Deck 26: International Financial Management

Question 1

When interest rate parity exists, the forward rate will differ from the spot rate by just enough to ____.

A) offset the difference in the real rate of return
B) permit the buyer of a covered option to make a profit
C) offset the interest rate differential between the two currencies
D) result in a perfect interest rate arbitrage

Answer 1

C

Question 2

To protect itself against transaction exchange rate risk, a U.S. company that purchases automobiles from a Japanese manufacturer may use all of the following techniques EXCEPT ____.

A) borrow U.S. funds and invest them in interest-bearing Japanese securities
B) execute a contract in the forward exchange market
C) sell yen in the spot market at the time of each transaction
D) execute a contract in the foreign exchange futures market

Answer 2

C

Question 3

Which of the following trade policies will tend to decrease the supply of the country's currency in the foreign exchange market?

A) Imposition of tariffs
B) Imposition of export quotas
C) Financing exports with low interest loans
D) Imposition of tariffs and export quotas

Answer 3

A

Question 4

Primary sources of demand for British pounds in the foreign exchange market include ____.

A) foreign buyers of British exports who must pay for their purchases in pounds
B) foreign investors who desire to make investments in physical or financial assets in Great Britain
C) speculators who expect British pounds to increase in value relative to other currencies
D) All of these are correct

Question 5

Firms engaged in international transactions incur ____ risk because of fluctuations in the exchange rates among currencies.

A) credit
B) political
C) market
D) exchange rate

Question 6

Under current accounting procedures, all of the following except which balance sheet items are translated into dollars at the rate of exchange prevailing on the date of the balance sheet?

A) Stockholder's equity
B) Fixed assets
C) Current liabilities payable in a foreign currency
D) Long-term liabilities payable in a foreign currency

Question 7

An increase in the value of a foreign currency relative to the U.S. dollar ____ the conversion value of the foreign subsidiary's liabilities.

A) decreases
B) increases
C) has no effect on
D) is an average of

Question 8

A U.S. company that purchases goods on credit from a German supplier can protect itself against transaction exchange risk by ____.

A) executing a contract in the forward exchange market
B) borrowing U.S. funds and investing in interest-bearing German securities
C) borrowing German funds and investing in interest-bearing U.S. securities
D) executing a contract in the forward exchange market, and by borrowing U.S. funds and investing in interest-bearing German securities

Question 9

Primary sources of supply of British pounds in the foreign exchange market include ____.

A) British importers who need to convert their pounds into foreign currency to pay for purchases
B) foreign investors who desire to make investments in physical or financial assets in Great Britain
C) speculators who expect British pounds to increase in value relative to other currencies
D) U.S. importers who need to convert dollars to pounds to pay for purchases

Question 10

When the Federal Reserve (acting through member commercial banks) sells U.S. dollars in the foreign exchange market, it ____ the supply of U.S. dollars and hence tends to ____ the value of the U.S. dollar relative to other currencies.

A) increases; raise
B) decreases; lower
C) increases; lower
D) decreases; raise

Question 11

Which of the following is not a primary category of foreign exchange risk that multinational firms must consider?

A) Economic exposure
B) Operating exposure
C) Translation exposure
D) Transaction exposure

Question 12

A euro is a ____.

A) monetary unit used in transactions between European central banks
B) monetary unit used in providing capital to the World Bank
C) monetary unit used in transactions between Common Market countries
D) composite currency whose value is based on the weighted value of several European currencies

Question 13

When a multinational firm has one or more foreign subsidiaries with assets and liabilities denominated in a foreign currency, it faces ____ exposure.

A) economic
B) operating
C) translation
D) transaction

Question 14

Government trade policies that restrict imports into a country tend to ____ the supply of the country's currency in the foreign exchange market and tend to ____ the value of the country's currency with respect to other currencies.

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

Question 15

The theory of interest rate parity states that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in ____ rates prevailing in the two countries.

A) inflation
B) interest
C) trade deficit
D) GNP growth

Question 16

A high rate of inflation within a country will tend to ____ the value of its currency with respect to the currencies of other countries that are experiencing lower rates of inflation.

