Deck 22: International Financial Management

Question 1

If the yen is trading at a forward discount relative to the dollar,then you'll receive less yen per dollar in the future.

Answer 1

False

Question 2

The forward exchange rate is the rate for immediate exchange of two currencies.

Answer 2

False

Question 3

According to interest rate parity,the interest rate differential must be equal to the differential between forward and spot exchange rates.

Answer 3

True

Question 4

You can purchase a futures contract on any currency.

Question 5

Even if a firm neither owes nor is owed foreign currency,it still may be affected by currency fluctuations.

Question 6

The law of one price implies that when converted into the same currency a commodity should sell at the same price in all countries.

Question 7

Forward contracts are standardized contracts sold in organized exchanges.

Question 8

Transaction risk can usually be identified and hedged.

Question 9

The direct exchange rate quotes the number of U.S.dollars that can be exchanged for one unit of a foreign currency.

Question 10

The international Fisher effect states that nominal interest rates should be equal in all countries.

Question 11

Forward rates are always equal to the actual future exchange rates.

Question 12

Interest rate parity tells us that the cost of buying yen forward is exactly the same as the cost of borrowing dollars,buying yen in the spot market,and leaving them on yen deposit.

Question 13

The spot rate is $1 = C$1.02.The 3-month forward rate is $1 = C$1.03.The Canadian dollar is selling at a forward premium.

Question 14

The New York Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market.

Question 15

If inflation is expected to be higher in the U.S.than in Mexico,then the peso is forecasted to depreciate against the dollar.

Question 16

Futures contracts offer an alternative way to buy foreign currency forward.

Question 17

The number of pesos that can be purchased with one U.S.dollar is referred to as an indirect quote.

Question 18

A U.S.importer of a Japanese product should sell Japanese yen forward to avoid the risk of an appreciation of the yen.

Question 19

Interest rate parity suggests that it is cheaper to borrow in a currency with a low nominal rate of interest.

Question 20

According to the international Fisher effect,the differences in nominal interest rates across countries reflect the differences in their expected rates of inflation.

Question 21

How many dollars will it take for a U.S.citizen to purchase a Japanese product priced at 60,000 yen if the indirect exchange rate is JPY104 = USD1?

A) $577
B) $700
C) $5,769
D) $62,400

Question 22

The nominal interest rate is the difference between the real interest rate and inflation.

Question 23

If purchasing power parity holds,what will happen to the currency of a country with high inflation?

A) The currency will appreciate.
B) The currency will depreciate.
C) There will be no significant change in the currency's value.
D) The currency will sell at a forward premium.

Question 24

High inflation rates are usually associated with:

A) low nominal interest rates.
B) high nominal interest rates.
C) high real interest rates.
D) low real interest rates.

Question 25

You can value overseas investments using the NPV of the cash flows.Which of the following adjustment is necessary to calculate the NPV?

A) Adjust the cost of capital by the forward exchange rate and then discount the foreign cash flows
B) Convert the foreign cash flows into domestic currency and use the domestic opportunity cost of capital for discounting
C) Use the domestic discount rate to discount the foreign cash flows
D) Convert the foreign cash flow into domestic currency and use the foreign cost of capital for discounting

Question 26

Buying currency in the forward market is a common method of hedging currency risk.

Question 27

If the exchange rate of euros/U.S.dollars is USD1.351 = EUR1,then:

A) it takes 1.35 euros to buy one US dollar.
B) the euro is worth less than one U.S. dollar.
C) one dollar is worth approximately €.74.
D) one dollar is worth approximately €1.

Question 28

An indirect quote is the rate of one unit of foreign currency expressed in U.S.dollars.

Question 29

Suppose the spot rate for the Canadian dollar is CAD1.034 = USD1,the 3-month forward rate is CAD1.036 = USD1,and the 1-year forward rate is CADS1.039.= USD1.If no other information is available,what will be your guess about the spot rate in 1 year?

A) 1.034
B) 1.036
C) 1.039
D) 1.037

Question 30

Country A has a higher inflation rate than Country B. In this case Country A will have the:

A) a depreciating currency.
B) higher nominal interest rate.
C) an appreciating currency.
D) higher real interest rate.

Question 31

If real interest rates are different across countries,investors will shift their money into countries with high real interest rates.

Question 32

Suppose the 1-year interest rate in Canada is 4% while it is 3% in the U.S.The indirect spot rate is CAD1.02 = USD1.What is the indirect 1-year forward rate?

