and 4.5 percent in Poland. Currently, you can buy 323PLN for $100.
How much will the payment 4 years from now be worth in Canadian dollars?

A) $148,613
B) $151,741
C) $153,262
D) $154,799
E) $160,074

Question 72

Suppose the indirect exchange rate for the Canadian dollar is 0.93. Based on this, you know you can buy:

A) $1 U.S. for $0.93 Canadian.
B) $1.93 U.S. for $1 Canadian.
C) $1 U.S. for $1.08 Canadian.
D) $1.08 U.S. for $1 Canadian.
E) $1 U.S. for $1.93 Canadian.

Question 73

Producing a product in the country in which it is being sold is a method of reducing the long-run
exposure risks of foreign exchange.

Question 74

Reducing the amount of borrowing denominated in the currency of the foreign subsidiary is a
method of reducing the long-run exposure risks of foreign exchange.

Question 75

Award: 2.00 points

Question 76

Today, you can get either 116 Canadian dollars or 1,102 Mexican pesos for 100 U.S. dollars. Last year, 100 U.S. dollars was worth 123 Canadian dollars or 1,148 Mexican pesos. Which one of the following
Statements is correct given this information?

A) $100 converted into Canadian dollars last year would now be worth $105.23.
B) $100 converted into Mexican pesos last year would now be worth $99.17.
C) $100 converted into Mexican pesos last year would now be worth $104.17.
D) $100 converted into Canadian dollars last year would now be worth $94.31.
E) $100 invested in Canadian dollars last year would now be worth $107.47.

Question 77

You are expecting a payment of 500,000PLN 3 years from now. The risk-free rate of return is 4 percent in Canada and 2 percent in Poland. The inflation rate is 4 percent in Canada and 1 percent
In Poland. Currently, you can buy 380PLN for $100. How much will the payment 3 years from now
Be worth in dollars?

A) $138,700
B) $138,900
C) $139,800
D) $142,300
E) $144,169

Question 78

Assume that you can buy 45 British pounds with 100 Canadian dollars. How much profit can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars?[LINE]
[LINE]

A) $0.42
B) $0.58
C) $1.13
D) $1.96
E) $2.41

Question 79

Assume that you can buy 245 Canadian dollars with 100 British pounds. How much profit (in U.S. dollars) can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S.
Dollars?[LINE][LINE]

A) $.86
B) $.93
C) $1.09
D) $1.37
E) $1.55

Question 80

The current exchange rate for the Canadian dollar is $.91US. The inflation rate in the U.S. is 2.5% while it is 3.5% in Canada. What is the expected spot rate in two years?

A) $.95
B) $.93
C) $.91
D) $.88
E) $.86