Deck 20: International Corporate Finance

Question 1

The rate most international banks charge one another for overnight Eurodollar loans is called the:

A)Paris Opening Interest Rate.
B)United States Treasury bill rate.
C)Eurodollar yield to maturity.
D)London Interbank Offer Rate.
E)international prime rate.

Answer 1

London Interbank Offer Rate.

Question 2

The idea that the exchange rate adjusts to keep buying power constant among currencies is called:

A)interest rate parity.
B)uncovered interest rate parity.
C)purchasing power parity.
D)the international Fisher effect.
E)the unbiased forward rates condition.

Answer 2

purchasing power parity.

Question 3

The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates between the countries is called:

A)the international Fisher effect.
B)purchasing power parity.
C)the unbiased forward rates condition.
D)uncovered interest parity.
E)interest rate parity.

Answer 3

uncovered interest parity.

Question 4

The price of one country's currency expressed in terms of another country's currency is:

A)by definition, one unit of currency.
B)the cross inflation rate.
C)the depository rate.
D)the exchange rate.
E)the foreign interest rate.

Question 5

An agreement to exchange currencies at some point in the future using an agreed-upon exchange rate is called a _____ trade.

A)spot
B)floating
C)swap
D)forward
E)triangle

Question 6

The foreign exchange market is where:

A)one country's stocks are exchanged for another's.
B)one country's bonds are exchanged for another's.
C)one country's currency is traded for another's.
D)international banks make loans to one another.
E)international businesses finalize import/export relationships with one another.

Question 7

Money deposited in a financial center outside the country whose currency is involved is called:

A)a foreign depository receipt.
B)an international exchange certificate.
C)Euroyen.
D)Eurocurrency.
E)Eurodollars.

Question 8

International bonds issued in multiple countries but denominated in a single currency are called:

A)Treasury bonds.
B)Eurobonds.
C)Bulldog bonds.
D)Samurai bonds
E)Yankee bonds.

Question 9

The idea that commodities have the same value no matter where they are purchased or what currency is used is known as _____ parity.

A)uncovered interest rate
B)relative purchasing power
C)interest rate
D)absolute purchasing power
E)forward exchange rates

Question 10

The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate is called:

A)the unbiased forward rates condition.
B)uncovered interest rate parity.
C)the international Fisher effect.
D)purchasing power parity.
E)interest rate parity.

Question 11

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:

A)interest rate parity.
B)purchasing power parity.
C)the international Fisher effect.
D)uncovered interest rate parity.
E)the unbiased forward rates condition.

Question 12

The exchange rate on a spot trade is called the _____ exchange rate.

A)triangle
B)forward
C)spot
D)open
E)cross

Question 13

Gilts are government securities issued by:

A)Japan.
B)Britain and Ireland.
C)Germany.
D)Italy.
E)Australia and New Zealand.

Question 14

The implicit exchange rate between two currencies when both are quoted in some third currency is called a(n):

A)open exchange rate.
B)cross-rate.
C)backward rate.
D)forward rate.
E)interest rate.

Question 15

A foreign bond issued in Japan and denominated in yen is called a(n):

A)American Depository Receipt.
B)European Currency Unit.
C)swap bond.
D)Samurai bond.
E)Eurobond.

Question 16

_____ holds because of the possibility of covered interest arbitrage.

A)Uncovered interest parity
B)Interest rate parity
C)The international Fisher effect
D)Unbiased forward rates
E)Purchasing power parity

Question 17

A foreign bond issued in the United States and denominated in dollars is called a(n):

A)American Depository Receipt.
B)European Currency Unit.
C)Eurobond.
D)swap bond.
E)Yankee bond.

Question 18

An agreement to trade currencies based on the exchange rate today for settlement within two business days is called a(n)_____ trade.

A)spot
B)forward
C)futures
D)option
E)swap

Question 19

A security issued in the United States that represents shares of a foreign stock and allows that stock to be traded in the United States is called a(n):

A)Eurostock.
B)Yankee stock.
C)Yankee bond.
D)American Depository Receipt.
E)foreign obligation trust certificate.

Question 20

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

A)Treasury bonds.
B)Eurobonds.
C)gilts.
D)Brady bonds.
E)foreign bonds.

Question 21

The international Fisher effect says that _____ rates are equal across countries.

A)real
B)inflation
C)nominal
D)one-year future
E)spot

Question 22

Which one of the following statements is correct assuming that exchange rates are quoted as units of foreign currency per dollar?

