Exam 27: Managing International Risks

Purchasing power parity implies that any differences in inflation rates will be offset by a change in the exchange rate.

In the forward exchange market, currency is traded for future delivery.

XJ Company from the United States 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 percent and the discount rate in the $US is 12 percent. The spot rate is $US1.99/BP. Calculate the NPV in $US.

Briefly explain why a currency forecast is not necessarily required when a multinational firm estimates the cash flows from an international project?

The risk associated with unanticipated actions by the host country government or its courts towards a multinational firm is called

The strength of a currency is directly related to its interest rate and inflation expectations.

An organized market for currency for future delivery that conducts trades on an exchange is called a(n)

Briefly explain the term political risk.

The risk that an unfriendly government might expropriate a firm's assets is called political risk.

Briefly describe what happens in foreign exchange markets.

Important aspects of international finance include: I.that the basic principles of corporate finance do not apply; II.the process of foreign exchange valuation of different currencies; III.that the NPV principle cannot be applied to foreign operations

The terms transaction exposure and economic exposure are two names for the same foreign exchange risk.

If the peso is traded at a forward discount relative to the U.S. dollar, then the U.S. dollar is also trading at a discount relative to the peso.

The spot $US/euro exchange rate is $US1.3549/euro. The three-month forward rate is $US1.3595/euro. What is the euro's forward premium (or discount)on the U.S. dollar, expressed as an annual percentage?

Project financing is often designed to reduce a foreign government's incentive to expropriate capital investment.

The spot peso/$US exchange rate is peso 10.9892/$US. The three-month forward rate is peso 11.0408/$US. What is the peso's forward premium (or discount)on the U.S. dollar, expressed as an annual percentage?

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

The spot yen/US dollar exchange rate is 119.795 yen/$US. The three-month forward rate is 118.397 yen/$US. What is the yen's forward premium (or discount)on the dollar, expressed as an annual percentage?

If a Big Mac costs $C3 in Canada and $2.31 in the United States, according to purchasing power parity, what is the implied exchange rate in terms of $C/$US?

An Australian firm is evaluating a proposal to build a new plant in the United States. The expected cash flows in $US (in millions)are as follows: Year 0, −100; Year 1, 40; Year 2, 50; Year 3, 65. The discount rate in $A is 10 percent, while the discount rate in $US is 12 percent and the spot rate is $US0.85/$A. Calculate the NPV in $A.