A) CAD1.0299 = USD1
B) CAD1.0608 = USD1
C) CAD1.0200 = USD1
D) CAD1.0302 = USD1

Question 33

Suppose that a bank quotes the following rates: JPY 58.00 = CHF1
CHF1.52 = USD1
JPY123.38 = USD1
Which of the following transactions would produce an arbitrage profit for a US investor?

A) Buy 123.38 yen, exchange them for Swiss francs and sell the Swiss francs that you receive.
B) Buy 1.52 Swiss francs, exchange them for Japanese yen and sell the yen that you receive.
C) Buy both Japanese yen and Swiss francs.
D) There are no transactions that would not involve at least some risk.

Question 34

If the interest rate in one country increases,then the value of that country's currency increases in the forward market.

Question 35

Suppose that the spot exchange rates against the US dollar are: SEK9.3924 = USD1
CHF1.5231 = USD1
JPY123.380 = USD1
What rate do you think a Japanese bank would quote for exchanging Swiss francs into Swedish krone?

A) SEK6.167 = CHF1
B) SEK0.162 = CHF1
C) SEK13.136 = CHF1
D) SEK1 = CHF1

Question 36

If the direct exchange rate between U.S.dollars and pounds sterling is USD1.50 = GBP1,how much should you be willing to pay to receive £350?

A) $175.00
B) $233.33
C) $367.50
D) $525.00

Question 37

If the international Fisher effect holds,what will be the effect of an increase of a country's nominal interest rates on the country's currency?

A) The currency will appreciate.
B) The currency will depreciate.
C) There will be no significant change in the currency's value.
D) The currency will sell at a forward premium.

Question 38

The main purpose in contracting to purchase foreign currency in the forward market is to:

A) earn a premium on the exchange.
B) lock into a future currency price now.
C) take advantage of future price reductions.
D) avoid the more expensive spot rates.

Question 39

If the international Fisher effect is valid,then expected real interest rates in all countries should be equal.

Question 40

A sandwich costs $6.79 in the U.S.The exchange rate is CAD0.98 = USD1 dollar.What does the identical sandwich have to cost in Canada for the law of one price to exist?

A) C$6.93
B) C$6.79
C) C$6.65
D) C$6.86

Question 41

If the spot exchange rate between euros and dollars is USD1.1=EUR1 before the dollar depreciates by 10%,how many dollars will it take after the depreciation has occurred to pay an invoice of €500?

A) $550
B) $611
C) $500
D) $345

Question 42

Current 1-year interest rates are 4% and 8% in the United States and Spain,respectively.The anticipated inflation in the United States is 2%.If the international Fisher effect holds,what is the expected inflation rate in Spain?

A) 4.00%
B) 4.04%
C) 5.92%
D) 6.00%

Question 43

Suppose that inflation next year is 8% in Japan and 4% in the United States.If the current spot rate is JPY107 = USD1,what is the expected spot rate at the end of the year?

A) JPY102.72 = USD1
B) JPY103.04 = USD1
C) JPY111.12 = USD1
D) JPY111.82 = USD1

Question 44

The pound is expected to appreciate by 2% against the dollar.If the expected inflation rate in the United States is 5% and purchasing power parity holds,what is the expected inflation rate in the United Kingdom?

A) 1.3%
B) 2.9%
C) 4.1%
D) 7.0%

Question 45

If exchange rates adjust to reflect inflation differentials across countries,then:

A) the law of one price is wrong.
B) spot and forward rates will be equal.
C) nominal interest rates will be equal across countries.
D) purchasing power parity holds.

Question 46

If the spot exchange rate of Mexican pesos for U.S.dollars is MXN9.8=USD1 and the peso is trading at a forward premium of 3%,then you will receive:

A) more than 9.8 pesos per dollar in the future.
B) less than 9.8 pesos per dollar in the future.
C) 9.83 pesos per dollar in the future.
D) 10.09 pesos per dollar in the future.

Question 47

You exchange USD100,000 into Hong Kong dollars today at HKD7.8= USD1,earn 7% on your Hong Kong investment,and exchange back into US dollars at a rate of HKD8.0 = USD1.How much wealthier are you as a result?

A) $2,600
B) $4,325
C) $6,000
D) $9,744

Question 48

The theory that,when measured in a common currency,the price of a product should be the same in two countries is referred to as the law of:

A) exchange rates.
B) large numbers.
C) spot rates.
D) one price.

Question 49

If a country's currency trades at a forward premium,interest rate parity would predict that:

A) that country will have the higher interest rate.
B) that country will have the lower interest rate.
C) the two countries will have the same interest rate.
D) that country could have a higher or lower interest rate.

Question 50

If prices in the United States rise less rapidly than in Canada,which of the following would be expected according to purchasing power parity?

