Deck 30: International Corporate Finance

Question 1

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

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

Answer 1

absolute purchasing power

Question 2

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.

Answer 2

the exchange rate.

Question 3

The foreign exchange market is where:

A)one country's equities 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.

Answer 3

one country's currency is traded for another's.

Question 4

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 5

Gilts are government securities issued by:

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

Question 6

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)Yankee bond.
D)swap bond.
E)Eurobond.

Question 7

The theory that real interest rates are equal across countries 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 8

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 9

_____ 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 10

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 11

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

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

Question 12

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 13

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

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

Question 14

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

Question 15

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 16

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 17

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

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

Question 18

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 19

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

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

Question 20

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

Question 21

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 home currency.
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 home currency.

Question 22

When the US dollar is quoted as $1.923 to the pound, this quote is a(n):

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

Question 23

The acronym LIBOR stands for:

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

Question 24

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

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

Question 25

Interest rate parity:

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

Question 26

When the US dollar is quoted as £.52 this quote is a(n):

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

Question 27

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)default on their debt payments.
E)None of the above.

Question 28

Which of the following is/are the basic kinds of swaps?

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

Question 29

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 30

The home currency approach:

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

Question 31

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

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

Question 32

The most important complication of international finance is the:

A)basic principles of corporate finance do not apply.
B)process of foreign exchange valuation of different currencies.
C)NPV principle can not be applied to foreign operations.
D)translation gains or losses are not recorded.
E)None of the above.

Question 33

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

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

Question 34

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 35

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 36

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

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

Question 37

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 38

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 39

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 40

The cross rate is the:

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

Question 41

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 42

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 43

Assume that $1 can buy you either ¥107 or £.55.If a TV in London costs £500, 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)¥118,889

Question 44

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)$0.86
B)$0.93
C)$1.09
D)$1.37
E)$1.55

Question 45

Which one of following statements is not correct?

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

Question 46

Today, you can exchange $1 for £.5428.Last week, £1 was worth $1.88.If you had converted £100 into dollars last week you would now have a:

A)profit of $2.05.
B)loss of $2.01.
C)profit of £2.01.
D)loss of $2.05.
E)profit of £2.05.

Question 47

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 48

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

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

Question 49

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

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

Question 50

"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 51

Currently, £1 will buy C$1.36 while £1.10 will buy €1.What is the exchange rate between the Canadian dollar and the euro?

A)C$1 = €1.10
B)C$1 = €.9091
C)C$1 = €1.2364
D)C$1.36 = €1.10
E)C$1.36 = €.9091

Question 52

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 53

Assume that ¥107.62 equal $1.Also assume that 7.5415SKr equal $1.How many Japanese yen can you acquire in exchange for 6,200 Swedish krona?

A)¥419
B)¥434
C)¥41,719
D)¥46,757
E)¥88,476

Question 54

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

Question 55

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

A)€2,306
B)€2,357
C)€2,451
D)€2,652
E)€2,675

Question 56

"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 57

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 58

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 = $.7349.

A)C$266.67
B)C$293.23
C)C$505.09
D)C$542.93
E)C$566.67

Question 59

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 €.0218?

A)1,843,010Rs
B)2,032,018Rs
C)2,064,220Rs
D)2,075,002Rs
E)2,076,289Rs

Question 60

In the spot market, $1 is currently equal to A$1.42.The expected inflation rate is 3 percent in Australia and 2 percent 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 61

You are expecting a payment of 500,000PLN 3 years from now.The risk-free rate of return is 4 percent in the U.S.and 2 percent in Poland.The inflation rate is 4 percent in the U.S.and 1 percent 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 62

Suppose that the spot rate on the Canadian dollar is C$1.18.The risk-free nominal rate in the U.S.is 5 percent while it is only 4 percent in Canada.Which one of the following three-year forward rates best establishes the approximate interest rate parity condition?

A)C$1.120
B)C$1.145
C)C$1.192
D)C$1.216
E)C$1.239

Question 63

What is triangle arbitrage? Using the U.S.dollar, the Canadian dollar, and the euro, construct an example in which triangle arbitrage exists, and then show how to exploit it.

Question 64

You want to invest in a project in Canada.The project has an initial cost of C$1.2 million and is expected to produce cash inflows of C$600,000 a year for 3 years.The project will be worthless
After the first 3 years.The expected inflation rate in Canada is 4 percent while it is only 3 percent in
The U.S.The applicable interest rate in Canada is 8 percent.The current spot rate is C$1 = $.69.
What is the net present value of this project in Canadian dollars using the foreign currency
Approach?

