Deck 16: International Business Finance

Question 1

The cost of debt used in the international investment decision is the lesser of the parent's or the subsidiary's cost of debt.

Answer 1

False

Question 2

Most major countries in the world have agreed on fixed exchange rates in order to facilitate international trade.

Answer 2

False

Question 3

A cross rate is the computation of an exchange rate for a currency from the exchange rates of two other currencies.

Answer 3

True

Question 4

Short-term daily fluctuations in exchange rates are caused by supply and demand conditions in the foreign exchange market.

Question 5

Spot exchange markets provide the potential for arbitrage opportunities.

Question 6

A U.S.corporation investing in a foreign corporation by purchasing stock on a foreign stock exchange is an example of direct foreign investment.

Question 7

The bid-asked spread is much lower for currencies that are infrequently traded in order to compensate banks for providing the service.

Question 8

Forward contracts are usually quoted for periods greater than 1 year.

Question 9

The Eurodollar market is larger than any financial market in the United States.

Question 10

Arbitrage is the process of buying in one market and selling in another market in order to make a riskless profit.

Question 11

Investments in capital markets in foreign countries are motivated by the desire to earn higher returns and reduce risk through international diversification.

Question 12

A major source of long-term capital overseas is in the Eurocurrency market.

Question 13

Compared with other developed countries,the U.S.is particularly reliant on foreign trade for self-subsistence.

Question 14

An indirect quote indicates the number of units of foreign currency that can be bought for one unit of the home currency.

Question 15

Which of the following is a reason for international investment?

A) to reduce portfolio risk
B) to increase P/E ratio
C) to gain an advantage in a foreign country
D) to gain access to foreign currency

Question 16

A narrow spread indicates efficiency in the spot exchange market.

Question 17

The difference between the asked price and the bid price is known as the spread.

Question 18

The forward exchange rate quoted today should be equal to the spot rate in the future.

Question 19

Problems of multinationals include

A) cash management and positioning of funds.
B) managing receivables.
C) global control.
D) all of the above.

Question 20

International expansion often occurs because it is generally easier for firms to expand the market for their products rather than to develop new products.

Question 21

The forward-spot differential is the difference between the forward rate and the expected future spot rate.

Question 22

The value of the euro floats against other major international currencies,but has a fixed value when compared to the currencies of the countries in the European Union,such as the French franc and the German mark.

Question 23

Covered interest arbitrage can be taken advantage of when premiums in forward rates are not exactly equal to the interest rate differential between two countries.

Question 24

An exchange rate of $1.6 per British pound is an example of a direct quote in the United States.

Question 25

Commercial centers for foreign exchange exist only in New York and London in order to make it possible for arbitrage to work.

Question 26

The bid rate is the rate at which the bank buys the foreign currency from the customer by paying in home currency.

Question 27

The asked rate is also known as the selling rate or the offer rate.

Question 28

Forward rates,like spot rates,are quoted in both direct and indirect form.

Question 29

The existence of a forward-spot differential creates an arbitrage opportunity that will eliminate the differential almost immediately.

Question 30

In order to profit from an expected near-term increase in the relative value of the British pound versus the U.S.dollar,an investor would be wise to maintain a short position in pounds,then sell when the pound rises in relative value.

Question 31

A direct quote is always denominated in U.S.dollars,since the dollar is the medium of exchange in international business.

Question 32

A direct quote of $1.9887 dollars to buy one U.K.pound corresponds to an indirect quote of .9887 pounds per one dollar.

Question 33

A quote of .7645 euros per dollar in New York is an example of a direct quote.

Question 34

Three types of arbitrage are simple arbitrage,rectangular arbitrage,and covered-expense arbitrage.

Question 35

A direct quote of $1.6255 dollars to buy one U.K.pound corresponds to an indirect quote of .6152 pounds per one dollar.

Question 36

Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.

Question 37

Triangular arbitrage eliminates exchange rate differentials across three markets for three currencies.

Question 38

The efficiency of foreign currency markets is assured,in large measure,by the process of arbitrageurs.

Question 39

A direct quote of $1.6 per British pound in the United States is equivalent to a direct quote of .625 British pounds per U.S.dollar in Great Britain.

Question 40

Forward contracts benefit only the customer due to a reduction in uncertainty.

Question 41

If you are an importer of goods and you will make payment for the purchase of inventory on 90-day terms,which of the below is the correct term for the exchange rate that you will use?

A) indirect rate
B) spot rate
C) direct rate
D) forward rate

Question 42

A wide bid/ask spread could indicate which of the following?