A) increase
B) decrease
C) have no effect on
D) Cannot be determined because of insufficient information

Question 17

The ____ states that the differences in interest rates between two countries should be offset by equal, but opposite, changes in the future spot exchange rate.

A) expectations theory
B) interest rate parity
C) purchasing power parity
D) international Fisher effect

Question 18

Which of the following actions would not tend to increase the value of a country's currency?

A) Relatively low interest rates
B) Government trade policies that limit imports
C) Relatively low rate of inflation
D) Restrictions on foreign exchange transactions

Question 19

A parent company's foreign investment risk exposure depends on the foreign subsidiary's net ____ position.

A) cash
B) equity
C) present value
D) working capital

Question 20

Motorola has a contract to deliver cellular telephones in Japan 6 months from now and the payment for these telephones will be in Japanese yen. What type of foreign exchange risk does Motorola face?

A) Economic exposure
B) Operating exposure
C) Transaction exposure
D) Translation exposure

Question 21

If one-year U.S. nominal interest rates are 4%, one year Canadian nominal interest rates are 7.5%, and the current spot exchange rate, S₀, is $0.587, then what will the expected spot rate be in one year?

A) $0.568
B) $0.607
C) $0.564
D) $0.573

Question 22

Vroom Vroom Motors purchased several Mercedes Benz automobiles from its West German broker. The contract was for 10,000,000 euros, due in 180 days. The present exchange rate is $0.51 per euro, and the 180-day forward rate is $0.514. If the rate actually goes to $0.50 in 180 days, what is the dollar gain or loss incurred if no hedge is taken relative to a hedged position?

A) $392,157 gain
B) $40,000 loss
C) $100,000 gain
D) $140,000 gain

Question 23

Today, short-term interest rates in Australia are 8.50% and the corresponding U.S. rate is 6.0%. The current discount on forward Australian dollars is 2.0%. Can a U.S. trader use covered interest arbitrage to take advantage of this situation? If so, what is the net effect?

A) No; lose 1/2%
B) No; lose 2 1/2%
C) Yes; gain 1/2%
D) Yes; gain 2 1/2%

Question 24

If the annual nominal interest rate on 10-year U.S. Government Treasury bonds is 7.35% and the annual nominal interest rate on 10-year Japanese bonds is 5.75%, what is the expected future spot rate in 10 years given that the current spot exchange rate between U.S. dollars and Japanese yen is $0.00959?

A) $0.00834
B) $0.01114
C) $0.00973
D) $0.00946

Question 25

If the annual nominal interest rate on 5-year U.S. Government Treasury bonds is 7%, and the annual nominal interest rate on 5-year Canadian bonds is 5.5%, what is the expected future spot rate in 5 years given that the current spot exchange rate between U.S. dollars and Canadian dollars is $0.587?

A) $0.595
B) $0.547
C) $0.578
D) $0.630

Question 26

Firms transacting business with foreign companies can lower exchange rate risk exposure by ____.

A) limiting transaction exposure
B) hedging
C) purchasing LIBORs
D) using the PPP to make exchange rate forecasts

Question 27

What is the nominal interest rate in Canada if the real rate of return is 2.5% and the expected inflation rate was 4.5%?

A) 7.00%
B) 6.89%
C) 7.11%
D) 7.07%

Question 28

If the spot rate (in U.S. dollars) for the Australian dollar is $0.559 and the 180-day forward rate is trading at a premium of 2.86%, what is the 180-day forward rate?

A) $0.551
B) $0.567
C) $0.575
D) $0.583

Question 29

The 6-month interest rate on 180-day U.S. Treasury bills is 7.64%. In the foreign exchange markets, the spot rate between U.S. dollars and British pounds is 1 pound = $1.5525. The 180-day (6-month) forward rate is 1 pound = $1.5188. Determine the expected rate of interest on 6-month British government debt securities, assuming interest rate parity between the dollar and pound exists.

A) 13.52%
B) 5.47%
C) 7.31%
D) 10.03%

Question 30

What is the real rate of return if the risk-free rate is 4% and the expected rate of inflation is 2.5%?