A)The exchange rate moves opposite to the value of the dollar.
B)The exchange rate is unaffected by differences in the inflation rates of the two countries.
C)The exchange rate falls as the dollar strengthens.
D)When a foreign currency appreciates in value it strengthens relative to the dollar.
E)The exchange rate rises when the U.S.inflation rate is higher than the foreign country's.

Question 23

Triangle arbitrage:
I.is a profitable situation involving three separate currency exchange transactions.
II.helps keep the currency market in equilibrium.
III.opportunities can exist in either the spot or the forward market.
IV.only involves currencies other than the U.S.dollar.

A)I and IV only
B)II and III only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Question 24

The changes in the relative economic conditions between countries are referred to as the:

A)international Fisher effect.
B)international exchange rate effect.
C)translation exposure to exchange rate risk.
D)long-run exposure to exchange rate risk.
E)the interest rate parity risk.

Question 25

The unbiased forward rate is a:

A)condition where a future spot rate is equal to the current spot rate.
B)guarantee of a future spot rate at one point in time.
C)condition where the spot rate is expected to remain constant over a period of time.
D)relationship between the future spot rate of two currencies at an equivalent point in time.
E)predictor of the future spot rate at the equivalent point in time.

Question 26

The most important complication of international finance is:

A)that basic principles of corporate finance do not apply.
B)that the NPV principle cannot be applied to foreign operations.
C)the process of foreign exchange valuation of different currencies.
D)All of the above.
E)None of the above.

Question 27

The theory that real interest rates are equal across countries is called:

A)the international Fisher effect.
B)purchasing power parity.
C)the unbiased forward rates condition.
D)uncovered interest parity.
E)interest rate parity.

Question 28

The foreign currency approach to capital budgeting analysis:
I.is computationally easier to use than the home currency approach.
II.produces the same results as the home currency approach.
III.utilizes the uncovered interest parity relationship.
IV.computes the net present value of a project in both the foreign and in the domestic currency.

A)I and III only
B)II and IV only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Question 29

Assume that the Euro is selling in the spot market for $1.10.Simultaneously,in the 3- month forward market the Euro is selling for $1.12.Which one of the following statements correctly describes this situation?

A)The Euro is selling at a premium relative to the dollar.
B)The dollar is selling at a premium relative to the euro.
C)The forward market is out of equilibrium.
D)The spot market is out of equilibrium.
E)None of the other four statements correctly describes this situation.

Question 30

Which of the following statements are correct concerning the foreign exchange market?
I.The trading floor of the foreign exchange market is located in London,England.
II.The foreign exchange market is the world's largest financial market.
III.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.
IV.Importers and exporters are key players in the foreign exchange market.

A)I and III only
B)II and IV only
C)I and II only
D)III and IV only
E)I and IV only

Question 31

Relative purchasing power parity:

A)states that identical items should cost the same regardless of the currency used to make the purchase.
B)looks at the factors that determine the changes in interest rates.
C)analyzes the changes in inflation rates to determine the cause.
D)relates differences in inflation rates to changes in exchange rates.
E)compares the real rate of return to the nominal rate of return.

Question 32

The home currency approach:

A)discounts all of a project's foreign cash flows using the current spot rate.
B)employs uncovered interest parity to project future exchange rates.
C)computes the net present value (NPV) of a project in the foreign currency and then converts that NPV into U.S.dollars.
D)utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency.
E)utilizes the international Fisher effect to compute the relevant exchange rates needed to compute the NPV of foreign cash flows in U.S.dollars.

Question 33

The forward rate market is dependent upon:

A)current forward rates exceeding current spot rates.
B)current spot rates exceeding current forward rates over time.
C)current spot rates equaling current forward rates on average over time.
D)forward rates equaling the actual future spot rates on average over time.
E)current spot rates equaling the actual future spot rates on average over time.

Question 34

The cross rate is the:

A)exchange rate between the US dollar and another currency.
B)exchange rate between two currencies, neither of which is generally the US dollar.
C)rate converting the direct rate into the indirect rate.
D)estimate based on the weighted average cost of capital by the agent at the exchange kiosk.
E)None of the above.

Question 35

The home currency approach:

A)generally produces more reliable results than those found using the foreign currency approach.
B)stresses the use of the real rate of return to compute the net present value (NPV) of a project.
C)uses the current risk-free nominal rate to discount all of the cash flows related to a project.
D)requires an applicable exchange rate for every time period for which there is a cash flow.