A) the presence of arbitrageurs
B) large volume transactions are taking place
C) frequent trading of a currency
D) an inefficient market

Question 43

Buying and selling in more than one market to make a riskless profit is called

A) profit-maximization.
B) arbitrage.
C) international trading.
D) cannot be determined from the above information

Question 44

The U.S.dollar is the most frequently traded currency in foreign currency markets,accounting for over 40% of total trading.

Question 45

Which of the following is true?

A) The forward rate is the same as the spot rate that will prevail in the future.
B) The future spot rate is equal to the forward rate less the current spot rate.
C) The actual spot rate that will prevail in the future is not known today.
D) The future spot rate is the current spot rate increased by the inflation rate.

Question 46

Exchange rate risk exists in international trade contracts denominated in a foreign currency,but not in foreign portfolio investments,because the returns on investment securities are adjusted automatically for differences in exchange rates.

Question 47

A Spot transaction occurs when

A) one currency is deposited in a foreign bank.
B) one currency is immediately exchanged for another currency.
C) one currency is exchanged for another currency at a specified price.
D) one currency is exchanged for another currency in 30, 60, or 90 days.

Question 48

The direct quote in New York is .015 dollar per Pakistani rupee.The direct quote in Pakistan is 60 rupees per dollar.This imbalance in rates can be corrected by arbitrage.A trader will ________ rupees in New York and ________ rupees in Pakistan,causing the direct quote in New York to ________.

A) buy; sell; increase
B) buy; sell; decrease
C) sell; buy; decrease
D) sell; buy; increase

Question 49

The spot exchange rate is 1.57 dollars per pound.The 30-day forward exchange rate is .6211 pounds per dollar.The percent-per-year discount on the 30-day pound is

A) 32.77%.
B) 30.57%.
C) 48.00%.
D) 45.93%.

Question 50

Forward rates are all of the following EXCEPT

A) quoted in both direct and indirect form.
B) quoted at a premium or discount.
C) beneficial to risk-reduction.
D) equal to future spot rates.

Question 51

Suppose the current exchange rates are 1.3215 dollars per euro,and 84.19 yen per dollar.What is the current exchange rate between yen and euros?

A) 86.356 yen per euro
B) 147.571 yen per euro
C) 151.696 yen per euro
D) 111.257 yen per euro

Question 52

A British-made component costs 36 U.K.pounds.A company in the United States needs to buy these components and the current indirect quote indicates that one dollar will buy .6250 pounds.Ignoring transactions costs,how much will one component cost in U.S.dollars?

A) $22.50
B) $45.94
C) $57.60
D) $72.00

Question 53

The Euro increased dramatically in value against the U.S.dollar between 2000 and 2009.The result has been that

A) U.S. exports are more competitive in Europe.
B) U.S. goods cost more in Europe.
C) U.S. travelers are finding it less expensive to travel in Europe.
D) European exports to the United States are more competitive.

Question 54

The spot exchange rate is 1.57 dollars per pound.The 30-day forward exchange rate is .6211 pounds per dollar.Therefore,pounds in the forward market are selling at a ________ to the current spot rate.

A) .958 discount
B) .958 premium
C) .04 discount
D) .04 premium

Question 55

Which of the following is true regarding the correct price of the forward contract?

A) If the quote is less than the computed price, the forward contract is undervalued.
B) If the quote is greater than the computed price, the forward contract is overvalued.
C) Both A and B
D) Neither A nor B

Question 56

If you are an importer of goods and you need to make payment for the purchase of inventory before the close of business today,which of the below is the correct term for the exchange rate that you will use?

A) indirect rate
B) spot rate
C) direct rate
D) forward rate

Question 57

IMXP Corp.enters into a 30-day forward exchange contract to buy 113,540,000 yen for $100,000.Which of the following statements is true concerning this transaction?

A) IMXP will pay $100,000 and receive 113,540,000 yen 30 days from now.
B) IMXP will pay $100,000 today and receive 113,540,000 yen 30 days from now.
C) The spot exchange rate in 30 days will be 113.54 yen per dollar.
D) IMXP will receive 113,540,000 yen today and pay $100,000 30 days from now.

Question 58

The 30-day forward exchange rate is .01073033 dollars per yen.If this forward rate represents a per year discount of 2.5% from the current spot rate,what is the current spot exchange rate?

A) 0.01073033 dollars per yen
B) 0.01257754 dollars per yen
C) 0.01329684 dollars per yen
D) 0)01093833 dollars per yen

Question 59

Due to the dominance of Chinese companies in international trade,the Chinese yuan is the most frequently traded currency.

Question 60

If a U.S.company enters into a purchase agreement with a European company and the contract is denominated in euros,then direct exchange rate risk exists for both companies.

Question 61

Interest rate parity theory states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity.

