Question 1

For absolute purchasing power parity to exist, the products must be identical.

Accepted Answer

Absolute purchasing power parity requires that identical goods in different countries have the same price when expressed in a common currency, necessitating the products to be identical to ensure a valid comparison.

Question 2

According to the relative purchasing power parity theory, high inﬂation in country A and low
inﬂation in country B will cause the value of country A's currency to appreciate relative to that of
country

Accepted Answer

According to the relative purchasing power parity theory, countries with high inflation rates are expected to experience depreciation in their currencies, not appreciation. Therefore, the value of country A's currency is expected to depreciate relative to that of country B in this scenario.

Question 3

Covered interest arbitrage involves an exchange of currency A for currency B at the spot rate.

Accepted Answer

Covered interest arbitrage involves borrowing currency A at a lower interest rate, converting it to currency B and investing it at a higher interest rate, while simultaneously entering into a forward contract to sell currency B and buy currency A at a rate that covers the cost of borrowing and includes the interest rate differential. The initial exchange of currency A for currency B at the spot rate is necessary to execute this strategy.

Question 4

Assume that the inﬂation rate in Canada is 3 percent over the next four years while the rate in the
U.S. is 4 percent for the same time period. Given this, the U.S. dollar will appreciate relative to the
Canadian dollar.

Accepted Answer

Inflation differential suggests that the currency with higher inflation rate will depreciate relative to the currency with lower inflation rate. Therefore, the Canadian dollar will appreciate relative to the U.S. dollar, not the other way around.

Question 5

For absolute purchasing power parity to exist, transaction costs must be equal to zero.

Accepted Answer

Absolute purchasing power parity assumes that after exchange rate adjustments, identical goods in different countries have the same price. For this to hold perfectly, there can be no transaction costs, such as shipping, tariffs, or taxes, otherwise, these costs would cause price differences.

Question 6

Covered interest arbitrage involves a forward contract to exchange currency B for currency

Accepted Answer

Covered interest arbitrage involves the use of a forward contract to exchange currency B for currency A, taking advantage of the interest rate differential between the two currencies.

Question 7

For absolute purchasing power parity to exist, the goods must be identical.

Accepted Answer

Absolute purchasing power parity (PPP) is a theory of exchange rate determination which states that the exchange rate between two currencies is equal to the ratio of the price levels of two countries. This assumes that the goods being compared are identical and can be freely traded without barriers or transportation costs. Otherwise, differences in quality or other factors may affect the prices and violate the principle of PPP.

Question 8

For absolute purchasing power parity to exist, no trade barriers can exist

Accepted Answer

Absolute purchasing power parity assumes that the price of goods and services should be the same in different countries when expressed in a common currency, which requires the absence of trade barriers, transportation costs, and differences in product quality to be fully achievable.

Question 9

International Pooch is headquartered in Canada, but is considering the construction of a plant in
Japan. If they use the home currency approach to calculating the NPV, they will:[LINE][LINE]1)
Convert all dollar cash ﬂows into yen;[LINE]2) Discount the cash ﬂows at the ﬁrm's required return
for Japanese denominated cash ﬂows;[LINE]3) Compute the NPV in yen.

Accepted Answer

The home currency approach involves converting all cash flows into the home currency, which in this case would be Canadian dollars, and then discounting at the firm's required return for Canadian denominated cash flows. Therefore, this approach would not involve converting cash flows into yen and computing the NPV in yen.

Question 10

International Pooch is headquartered in Canada, but is considering the construction of a plant in
Japan. If they use the home currency approach to calculating the NPV, they will[LINE][LINE]1)
Convert all yen cash ﬂows into dollars;[LINE]2) Discount the cash ﬂows at the ﬁrm's required return;
[LINE]3) Compute the NPV in dollars.

Accepted Answer

Using the home currency approach, all cash flows from different currencies are converted to the company's home currency and then discounted at the required return rate to calculate the NPV. Therefore, all yen cash flows will be converted to Canadian dollars, and the NPV will be calculated in Canadian dollars.

Question 11

For absolute purchasing power parity to exist, goods must have equal economic values.

Accepted Answer

Absolute purchasing power parity states that the prices of identical goods in different countries should be equal when expressed in a common currency. Therefore, goods must have equal economic values for absolute PPP to exist.

Question 12

For absolute purchasing power parity to exist, forward exchange rates must equal the spot rates

Accepted Answer

Absolute purchasing power parity focuses on the idea that identical goods in different countries should have identical prices when expressed in a common currency, which is independent of the relationship between forward and spot exchange rates.

Question 13

For absolute purchasing power parity to exist, transaction costs must be zero.

Accepted Answer

Absolute purchasing power parity assumes that the cost of a basket of goods should be the same in two different countries when measured in a common currency, which requires ignoring transaction costs such as shipping, tariffs, and taxes to hold true.