Question 36

Which of the following statements are correct?
I.The usage of forward rates can help reduce the short-run exposure to exchange rate risk.
II.Accounting translation gains are recorded on the income statement as other income.
III.The long-run exchange rate risk faced by an international firm can be reduced if the firm borrows money in the foreign country where it has operations.
IV.Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

A)I and III only
B)II and IV only
C)II and III only
D)I and IV only
E)I and II only

Question 37

Which of the following conditions exist if absolute purchasing power parity exists?
I.the goods are identical
II.the goods have equal economic values
III.transaction costs are equal to zero
IV.there are no trade barriers

A)I and III only
B)II and IV only
C)I, III, and IV only
D)I, II, and III only
E)I, II, III, and IV

Question 38

Interest rate parity:

A)eliminates exchange rate fluctuations.
B)exists when spot rates are equal for multiple countries.
C)exists when the spot rate is equal to the futures rate.
D)means that the nominal risk-free rate of return must be the same across countries.
E)eliminates covered interest arbitrage opportunities.

Question 39

Spot trades must be settled:

A)on the day of the trade.
B)on the day following the day of the trade.
C)within two business days.
D)within three business days.
E)within one week of the trade date.

Question 40

An international firm which imports raw materials can reduce its _____ exposure to _______ rate risk by entering into a forward contract.

A)short-term; inflation
B)long-term; inflation
C)total; interest
D)long-run; exchange
E)short-run; exchange

Question 41

Remitting cash flows is a term used to describe:

A)cash flows earned in a foreign country.
B)moving cash flows from the foreign subsidiary to the parent firm.
C)forecasting the value of foreign currency one-year hence.
D)forecasting the value of U.S.currency one-year hence.
E)None of the above.

Question 42

Currently,$1 will buy C$1.16 while $1.10 will buy €1.What is the exchange rate between the Canadian dollar and the euro?

A)C$1 = €1.16
B)C$1 = €.8696
C)C$1 = €1.2364
D)C$1.16 = €0.909
E)C$1.16 = €1.1524

Question 43

"The rate of change in commodity price levels between two countries determines the rate of change in exchange rates between the two countries." This is a statement of:

A)Absolute Purchasing Power Parity.
B)Relative Purchase Power Parity.
C)International Fisher Effect.
D)Interest Rate Parity.
E)Unbiased Forward Rates.

Question 44

You want to import $45,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $.0238?

A)1,890,757Rs
B)1,932,018Rs
C)2,064,220Rs
D)2,075,002Rs
E)2,076,289Rs

Question 45

Suppose the spot exchange rate is 2 U.S.dollars per British pound.The forward exchange rate is 1.9 dollars per pound.Which of the following is true?

A)The U.S.inflation rate is lower.
B)The pound is selling at a premium.
C)The pound is selling at a discount.
D)U.S.interest rates are lower.
E)More than one of the above is true.

Question 46

A swap can be an agreement between two parties to:

A)exchange a floating rate currency for dollars.
B)exchange a floating rate currency for a fixed interest rate currency.
C)exchange a floating rate debt payment for a fixed rate debt payment.
D)All are legitimate swaps.
E)None of the above.

Question 47

Suppose that the one-year forward rate on pounds is $1.75/ $\le$ .Given no arbitrage opportunities,this implies that traders expect:

A)the spot rate to be $1.75/ $\le$ in one year.
B)the spot rate to be greater than $1.75/ $\le$ in one year.
C)the spot rate to be less than $1.75/ $\le$ in one year.
D)the spot rate to be greater than or equal to $1.75/ $\le$ in one year.
E)the spot rate to be less than or equal to $1.75/ $\le$ in one year.

Question 48

What kind of trade involves agreeing today on an exchange rate for settlement in 90 days?

A)Forward trade.
B)Futures trade.
C)Spot trade.
D)Triangle trade.
E)None of the above.

Question 49

Which of the following are the basic kinds of swaps?

A)Interest rate.
B)Management.
C)Currency.
D)Both A and C.
E)None of the above

Question 50

Assume that *106.62 equal $1.Also assume that 7.6415Skr equal $1.How many Japanese yen can you acquire in exchange for 6,200 Swedish krona?