A) The value of the Canadian dollar will decline, relative to the U.S. dollar.
B) The value of the U.S. dollar will decline, relative to the Canadian dollar.
C) Inflation in the U.S. will exceed inflation in Canada.
D) The exchange rate will be unaffected by the price changes.

Question 51

Which one of the following is more likely to be roughly equal across countries?

A) Nominal interest rates
B) Real interest rates
C) Inflation rates
D) Forward premium

Question 52

Which one of the following is correct if you have contracted to purchase 1,000 Swiss francs 3 months forward at a rate of CHF1.6 = USD1?

A) You pay $625 today for the francs.
B) You pay $1,600 today for the francs.
C) You pay $625 three months from now for the francs.
D) You pay $1,600 three months from now for the francs.

Question 53

If you buy yen forward when the yen is selling at a forward premium,you will get:

A) more yen than if you buy yen today on the spot market.
B) fewer yen than if you buy yen today on spot market.
C) the same number of yen as on the spot market, but with a lower commission.
D) the expectation of more yen, but the difference is not locked in.

Question 54

According to the expectations theory of exchange rates,what change is expected in the future spot exchange rate if the forward rate trades at an 8% discount?

A) The spot rate is expected to appreciate by 8%.
B) The spot rate is expected to depreciate by 8%.
C) The spot rate is expected to depreciate by 4%.
D) No change is expected in the spot rate.

Question 55

The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in:

A) real rates of interest.
B) purchasing power parity.
C) the standard of living.
D) expected inflation.

Question 56

Suppose the one-year interest rate in the United States is 7%.What would you expect the interest rate to be in the UK if expected inflation is 4% in the United States and 8% in the UK?

A) 5.19%
B) 7.93%
C) 9.08%
D) 11.12%

Question 57

Expected inflation in the United States is 6%.What do you expect to happen to prices in Japan,if the nominal interest rate is 10% in the United States and 6% in Japan?

A) Expected Japanese inflation is 1.79%.
B) Expected Japanese inflation is 2.15%.
C) Expected Japanese inflation is 6.22%.
D) Expected Japanese inflation is 10.00%.

Question 58

You are importing TV sets worth ¥10 million from a Japanese manufacturer,and this amount is payable after 6 months.You can hedge your exchange risk by:

A) buying Japanese yen in the forward market.
B) selling Japanese yen in the forward market.
C) borrowing Japanese yen.
D) doing nothing - it is impossible to hedge.

Question 59

Which one of the following is advised when evaluating a capital project in a foreign country if you are concerned about political risk?

A) The project should be abandoned until this risk disappears.
B) The project's cost of capital rate should be decreased to offset the perceived risk.
C) The domestic discount rate should be increased to account for the added risk.
D) The project cash flows should be decreased to recognize the possibility of bad outcomes.

Question 60

If interest rates are higher in Italy than in the United States,US investors can earn a higher expected return by investing in Italian bonds unless the euro is expected to:

A) appreciate against the dollar.
B) depreciate against the dollar.
C) offer a higher real rate of return than the dollar.
D) offer a lower real rate of return than the dollar.

Question 61

If purchasing power parity holds,what is the expected German inflation rate,if the US expected inflation rate is 3%,the spot exchange rate is USD0.667= EUR1 and the expected spot rate is USD0.625 = EUR1?

A) 2.8%
B) 7.1%
C) 9.9%
D) 11.4%

Question 62

Yesterday the spot exchange rate of yen-to-dollar was JPY105 = USD1.What is today's spot exchange rate if the yen has appreciated 10% against the dollar today?

A) JPY94.5 = USD1
B) JPY95.5 = USD1
C) JPY116.7 = USD1
D) JPY105 = USD1

Question 63

Which of the following is correct when contracting ahead in the forward exchange market?

A) At contract close you pay either the forward rate that was contracted or the then-current rate.
B) Contracting ahead is always cheaper than waiting to pay spot rates.
C) Your cost is locked in from the beginning of the contract, regardless of market changes.
D) Paying the spot price is safer than contracting forward.

Question 64

The international Fisher effect is valid in the long run because:

A) inflation rates are equal in different countries.
B) investors will move their money into countries with high real interest rates.
C) investors will move their money into countries with high nominal interest rates.
D) investors will move their money into countries with low inflation.

Question 65

Which one of these is an example of operational hedging?

A) Producing goods in a foreign country for sale in the U.S
B) Manufacturing goods in the country where they will be sold
C) Producing products in one location and distributing them internationally
D) Offsetting every spot trade with an opposing forward trade

Question 66

What would you expect to be the relationship between real rates of interest in Japan and the United States if inflation is expected to be 3% in Japan and 6% in the United States?

