Question 1

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 104/1?

Accepted Answer

60,000¥ × ($/104¥) = $577

Question 2

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

Accepted Answer

The main purpose of contracting to purchase foreign currency in the forward market is to lock into a future currency price now. By doing so, companies can hedge against potential currency fluctuations and secure a known exchange rate for a transaction that will occur in the future. This can help to minimize risk and uncertainty in international trade and business operations.

Question 3

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

Accepted Answer

To calculate the NPV of overseas investments, one needs to convert the foreign cash flows into domestic currency and then discount them using the domestic opportunity cost of capital. This is because the investors' expected return should be evaluated in terms of their domestic currency, and the cost of capital reflects the opportunity cost of investing domestically. Adjusting the cost of capital by the forward exchange rate (choice A) or using the domestic discount rate to discount foreign cash flows (choice C) is incorrect as it doesn't consider the impact of currency exchange rates on cash flows. Using the foreign cost of capital for discounting (choice D) is improper because the investors' expected return should be evaluated in terms of their domestic currency.

Question 4

Suppose that:  What rate do you think a Japanese bank would quote for buying or selling Swiss francs today?

Accepted Answer

Cross-rate = 123.380 yen/1.5231 franc = 81.01 yen/franc

Question 5

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

Accepted Answer

According to the international Fisher effect, if a country's nominal interest rates increase, it suggests that inflation rates are expected to be higher in that country compared to others. This leads to an expectation that the country's currency will depreciate in the future as higher inflation reduces the currency's purchasing power.

Question 6

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

Accepted Answer

The answer of If the interest rate in one country...

Question 7

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

Accepted Answer

Buying currency in the forward market allows for locking in an exchange rate for a future transaction, thereby providing protection against potential currency fluctuations. This is a common hedging method used by businesses and investors to manage currency risk.

Question 8

Suppose the interest rate in Canada is 4% while it is 3% in the U.S. The indirect spot rate is C$1.02. What is the indirect 1-year forward rate?

Accepted Answer

1-year forward rate = C$1.02 × (1.04/1.03) = C$1.0299

Question 9

If the exchange rate of euros/U.S. dollars is 0.74/1, then:

Accepted Answer

The exchange rate of 0.74/1 means that 0.74 euros are equivalent to 1 U.S. dollar, so each euro is worth approximately 1/0.74 = $1.35.

Question 10

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

Accepted Answer

If purchasing power parity is holding, it means that the exchange rate should adjust to reflect the difference in inflation rates between countries. Therefore, if a country has high inflation, its currency will depreciate to ensure that its goods remain competitive in the international market.

Question 11

Country A has a higher inflation rate than Country B. Given this, Country A will have the:

Accepted Answer

Higher inflation rate typically leads to the weakening of the currency as it reduces the purchasing power of that currency.

Question 12

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

Accepted Answer

The international Fisher effect suggests that the difference between nominal interest rates in two countries is equal to the difference between their expected inflation rates. Therefore, if this holds true, real interest rates in all countries should be equal, as inflation rates would be the only determinant of nominal interest rate discrepancies. However, in reality, other factors such as risk and market conditions can influence nominal interest rates, and thus, real interest rates may not be equal across all countries.

Question 13

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

Accepted Answer

Investors seek higher returns on their investments, and therefore, they will shift their money towards countries with high real interest rates. This is a basic principle of international finance known as interest rate parity.

Question 14

Suppose that:  What arbitrage gains can be achieved by a U.S. investor if the bank quotes a rate of 75 yen per Swiss franc?

Accepted Answer

Suppose that the exchange rate were ¥75/Swiss franc. Then an investor could:(1) Convert $1 into ¥123.38(2) Convert the ¥123.38 into 123.38/75 = 1.645 Swiss francs(3) Convert the Swiss francs into 1.645/1.5231 = $1.080The investor therefore immediately and risklessly converts $1 into $1.080 for an 8% gain.

Question 15

A sandwich costs $6.79 in the U.S. The exchange rate is $C0.98 per U.S. dollar. What does the identical sandwich have to cost in Canada for purchasing power parity to exist?

Accepted Answer

$6.79 × (C$0.98/$1) = C$6.65

Question 16

If the direct exchange rate between U.S. dollars and pounds sterling is 1.50/1, how much should you be willing to pay to receive 350 pounds?

Accepted Answer

₤350 × ($1.50/₤1) = $525.00

Question 17

Suppose the spot rate for the Canadian dollar is 1.034, the 3-month forward rate is 1.036, and the 1-year forward rate is 1.039. If no other information is available, what will be your guess about the spot rate in 1 year?

Accepted Answer

The forward rates are predicting an increase in the value of the Canadian dollar over time. Therefore, it is likely that the spot rate in 1 year will be higher than the current spot rate of 1.034. The 1-year forward rate of 1.039 suggests the highest expected spot rate, so C is the best choice.

Question 18

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

Accepted Answer

The nominal interest rate includes inflation, while the real interest rate adjusts for inflation. The equation for nominal interest rate is: nominal interest rate = real interest rate + inflation rate.

Question 19

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

Accepted Answer

An indirect quote is the rate of one unit of domestic currency expressed in terms of the foreign currency.

Question 20

High inflation rates are usually associated with:

Accepted Answer

High inflation rates typically lead to high nominal interest rates because lenders demand compensation for the eroding value of money over time.

Quiz 22: International Financial Management