A)(*419)
B)(*434)
C)(*41,719)
D)(*86,507)
E)(*88,476)

Question 51

You are planning a trip to Australia.Your hotel will cost you A$150 per night for five nights.You expect to spend another A$2,000 for meals,tours,souvenirs,and so forth.How much will this trip cost you in U.S.dollars given the following exchange rates?

A)$1,926
B)$2,007
C)$2,782
D)$2,856
E)$3,926

Question 52

When the German mark is quoted as 1.923 marks to the dollar,this quote is a(n):

A)indirect rate.
B)direct rate.
C)cross rate.
D)triangular rate.
E)None of the above.

Question 53

The acronym LIBOR stands for:

A)Loan Interest Bank Order Receipt.
B)Lending Institution Bank Receipt.
C)Leading Indicator Borrowing Rate.
D)London Interbank Offer Rate.
E)London International Opportunity Rate.

Question 54

How many euros can you get for $2,500 given the following exchange rates?

A)€2,306
B)€2,381
C)€2,451
D)€2,624
E)€2,675

Question 55

You just returned from some extensive traveling throughout the Americas.You started your trip with $10,000 in your pocket.You spent 1.4 million pesos while in Chile.You spent another 40,000 bolivars in Venezuela.Then on the way home,you spent 34,000 pesos in Mexico.How many dollars did you have left by the time you returned to the U.S.given the following exchange rates?

A)$3,887
B)$4,039
C)$4,117
D)$4,244
E)$4,299

Question 56

Financial Accounting Standards Board Statement Number 52 requires that most assets and liabilities be translated at the current exchange rate.Gains and losses are recorded:

A)as a footnote to the statements.
B)as an extraordinary item against income.
C)as a normal part of income.
D)against shareholder's equity.
E)only on the income tax statements.

Question 57

Triangular arbitrage would take place if the _____ rate between two currencies was not _____ to the ratio of the two direct rates.

A)cross; equal
B)spot; equal
C)cross; less than
D)spot; less than
E)cross; greater than

Question 58

When the German mark is quoted as $.52,this quote is a(n):

A)cross rate.
B)direct rate.
C)indirect rate
D)triangular rate.
E)None of the above.

Question 59

Which one of following statements is not correct?

A)Importers are participants in the foreign exchange market.
B)There are no speculators in the foreign exchange market.
C)The foreign exchange market is an over-the-counter market.
D)Portfolio managers are participants in the foreign exchange market.
E)Exporters are participants in the foreign exchange market.

Question 60

"A commodity costs the same regardless of what currency is used to purchase it." This is a statement of:

A)Absolute Purchasing Power Parity.
B)Relative Purchasing Power Parity.
C)The First Principle of International Finance.
D)The Conservation of Currency Value.
E)None of the above.

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% in the U.S.and 4% in Poland.The inflation rate is 2% in the U.S.and 5% in Poland.Currently,you can buy 375PLN for 100USD.How much will the payment 5 years from now be worth in U.S.dollars?

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

Question 62

Assume that you can buy 250 Canadian dollars with 100 British pounds.Which one of the following statements is correct given the following exchange rates? Assume that you start out with British pounds.

A)You can not earn a profit given the current exchange rates.
B)You can earn a profit of $\le$ 2.47 by using triangle arbitrage.
C)You can earn a profit of C$1.17 by using triangle arbitrage.
D)You can earn a profit of $\le$ 1.17 by using triangle arbitrage.
E)You can earn a profit of C$2.47 by using triangle arbitrage.

Question 63

Suppose that the spot rate on the Canadian dollar is C$1.15.The risk-free nominal rate in the U.S.is 5% while it is only 4% in Canada.Which one of the following three-year forward rates best establishes the approximate interest rate parity condition?

A)C$1.116
B)C$1.125
C)C$1.132
D)C$1.146
E)C$1.159

Question 64

The spot rate for the Japanese yen currently is *106 per $1.The one-year forward rate is *105 per $1.A risk-free asset in Japan is currently earning 3%.If interest rate parity holds,approximately what rate can you earn on a one-year risk-free U.S.security?

A)3.00%
B)3.12%
C)3.98%
D)4.25%
E)4.33%

Question 65

The camera you want to buy costs $399 in the U.S.If absolute purchasing power parity exists,the identical camera will cost _____ in Canada if the exchange rate is C$1 = $.8349.