A) Japan's real interest rate should be 3% higher than in the United States.
B) Japan's real interest rate should be 3% lower than in the United States.
C) Japan's real interest rate should be half as high as in the United States.
D) Real interest rates should be equal in both countries.

Question 67

Assume you can exchange $1 for either C$1.03 or €0.74.How many Canadian dollars can be acquired with one euro?

A) C$0.7622
B) C$1.2900
C) C$1.3919
D) C$0.7184

Question 68

Today,you purchased 125,000 yen 6-months forward at JPY130 = USD1 per dollar.The spot rate today is JPY128 =USD1.If the yen appreciates by 10% over the next six months,how many dollars must you pay to acquire the 125,000 yen?

A) $0
B) $961.54
C) $976.56
D) $1,085.07

Question 69

You have the opportunity to invest in the United States at 6% or invest in an equally risky Australian investment that offers 20%.This is too good to be true! The current exchange rate is AUD1.65 = USD1.Which one of the following do you suspect about this 1-year investment?

A) Expected inflation is higher in the United States.
B) The 1-year forward exchange rate is AUD1.8679 = USD1.
C) Real interest rates are higher in the United States.
D) The Australian dollar is selling forward at an 8.48% premium relative to the dollar.

Question 70

If nominal interest rates are 5% in the United States and 8% in Mexico,you should convert the expected cash flows on your Mexican project into US dollars:

A) by assuming that the Mexican peso will appreciate by about 3% a year.
B) by assuming that the Mexican peso will depreciate by 8% a year.
C) by assuming that the dollar will appreciate by 5% a year.
D) by assuming that the Mexican peso will depreciate by about 3% a year.

Question 71

Buckingham plc,a British corporation,owes $1 million due in 2 months.How can Buckingham hedge the exchange risk?

A) Sell pounds in the spot market
B) Buy pounds in the forward market
C) Sell dollars in the spot market
D) Buy dollars in the forward market

Question 72

Consider the following spot exchange rates for the British pound,the Japanese yen,the euro and the Swedish krona: USD1.60 = GBP1,JPY105 = USD1,USD0.625 = EUR1,and SEK6.2 = USD1.If gold sells for $290 per ounce in the United States,which one of the following prices for 1 ounce of gold seems to violate the law of one price?

A) £181.25
B) ¥30,450
C) €405
D) kr1,798

Question 73

Which one of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?

A) The countries have equal nominal interest rates.
B) The spot rate is expected to change.
C) Expected inflation is less than the nominal rate.
D) Both currencies are selling at a premium relative to the other.

Question 74

According to the theory of purchasing power parity,exchange rates will adjust to offset differences in:

A) interest rates across countries.
B) forward rates across countries.
C) expected inflation rates across countries.
D) international Fisher rates.

Question 75

A firm must make a large future payment in a foreign currency and wants to hedge the associated exchange rate risk.Which one of the following identifies the cost of such a hedge?

A) difference between expected and current spot rates
B) difference between expected and current forward rates
C) difference between the forward premium and the forward discount
D) difference between the forward rate and the expected future spot rate

Question 76

What would you expect to occur if the expected rate of inflation in the United States is considerably lower than the expected inflation in Germany?

A) The expected spot rate of €/$ will decrease.
B) The current spot rate of €/$ will increase.
C) The dollar should appreciate against the euro.
D) The dollar should depreciate against the euro.

Question 77

An indirect exchange rate can be converted to a direct exchange rate by:

A) dividing the indirect rate by the number of U.S. dollars required to purchase one unit of the other currency.
B) dividing the indirect rate by 100.
C) multiplying the indirect rate by the spot rate.
D) taking the inverse of the indirect rate.

Question 78

Which one of the following is correct when foreign currency is bought in the forward market?

A) A fixed amount is paid when initiating the contract.
B) A fixed amount is paid at the end of the contract.
C) The amount to be paid is determined and paid at the end of the contract.
D) The amount to be paid is determined periodically and paid in installments during the contract.

Question 79

Which one of these is probably the best means of reducing or offsetting political risk?

A) Refusing any foreign government assistance in building the infrastructure required for your foreign operations
B) Borrowing money in the country in which you have foreign operations to fund those activities
C) Manufacturing a complete product in a foreign country using only resources from that country
D) Paying for all foreign operations with cash originating in the home country

Question 80

What is the expected spot rate for Japanese yen one year from now if the current spot rate is JPY106 = USD1 and the yen is selling 1-year forward at JPY114 = USD1?

A) JPY78.9 = USD1
B) JPY98.0 = USD1
C) JPY106.0 = USD1
D) JPY114.0 = USD1