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Exam 30: International Corporate Finance

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Question 1

Multiple Choice

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The forward rate market is dependent upon:

A) current forward rates exceeding current spot rates.
B) current spot rates exceeding current forward rates over time.
C) current spot rates equaling current forward rates on average over time.
D) forward rates equaling the actual future spot rates on average over time.
E) current spot rates equaling the actual future spot rates on average over time.

F) A) and B)
G) A) and C)

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Question 2

Multiple Choice

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When the US dollar is quoted as $1.923 to the pound, this quote is a(n) :

A) indirect rate.
B) direct rate.
C) cross rate.
D) triangular rate.
E) None of the above.

F) A) and B)
G) None of the above

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Question 3

Multiple Choice

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Suppose that the one-year forward rate on pounds is $1.75£.Given no arbitrage opportunities, this implies that traders expect:

Which of the following statements are correct? I. The usage of forward rates can help reduce the short-run exposure to exchange rate risk. II. Accounting translation gains are recorded on the income statement as other income. III. The long-run exchange rate risk faced by an international firm can be reduced if the firm borrows money in the foreign country where it has operations. IV. Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

Which one of the following statements is correct assuming that exchange rates are quoted as units of foreign currency per euro?

The price of one country's currency expressed in terms of another country's currency is:

The spot rate for the British pound currently is £.55 per $1.The one-year forward rate is £.58 per $1. A risk-free asset in the U.S.is currently earning 3 percent.If interest rate parity holds, approximately what rate can you earn on a one-year risk-free British security?

The current spot rate is C$1.362 and the one-year forward rate is C$1.371.The nominal risk-free rate in Canada is 6 percent while it is 3.5 percent in the U.S.Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

You want to invest in a riskless project in Sweden.The project has an initial cost of SKr2.1 million and is expected to produce cash inflows of SKr810,000 a year for 3 years.The project will be Worthless after the first 3 years.The expected inflation rate in Sweden is 2 percent while it is 5 Percent in the U.S.A risk-free security is paying 6 percent in the U.S.The current spot rate is $1 = SKr7.55.What is the net present value of this project in Swedish krona using the foreign currency Approach? Assume that the international Fisher effect applies.

Describe the foreign currency and home currency approaches to capital budgeting.Which is better? Which approach would you recommend a U.S.firm use? Justify your answer.

Assume that the pound is selling in the spot market for €1.10.Simultaneously, in the 3-month forward market the pound is selling for €1.12.Which one of the following statements correctly Describes this situation?

You just returned from some extensive traveling throughout the Americas. You started your trip with $10,000 in your pocket. You spent 1.4 million pesos while in Chile. You spent another 40,000 bolivars in Venezuela. Then on the way home, you spent 34,000 pesos in Mexico. How many dollars did you have left by the time you returned to the U.S. given the following exchange rates? $\begin{array} { | l | l | l | } \hline \text { Country } & \text { U.S. \$ Equivalent } & \text { Currency per U.S. \$ } \\\hline \text { Chile } & ? & 633.31 \\\hline \text { Venezuela } & 0882 & ? \\\hline \text { Mexico } & ? & 1919.39 \\\hline\end{array}$

The exchange rate on a spot trade is called the _____ exchange rate.

The changes in the relative economic conditions between countries are referred to as the:

Which one of following statements is not correct?

What is required for absolute purchasing power parity to hold? Do you think absolute PPP would hold in the case where a computer retailer in the U.S. sits directly across the border from a computer retailer in Canada? How about Houston, Texas, and Winnipeg, Manitoba?

What kind of trade involves agreeing today on an exchange rate for settlement in 90 days?

Suppose that the spot rate on the Canadian dollar is C$1.40.The risk-free nominal rate in the U.S.is 8 percent while it is only 4 percent in Canada.Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?

Assume that ¥107.62 equal $1.Also assume that 7.5415SKr equal $1.How many Japanese yen can you acquire in exchange for 6,200 Swedish krona?

Assume that $1 can buy you either ¥107 or £.55.If a TV in London costs £500, what will that identical TV cost in Tokyo if absolute purchasing power parity exists?