A)C$366.67
B)C$477.90
C)C$505.09
D)C$542.93
E)C$566.67

Question 66

The current spot rate is C$1.400 and the one-year forward rate is C$1.364.The nominal risk-free rate in Canada is 2% while it is 4% 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)$.0000
B)$.0033
C)$.0069
D)$.0833
E)$.0840

Question 67

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

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

Question 68

A risk-free asset in the U.S.is currently yielding 3% while a Canadian risk-free asset is yielding 2%.The current spot rate is C$.75 is equal to $1.What is the approximate two-year forward rate if interest rate parity holds?

A)C$.7257
B)C$.7328
C)C$.7351
D)C$.7389
E)C$.7472

Question 69

In the spot market,$1 is currently equal to A$1.42.The expected inflation rate is 3% in Australia and 2% in the U.S.What is the expected exchange rate one year from now if relative purchasing power parity exists?

A)A$1.4058
B)A$1.4062
C)A$1.4286
D)A$1.4342
E)A$1.4484

Question 70

In the spot market,$1 is currently equal to $\le$ .56.The expected inflation rate in the U.K.is 4% and in the U.S.3%.What is the expected exchange rate two years from now if relative purchasing power parity exists?

A)( $\le$ .5391)
B)( $\le$ .5445)
C)( $\le$ .5555)
D)( $\le$ .5611)
E)( $\le$ .5713)

Question 71

The spot rate for the British pound currently is $\le$ .55 per $1.The one-year forward rate is $\le$ .58 per $1.A risk-free asset in the U.S.is currently earning 2%.If interest rate parity holds,approximately what rate can you earn on a one-year risk-free British security?

A)4.01%
B)4.31%
C)6.22%
D)7.56%
E)8.62%

Question 72

A new sweater costs 1,449.95 Russian rubles.How much will the identical sweater cost in euros if absolute purchasing power parity exists and the following exchange rates apply?

A)€41.09
B)€43.08
C)€45.90
D)€58.25
E)€60.75

Question 73

Assume that $1 can buy you either *108 or $\le$ .55.If a TV in London costs $\le$ 525,what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

A)(*95,255)
B)(*96,667)
C)(*97,273)
D)(*98,008)
E)(*103,091)

Question 74

The current spot rate is C$1.362 and the one-year forward rate is C$1.371.The nominal risk-free rate in Canada is 6% while it is 3.5% 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)$.0018
B)$.0045
C)$.0120
D)$.0180
E)$.0240

Question 75

Suppose that the spot rate on the Canadian dollar is C$1.20.The risk-free nominal rate in the U.S.is 4% while it is only 2% in Canada.Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?

A)C$1.176
B)C$1.244
C)C$1.255
D)C$1.356
E)C$1.412

Question 76

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

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

Question 77

You are expecting a payment of C$100,000 four years from now.The risk-free rate of return is 3% in the U.S.and 4% in Canada.The inflation rate is 3% in the U.S.and 2% in Canada.The current exchange rate is C$1 = $.72.How much will the payment four years from now be worth in U.S.dollars?

A)$68,887
B)$69,191
C)$69,300
D)$72,222
E)$74,953

Question 78

Today,you can exchange $1 for $\le$ .5528.Last week, $\le$ 1 was worth $1.88.If you had converted $\le$ 100 into dollars last week you would now have a:

A)profit of $3.05.
B)loss of $3.93.
C)profit of $\le$ 3.93.
D)loss of $3.05.
E)profit of $\le$ 3.05.

Question 79

Today,you can get either 140 Canadian dollars or 1,140 Mexican pesos for 100 U.S.dollars.Last year,100 U.S.dollars was worth 139 Canadian dollars and 1,160 Mexican pesos.Which one of the following statements is correct given this information?

A)$100 invested in Canadian dollars last year would now be worth 1,148.20 Mexican pesos.
B)$100 invested in Mexican pesos last year would now be worth $98.28.
C)$100 invested in Mexican pesos last year would now be worth $102.03.
D)$1,200 invested in Canadian dollars last year would now be worth $1,208.63.
E)$1,200 invested in Canadian dollars last year would now be worth $1,191.43.

Question 80

The current spot rate for the Norwegian krone is $1 = NKr6.83.The expected inflation rate in Norway is 2% and in the U.S.3%.A risk-free asset in the U.S.is yielding 5%.What risk-free rate of return should you expect on a Norwegian security?

A)2%
B)3%
C)4%
D)5%
E)6%