Question 1

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%

Accepted Answer

i = .025 + .045 + (.025)(.045) = .0711 or 7.11%

Question 2

Basic hedging techniques include all of the following except

Accepted Answer

There is no such thing as a "primary market hedge." Money market and forward market hedging techniques are both basic and commonly used in risk management.

Question 3

If the annual nominal interest rate on 10-year U.S.Government Treasury bonds is 7.35 percent and the annual nominal interest rate on 10-year Japanese bonds is 5.75 percent, 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?

Accepted Answer

S₁₀/$0.00959 = (1.0735)¹⁰/(1.0575)¹⁰
S₁₀ = $0.01114

Question 4

If the annual nominal interest rate on 5-year U.S.Government Treasury bonds is 7 percent 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?

Accepted Answer

S₅/$0.739 = (1.07)⁵/(1.0775)⁵ = 1.4026/1.4524
S₅ = $0.714

Question 5

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?

Accepted Answer

Old cost = 965,600/142 = $6,800
New cost = 965,600/171.8 = $5,620
Gain = $6,800 - $5,620 = $1,180

Question 6

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?

Accepted Answer

11ea4079_515e_d008_87fe_6924a820c498_TB2041_00

Question 7

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

Accepted Answer

iR = 0.04 - 0.025 - 0.025iR
iR = 0.0146 or 1.46%

Question 8

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

Accepted Answer

S₁/$1.497 = 1.035/1.0525
S₁ = $1.472

Question 9

The 6 month interest rate on 180 day U.S.Treasury Bills is 7.5 percent.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.

Accepted Answer

$0.46/$0.452 = 1.075/1 + iWG
iWG = 5.63%

Question 10

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

Accepted Answer

This theory is known as interest rate parity. Covered interest arbitrage is a trading strategy that tries to take advantage of deviations from interest rate parity. Inflation and hedging are not directly related to this theory.

Question 11

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?

Accepted Answer

Sell dollars, buy Australian dollars and invest in Australian securities at 8.5%. Sell Australian dollars forward at 2% discount. Trader earns 8.5% - 2% = 6.5% compared to 6% U.S. rate.

Question 12

If the 182-day interest rate is 1.75 percent in the U.S.and 2.625 percent 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?

Accepted Answer

F/$0.583 = 1.0175/1.02625
F = $0.578

Question 13

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.

Accepted Answer

($1.5188)/($1.5525) = (1.0764)/1 + iUK
iUK = 10.03%

Question 14

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.

Accepted Answer

When the exchange rate on the currency of the country in which the foreign subsidiary operates loses value, the value of the subsidiary's assets (in the parent company's currency) will decrease while its liabilities (in the local currency) will remain the same, resulting in a greater amount of liabilities than assets. This means that the subsidiary will have currency exchange losses.

Question 15

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

Accepted Answer

The best way for firms to lower exchange rate risk exposure is by hedging. Firms can use financial instruments like forwards, futures, options, and swaps to hedge against unfavorable exchange rate movements. This helps to protect the company's profits and cash flows from the negative impact of currency fluctuations. Limiting transaction exposure and using the PPP to make exchange rate forecasts are helpful strategies, but they do not provide the same level of protection as hedging. Purchasing LIBORs is not a relevant strategy for managing exchange rate risk.

Question 16

If U.S.prices are expected to rise by 3 percent over the coming year and prices in Switzerland are expected to rise by 7 percent 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

Accepted Answer

S₁/$0.168 = 1.03/1.07
S₁ = $0.1617

Question 17

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

Accepted Answer

iR = .0325 - .0275 - iR(.0275)
iR = .00487 or 0.487%

Question 18

If the annual nominal interest rate on 5-year U.S.Government Treasury bonds is 7 percent, and the annual nominal interest rate on 5-year Canadian bonds is 5.5 percent, 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?

Accepted Answer

S₅/$0.587 = (1.07)⁵)/(1.055)⁵ = 1.4026/1.307
S₅ = $0.6299

Question 19

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

Accepted Answer

S₁/$0.587 = 1.04/1.075
S₁ = $0.568

Question 20

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 of2.86%, then the 180 day forward rate is:

Accepted Answer

2.86 = $\frac { ( x - \$ 0.559 ) } { \$ 0.559 }$ (12/6)(100%)
x = $0.567

Quiz 22: International Financial Management