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Exam 27: Managing International Risks

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Question 21

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Big Mac exchange rate provides official exchange rate quotes for different currencies.

A) True
B) False

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Question 22

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XJ Company from the USA is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, -50; Year 1, 25; Year 2, 35; Year 3, 40. The discount rate in BP is 14% and the discount rate in the US$ is 12%. The spot rate is US$1.99/BP. Calculate the NPV of the project in BP:

A) +28.69
B) +25.86
C) +42.67
D) None of the above

E) C) and D)
F) All of the above

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Question 23

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The country with the highest score is:

Briefly explain the expectations theory of forward exchange rates.

Briefly explain why no currency forecast is needed when estimating the cash flows from an international project?

For a project's cost of capital measured in Swiss francs, we use Swiss interest rates and beta with respect to Swiss market.

The spot US$/Euro exchange rate is US$1.3549/US$. The 3-month forward rate is US$1.3595/Euro. What is Euro's forward premium (or discount) on the US dollar, expressed as annual rate? (approximately)

Assume that international capital markets are competitive and that the real interest rates are the same. The one-year interest rate is approximately 9% in the USA and 5% in Switzerland. If the expected inflation rate is 6% in the USA, what is the expected inflation rate in Switzerland? (Approximately)

The spot rate = US$0.8543/A$; the one year forward rate = US$0.8475/A$. A US exporter denominates its exports to Australia in A$ and expects to receive A$600,000 in one year. What will the value of these exports in one year in US$ given that the firm executes a forward hedge? (Ignore transaction costs)

The spot BP/$ exchange rate is 0.5025/$ and the one-year forward rate is BP 0.5048/$. If the annual interest rate on dollar CDs is 6%, what would you expect the annual interest to be on BP CDs?

Spot rate = BP 0.5024/US$; 3-month forward rate = BP 0.5040/US$. TE Company is expecting a payment of BP 100 million in 3 months. If the firm hedges this transaction in forward market what is the US$ amount it will receive in three months? (Ignore transaction costs)

The spot exchange rate for British pounds is 0.5025 (BP/US$) . The 180-day risk-free rates in the US and Britain are 3% and 2.75%, respectively. What is the forward exchange rate in BP/US$? (Assume that the interest rates are for 180-days.)

A currency forward contract is described by:

The most important aspect of international finance is: I. The basic principles of corporate finance do not apply II. The process of foreign exchange valuation of different currencies III. The NPV principle cannot be applied to foreign operations

Briefly explain the concept of purchasing power parity.

The expectations theory of forward rates implies that:

Briefly explain the term economic exposure.

In general, the countries with the highest interest rates also had the highest inflation rates.

An organized market for currency for future delivery that is traded on an exchange is called:

Briefly explain the different types of currency markets.