Question 14

International Pooch is headquartered in Canada, but is considering the construction of a plant in
Japan. If they use the foreign currency approach to calculating the NPV, they will:[LINE][LINE]1)
Convert all yen cash ﬂows into dollars;[LINE]2) Discount the dollar cash ﬂows at the ﬁrm's required
return for dollar denominated cash ﬂows;[LINE]3) Compute the NPV in yen.

Accepted Answer

If they use the foreign currency approach, they should convert all cash flows into the foreign currency (yen) and discount them at the required return for yen-denominated cash flows. The NPV should then be computed in yen.

Question 15

International Pooch is headquartered in Canada, but is considering the construction of a plant in
Japan. If they use the foreign currency approach to calculating the NPV, they will:[LINE][LINE]1)
Discount yen cash ﬂows at the required return on yen investments;[LINE]2) Compute the NPV in
yen;[LINE]3) Convert the yen NPV to a dollar NPV.

Accepted Answer

The foreign currency approach involves discounting cash flows in the foreign currency at the required return on investments in that currency, computing the NPV in that currency, and then converting the NPV to the domestic currency. Therefore, the given statement is true.

Question 16

If absolute purchasing power parity is said to hold for some good, then it must be true that there are
no transactions costs.

Accepted Answer

Absolute purchasing power parity assumes that the price of a good in one country is equal to the price of the same good in another country when exchange rates are taken into account. This assumes that there are no transaction costs or barriers such as tariffs, transportation costs, or taxes that could affect the price of the good in different countries. Therefore, if absolute purchasing power parity is said to hold for a good, it implies that there are no transaction costs.

Question 17

Assume that the inﬂation rate in Canada is 3 percent over the next four years while the rate in the
U.S. is 4 percent for the same time period. Given this, the U.S. dollar will depreciate relative to the
Canadian dollar.

Accepted Answer

According to the purchasing power parity theory, a country with a higher inflation rate will have its currency depreciate relative to a country with a lower inflation rate. Therefore, the US dollar will depreciate relative to the Canadian dollar due to the higher inflation rate in the US compared to Canada.

Question 18

The passage of the North American Free Trade Agreement (NAFTA) in 1994 sharply reduced trade
barriers between Canada and Mexico. All else equal, the absolute PPP theory predicts that the
exchange rate between the dollar and the peso will adjust to make the cost of goods in Mexico
cheaper than the cost of identical goods in Canada.

Accepted Answer

Absolute Purchasing Power Parity (PPP) theory predicts that exchange rates will adjust to equalize the price of identical goods and services between two countries, not to make goods cheaper in one country compared to another.

Question 19

If absolute purchasing power parity is said to hold for some good, then it must be true that there are
no signiﬁcant barriers to trading the good.

Accepted Answer

Absolute purchasing power parity states that the price of a good should be the same in two different countries once it is converted to a common currency. This assumes that there are no significant barriers to trading the good, such as tariffs or transportation costs, which would affect its price in each country.

Question 20

If absolute purchasing power parity is said to hold for some good, then it must be true that the good
in question is standardized, and virtually identical in the markets being considered.

Accepted Answer

Absolute purchasing power parity assumes that a good should cost the same in two different countries when prices are expressed in a common currency, which implies that the good must be standardized and virtually identical across markets to ensure a valid comparison.

Quiz 21: International Corporate Finance

For absolute purchasing power parity to exist, the products must be identical.

According to the relative purchasing power parity theory, high inﬂation in country A and low inﬂation in country B will cause the value of country A's currency to appreciate relative to that of country

Covered interest arbitrage involves an exchange of currency A for currency B at the spot rate.

Assume that the inﬂation rate in Canada is 3 percent over the next four years while the rate in the U.S. is 4 percent for the same time period. Given this, the U.S. dollar will appreciate relative to the Canadian dollar.

For absolute purchasing power parity to exist, transaction costs must be equal to zero.

Covered interest arbitrage involves a forward contract to exchange currency B for currency

For absolute purchasing power parity to exist, the goods must be identical.

For absolute purchasing power parity to exist, no trade barriers can exist

For absolute purchasing power parity to exist, goods must have equal economic values.

For absolute purchasing power parity to exist, forward exchange rates must equal the spot rates

For absolute purchasing power parity to exist, transaction costs must be zero.

If absolute purchasing power parity is said to hold for some good, then it must be true that there are no transactions costs.

Assume that the inﬂation rate in Canada is 3 percent over the next four years while the rate in the U.S. is 4 percent for the same time period. Given this, the U.S. dollar will depreciate relative to the Canadian dollar.

If absolute purchasing power parity is said to hold for some good, then it must be true that there are no signiﬁcant barriers to trading the good.

If absolute purchasing power parity is said to hold for some good, then it must be true that the good in question is standardized, and virtually identical in the markets being considered.