A)C$335,974
B)C$342,795
C)C$346,258
D)C$349,721
E)C$356,750

Question 65

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 the U.S.and 4 percent in Poland.The inflation rate is 2 percent in the U.S.and 5 percent 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 66

You are analyzing a very low-risk project with an initial cost of £120,000.The project is expected to return £40,000 the first year, £50,000 the second year and £60,000 the third and final year.The Current spot rate is £.54.The nominal return relevant to the project is 4 percent in the U.K.and 3 Percent in the U.S.Assume that uncovered interest rate parity exists.What is the net present value Of this project in U.S.dollars?

A)$33,232
B)$34,040
C)$34,067
D)$34,422
E)$35,009

Question 67

What is required for absolute purchasing power parity to hold? Do you think absolute PPP would hold in the case where a computer retailer in the U.S. sits directly across the border from a computer retailer in Canada? How about Houston, Texas, and Winnipeg, Manitoba?

Question 68

A risk-free asset in the U.S.is currently yielding 3 percent while a Canadian risk-free asset is yielding 2 percent.The current spot rate is C$.72 is equal to $1.What is the approximate two-year forward rate if interest rate parity holds?

A)C$.7057
B)C$.7128
C)C$.7136
D)C$.7189
E)C$.7272

Question 69

How well do you think relative purchasing power parity and uncovered interest parity behave? That is, do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?

Question 70

Suppose that the spot rate on the Canadian dollar is C$1.40.The risk-free nominal rate in the U.S.is 8 percent while it is only 4 percent in Canada.Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?

A)C$1.278
B)C$1.344
C)C$1.355
D)C$1.456
E)C$1.512

Question 71

The expected inflation rate in Finland is 2 percent while it is 4 percent in the U.S.A risk-free asset in the U.S.is yielding 5.5 percent.What real rate of return should you expect on a risk-free Norwegian Security?

A)2.0%
B)2.5%
C)3.0%
D)3.5%
E)4.0%

Question 72

Describe the foreign currency and home currency approaches to capital budgeting.Which is better? Which approach would you recommend a U.S.firm use? Justify your answer.

Question 73

The current spot rate for the Norwegian krone is $1 = NKr6.83.The expected inflation rate in Norway is 3 percent and in the U.S.2 percent.A risk-free asset in the U.S.is yielding 4.5 percent. What real rate of return should you expect on a risk-free Norwegian security?

A)4.5%
B)5.0%
C)5.5%
D)6.0%
E)6.5%

Question 74

In the spot market, $1 is currently equal to £.55.The expected inflation rate in the U.K.is 4 percent and in the U.S.3 percent.What is the expected exchange rate two years from now if relative purchasing power parity exists?

A)£.5391
B)£.5445
C)£.5555
D)£.5611
E)£.5667

Question 75

You are expecting a payment of C$100,000 four years from now.The risk-free rate of return is 3 percent in the U.S.and 4 percent in Canada.The inflation rate is 3 percent in the U.S.and 2 percent 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 76

The current spot rate for the Norwegian krone is $1 = NKr6.83.The expected inflation rate in Norway is 2 percent and in the U.S.4 percent.A risk-free asset in the U.S.is yielding 5 percent. What risk-free rate of return should you expect on a Norwegian security?

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

Question 77

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 percent while it is 3.5 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)$.0018
B)$.0045
C)$.0120
D)$.0180
E)$.0240

Question 78

You want to invest in a riskless project in Sweden.The project has an initial cost of SKr2.1 million and is expected to produce cash inflows of SKr810,000 a year for 3 years.The project will be Worthless after the first 3 years.The expected inflation rate in Sweden is 2 percent while it is 5 Percent in the U.S.A risk-free security is paying 6 percent in the U.S.The current spot rate is $1 = SKr7.55.What is the net present value of this project in Swedish krona using the foreign currency Approach? Assume that the international Fisher effect applies.

A)SKr185,607
B)SKr191,175
C)SKr196,910
D)SKr197,867
E)SKr202,818

Question 79

The current spot rate is C$1.400 and the one-year forward rate is C$1.344.The nominal risk-free rate in Canada is 4 percent while it is 8 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)$.0000
B)$.0033
C)$.0040
D)$.0833
E)$.0840

Question 80

The spot rate for the British pound currently is £.55 per $1.The one-year forward rate is £.58 per $1. A risk-free asset in the U.S.is currently earning 3 percent.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)6.87%
E)8.62%