A) 0.43%
B) 1.50%
C) 6.35%
D) 1.46%

Question 31

The theory that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in interest rates in the two countries is known as ____.

A) covered interest arbitrage
B) inflation
C) hedging
D) interest rate parity

Question 32

Crown Honda purchased one of its most popular models for 965,600 yen. The exchange rate for the yen was 142 yen per U.S. dollar at the time of purchase but then rose to 171.8 yen by the time payment was made. What was the dealer's gain or loss on the change in rates?

A) Gain of $1,180
B) Loss of $1,427
C) Loss of $1,180
D) Gain of $1,427

Question 33

The 6-month interest rate on 180 day U.S. Treasury Bills is 7.5%. In the foreign exchange markets, the spot rate between U.S. dollars and Australian dollars is 1 Australian dollar = $0.452 and the 180-day (6-month) forward rate is 1 mark = $0.46. Determine the expected rate of interest on 6-month Australian government debt securities, assuming that the interest rate parity between the U.S. dollar and Australian dollar exists.

A) 7.35%
B) 1.77%
C) 5.63%
D) 3.82%

Question 34

If the 182-day interest rate is 1.75% in the United States and 2.625% in Germany, and the current spot exchange rate between dollars and euros is $0.583, what will the 180-day forward rate be if IRP holds?

A) $0.578
B) $0.588
C) $0.573
D) $0.581

Question 35

If U.S. prices are expected to rise by 3% over the coming year and prices in Switzerland are expected to rise by 7% during the same time, what is the expected spot rate in one year of the Swiss franc given that the current spot exchange rate is $0.168?

A) $0.1612
B) $0.1613
C) $0.1617
D) $0.1745

Question 36

Which of the following is NOT one of the basic hedging techniques?

A) Money market hedge
B) Forward market hedge
C) Primary market hedge
D) All of these are basic hedging techniques.

Question 37

If U.S. prices are expected to rise by 3.5% over the coming year and prices in Great Britain are expected to rise by 5.25% during the same time, what is the expected spot rate in one year given that the current spot exchange rate is $1.497?

A) $1.522
B) $1.470
C) $1.472
D) $1.499

Question 38

If the annual nominal interest rate on 5-year U.S. Government Treasury bonds is 7% and the annual nominal interest rate on 5-year Canadian bonds is 7.75%, what is the expected future spot rate in 5 years given that the current spot exchange rate between U.S. dollars and Canadian dollars is $0.739?

A) $0.734
B) $0.714
C) $0.765
D) $0.733

Question 39

In general, when a foreign subsidiary's assets are ____ than its liabilities, ____ will occur when the exchange rate on the currency of the country in which the foreign subsidiary operates loses value.

A) greater; currency exchange gains
B) greater; currency exchange losses
C) less; nothing
D) greater; nothing

Question 40

What is the real rate of return if the risk-free rate is 3.25% and the expected rate of inflation is 2.75%?

A) 0.50%
B) 0.51%
C) 0.487%
D) 1.49%

Question 41

A less restrictive form of purchasing power parity is ____.

A) omnipotent purchasing power parity
B) relative purchasing power parity
C) absolute purchasing power parity
D) exchange parity

Question 42

According to Fisher, in the absence of government interference and holding risk constant, real rates of return across countries will be equalized through a process of ____.

A) margining accounts
B) transaction transference
C) arbitrage
D) equalization of costs

Question 43

In considering purchasing power parity, the relationship is ____.
I. not applicable due to tariffs
II. applicable, despite trade barriers

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements I and II are correct.
D) Neither statement I nor II is correct.

Question 44

All of the following items are needed to compute relative purchasing power parity EXCEPT ____.

A) spot price
B) home country interest rate
C) benchmark tax rate
D) expected foreign country inflation rate

Question 45

The law of one price, an economic principle, means that the price of a product in different markets should be the same if ____.

A) the raw materials were obtained from a single source
B) adjusted for inflation
C) taxes are adjusted based on a single currency
D) there are no significant costs associated with moving between markets

Question 46

The international Fisher effect theory states that differences in interest rates between two countries will be offset by equal but opposite changes in the ____.

A) future spot rate
B) future interest rate
C) American dollar
D) euro