Question 62

One theory that is useful states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity.This theory is known as

A) the forward rate theory.
B) the interest rate parity theory.
C) the exchange rate theory.
D) the covered interest arbitrage theory.

Question 63

Describe exchange rate risk in direct foreign investment.

Question 64

If the exchange rate quotes in two different countries were out of line with each other,an enterprising trader could make a profit by buying in the market where the currency was cheaper and simultaneously selling it in the market where the currency was more expensive.Such a person would be known as a(n)

A) spot trader.
B) arbitrageur.
C) cross trader.
D) capitalist.

Question 65

The current direct quote in New York is .01075 dollars per yen.Suppose the current direct quote in Tokyo is 91 yen per dollar.What is the appropriate indirect quote in New York? What will arbitrageurs do to eliminate the differential rates in these markets?

Question 66

What is a forward exchange rate?

Question 67

Money-market hedges and forward-market hedges rely on the

A) interest rate parity theory.
B) purchasing power parity theory.
C) law of large numbers.
D) capital asset pricing model.

Question 68

Who is an arbitrageur? How does an arbitrageur make money?

Question 69

Suppose the 360-day forward exchange rate is 1.657 dollars per British pound,and the current spot rate is 1.625 dollars per British pound.If the 360-day interest rate in the United States is 5% and the 360-day interest rate in Great Britain is 3%,is the market in equilibrium according to the interest rate parity theory?

A) Yes, because the forward premium on the pound (2%) is exactly offset by the lower interest rate in Great Britain.
B) No, because the higher interest rate in the United States (2%) implies that the forward exchange rate should be 2% lower than the current spot rate.
C) No, because the forward premium on the pound is 2% while the interest rate in the United States is 67% higher than the interest rate in Great Britain.
D) Cannot be determined without knowing the amount of money being exchanged.

Question 70

A forward exchange contract

A) gives the owner the right, but not the obligation, to buy a foreign currency at a fixed exchange rate for a fixed period of time.
B) gives the owner the right to purchase a foreign currency at some point in the future and any gains or losses are credited/debited to the account at the close of business each day.
C) requires delivery, at a specified future date, of one currency for a specified amount of another currency.
D) requires delivery, within two working days, of one currency for a specified amount of another currency.

Question 71

The spot exchange rate in New York is 1.600 dollars per British pound.The 360-day forward exchange rate is 1.680 dollars per pound.The one-year interest rate in Great Britain is 2% while the one-year interest rate in the United States is 4%.
a.If the interest rate in Great Britain remains at 2%,what should the interest rate be in the United States according to the interest rate parity theory?
b.An American investor with $40,000 decides to take advantage of the differences in rates.Ignoring transaction costs,how can the American investor exploit the disequilibrium? Compare the amount of money the investor will have at the end of the year if he or she invests in one-year U.S.securities versus one-year British securities.

Question 72

WSM Wine Importers,Inc.purchased 75,000 cases of French wine at a cost of 6,000,000 euros.If the current exchange rate is 0.7576 euros to the U.S.dollar,what is the purchase price of the wine in U.S.dollars?

A) $9,684,148
B) $9,328,651
C) $8,350,012
D) $ 7,919,747

Question 73

What is arbitrage? Assume that the dollar is quoted $1 = £0.625 in New York and the pound sterling is quoted as £1 = $1.63 in London.Is there an arbitrage opportunity? If so,what would an astute trader do? What will happen to the quotes as trades are made at current prices?

Question 74

What is a spot transaction? What is a direct quote? An indirect quote?

Question 75

Interest Rate Parity theory states that interest rates must be the same in all countries using floating exchange rates or else international markets will not be in equilibrium.

Question 76

Assume that the British pound is worth 1.6242 U.S.dollars.If a new Jaguar costs $138,000,what is the cost in British pounds?

A) 201,000
B) 84,965
C) 71,642
D) 119,998

Question 77

Except for the effects of small transaction costs,the forward premium or discount should be equal and opposite in size to the difference in the national interest rates for securities of the same maturity.What is the name of this theory?

A) the purchasing power parity theory
B) the Bobby Fisher effect
C) interest rate parity theory
D) the law of one price

Question 78

You purchased 3,000,000 Indian rupees in London at an exchange rate of 54.86 to the dollar and simultaneously sold the rupees in Bahrain at an exchange rate of 55.12 to the dollar.What is the name for such a transaction?

A) trend trading
B) arbitrage
C) currency swapping
D) exchange rate hedging

Question 79

Why do currency exchange rates throughout the world trade within a very narrow range on any given day?

A) because of purchasing power parity
B) because of the international translation effect
C) because of arbitrage
D) because of the law of one price

Question 80

What does the law of one price say?