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Exam 21: International Corporate Finance

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Question 51

Multiple Choice

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Long-run exposure to exchange rate risk relates to:

A) daily variations in exchange rates.
B) variances between spot and future rates.
C) unexpected changes in relative economic conditions.
D) differences between future spot rates and related forward rates.
E) accounting gains and losses created by fluctuating exchange rates.

F) A) and E)
G) B) and D)

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Question 52

Multiple Choice

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Today, you can exchange $1 for £0.6211. Last week, £1 was worth $1.6104. How much profit or loss would you now have if you had converted £100 into dollars last week?

A) loss of ₤1.57
B) loss of ₤0.39
C) loss of ₤0.07
D) profit of ₤0.02
E) profit of ₤1.59

F) C) and D)
G) B) and D)

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Question 53

Multiple Choice

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You are expecting a payment of 480,000PLN three years from now. The risk-free rate of return is 3 percent in the U.S. and 4 percent in Poland. The inflation rate is 2.5percent in the U.S. and 3 percent in Poland. Currently, you can buy 277PLN for 100USD. How much will the payment three years from now be worth in U.S. dollars?

On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following Monday morning. Which one of the following is most likely the interest rate that will be charged on this loan?

Assume the spot rate for the British pound currently is £0.6211 per $1. Also assume the one-year forward rate is £0.6347 per $1. A risk-free asset in the U.S. is currently earning 3.4 percent. If interest rate parity holds, what rate can you earn on a one-year risk-free British security?

George and Pat just made an agreement to exchange currencies based on today's exchange rate. Settlement will occur tomorrow. Which one of the following is the exchange rate that applies to this agreement?

You want to invest in a riskless project in Sweden. The project has an initial cost of SKr4.1million and is expected to produce cash inflows of SKr1.75 million a year for three years. The project will be worthless after three years. The expected inflation rate in Sweden is 3.2 percent while it is 4.3 percent in the U.S. A risk-free security is paying 5.5 percent in the U.S. The current spot rate is $1 = SKr7.7274. What is the net present value of this project in Swedish kroner? Assume the international Fisher effect applies.

Where does most of the trading in Eurobonds occur?

Which of the following conditions are required for absolute purchasing power parity to exist? I. goods must be identical II. goods must have equal economic value III. transaction costs must be zero IV. there can be no barriers to trade

International bonds issued in a single country and denominated in that country's currency are called:

Using currencies A, B, and C construct an example in which triangle arbitrage exists and then show how to exploit it.

The camera you want to buy costs $289 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing power parity exists.

Lakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2.7 million in year 1, €3 million in year 2, and €2.8 million in year 3. The current spot exchange rate is $1.3/€. The current risk-free rate in the United States is 5 percent, compared to that in Europe of 3.5 percent. The appropriate discount rate for the project is estimated to be 18 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €6.5 million. What is the NPV of the project?

Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £0.62. The traders agree to settle this trade within two business day. What is this exchange called?

Based on the information below, what is the cross-rate for Australian dollars in terms of Swiss francs?

You are analyzing a project with an initial cost of £48,000. The project is expected to return £11,000 the first year, £36,000 the second year and £38,000 the third and final year. There is no salvage value. The current spot rate is £0.6211. The nominal return relevant to the project is 12 percent in the U.S. The nominal risk-free rate in the U.S. is 4 percent while it is 5 percent in the U.K. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

Which one of the following names matches the country where the bond is issued?

A new coat costs 3,900 Russian rubles. How much will the identical coat cost in Euros if absolute purchasing power parity exists and the following exchange rates apply?

The interest rate parity approximation formula is: