Question 1

A(n)________ market is one where an investor can exchange any currency in any amount at the spot rate or forward rate and is free to purchase or sell any security in any amount in any country at their current market prices.

Accepted Answer

The description given best fits an internationally integrated capital market where investors can freely exchange currencies and purchase/sell securities in any country at current market prices. A financial market usually refers to a broader category encompassing different types of markets including capital markets. A limit order market refers to a market where investors can only buy or sell securities at a specific price limit. An over-the-counter market refers to a decentralized market where securities are traded directly between two parties without the involvement of an exchange.

Question 2

With internationally integrated capital markets,the value of an investment depends on the currency used in the analysis.

Accepted Answer

The value of an investment in internationally integrated capital markets should be independent of the currency used in the analysis because the underlying economic value of the investment does not change with the currency of measurement. Exchange rates adjust to reflect differences in inflation and interest rates between countries, ensuring that the value of an investment is consistent across currencies when markets are efficient.

Question 3

A Canadian exporter will receive $1.5 million USD in September,and decides to buy a put option on the USD for September delivery.Suppose a put option on the USD with a September expiration and a strike price of 1.275 USD/CADtrades for 0.0115CAD per put on 1 USD.If,by the September expiration date,the USD has appreciated to 1.250 USD/CAD,how much did the firm lose (in CAD)from hedging with the option,compared to remaining unhedged?

Accepted Answer

D) Since the option will not be exercised, the loss compared to remaining unhedged is just the cost of the option = .0115 × $1,500,000 = $17,250

Question 4

A Canadian exporter will receive $1 million USD in September,and decides to buy a put option on the USD for September delivery.Suppose a put option on the USD with a September expiration and a strike price of 1.225 USD/CADtrades for 0.0225 CAD per put on 1 USD.If,by the September expiration date,the USD has depreciated to 1.275 USD/CAD,how much did the firm gain (in CAD)from hedging with the option,compared to remaining unhedged?

Accepted Answer

C) Revenue if unhedged = $1 million/1.275 = $784,314 CAD
Revenue with option exercise = $1 million/1.225 = $816,327 CAD
Cost of the option = 0.0225 × $1 million = $22,500 CAD
Net gain = $816,327 - $784,314 - $22,500 = $9,513

Question 5

What is the importer-exporter dilemma?

Accepted Answer

The answer of What is the importer-exporter dilemma?...

Question 6

Why do firms prefer forward contracts rather than the cash-can-carry strategy?

Accepted Answer

The answer of Why do firms prefer forward contracts rather...

Question 7

A Canadian firm is planning to make an investment in Japan.The firm estimates that the project will generate a single cash flow of 10 million JPY after one year.If the one year forward exchange rate is 105 JPY/CAD,and the Canadian cost of capital is 7.5%,what is the PV of the project cash flow?

Accepted Answer

D) Present Value = (10 million / 105)/1.075 = $88,594

Question 8

A Canadian exporter will receive $10 million USD in September,and decides to buy a put option on the USD for September delivery.Suppose a put option on the USD with a September expiration and a strike price of 1.25 USD/CADtrades for 0.0115CAD per put on 1 USD.If,by the September expiration date,the USD has depreciated to 1.26 USD/CAD,how much did the firm lose (in CAD)from hedging with the option,compared to remaining unhedged?

Accepted Answer

A) Revenue if unhedged = $10 million/1.26 = $7,936,508 CAD
Revenue with option exercise = $10 million/1.25 = $8,000,000 CAD
Cost of the option = 0.0115 × $10 million = $115,000 CAD
Net loss = $8,000,000 - $7,936,508 - $115,000 = -$51,508

Question 9

Consider the following equation: S ×  = 
The term in this equation is

Accepted Answer

This equation is related to the interest rate parity condition, which relates the spot exchange rate, the forward exchange rate, and the interest rates in two different countries. Based on this equation, we can solve for the forward exchange rate, which is the unknown term. Therefore, the best choice is E, the forward exchange rate. The risk-free rate and the cost of capital are not directly related to this equation.

Question 10

A currency forward contract passes exchange rate risk from a firm to the bank that has written the forward contract.Why is the bank willing to bear this risk?

Accepted Answer

The answer of A currency forward contract passes exchange rate...

Question 11

A Canadian firm is planning to make an investment in Europe.The firm estimates that the project will generate a single cash flow of 200,000 euros after one year.If the one year forward exchange rate is 1.34 CAD/EUR,and the Canadian cost of capital is 6%,what is the PV of the project cash flow?

Accepted Answer

A) Present Value = Cash Flows × Forward Rate /(1 + cost of capital)
Present Value = 200,000 × 1.34/(1 + 0.06) = $252,830

Question 12

What is covered interest parity?

Accepted Answer

The answer of What is covered interest parity?...

Question 13

Consider the following equation: S ×  = 
The term in this equation is

Accepted Answer

The answer of Consider the following equation: S × ...

Question 14

Use the information for the question(s) below.
You are a Canadian investor who is trying to calculate the present value (PV) of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = 1.8839 CAD/GBP and the forward rate is F₁ = 1.8862 CAD/GBP. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate GBP discount rate is 5.24%.
-The present value (PV)of the £5 million cash inflow computed by first discounting the pounds and then converting into dollars is closest to:

Accepted Answer

B) PV£ = 11ea4813_570a_428a_a73a_3f440045a2c5_TB1618_11 = 4,751,045.23 GBP
PV$ = PV£ × S = 4,751,045.23 GBP × 1.8839 CAD/GBP = $8,950,494.10

Question 15

What are the three factors that drive the supply and demand for each currency?

Accepted Answer

The answer of What are the three factors that drive...

Question 16

Consider the following equation:
S ×  = 
The term F in this equation is

Accepted Answer

The term F in this equation represents the forward exchange rate, which is the exchange rate agreed upon now for a transaction that will happen at a specific future date. The equation uses the forward exchange rate to calculate the amount of foreign currency required for the transaction.

Question 17

Why might firms prefer hedging with options rather than forward contracts?

Accepted Answer

The answer of Why might firms prefer hedging with options...

Question 18

Consider the following equation: S ×  = 
The term S in this equation is

Accepted Answer

S is the current spot exchange rate, which is the exchange rate between two currencies at the current time.

Question 19

What is a cash-and-carry strategy?

Accepted Answer

The answer of What is a cash-and-carry strategy?...

Question 20

A Canadian firm is planning to make an investment in the UK.The firm estimates that the project will generate a single cash flow of 1 million GBP after one year.If the one year forward exchange rate is 2.12 CAD/GBP,and the Canadian cost of capital is 5.4%,what is the PV of the project cash flow?

Accepted Answer

B) Present Value = 1 million × 2.12/1.054 = 2.01 million

Quiz 22: International Corporate Finance

A(n) ________ market is one where an investor can exchange any currency in any amount at the spot rate or forward rate and is free to purchase or sell any security in any amount in any country at their current market prices.