Question 1

Briefly explain the concept of purchasing power parity.

Accepted Answer

Purchasing power parity (PPP)is based on

Question 2

If a government were to seize the assets of a multinational company and not provide adequate compensation to its owners, the government would be following which practice?

Accepted Answer

A) WTO resolution 
B) Expropriation 
C) Repatriation 
D) Terrorism 
A) WTO resolution 
B) Expropriation 
C) Repatriation 
D) Terrorism

Question 3

The country with the most favorable political risk score is

Accepted Answer

A) the United States. 
B) France. 
C) Norway. 
D) the United Kingdom. 
A) the United States. 
B) France. 
C) Norway. 
D) the United Kingdom.

Question 4

The expectations theory of exchange implies that

Accepted Answer

A) the forward rate is determined by the central bank's expectations. 
B) on average, the forward rate equals the future spot rate. 
C) the forward rate is determined by expectations of future spot interest rates. 
D) the forward rate usually equals the future spot rate of exchange. 
A) the forward rate is determined by the central bank's expectations. 
B) on average, the forward rate equals the future spot rate. 
C) the forward rate is determined by expectations of future spot interest rates. 
D) the forward rate usually equals the future spot rate of exchange.

Question 5

The dollar interest rate is 6 percent, and the Swiss franc interest rate is 4 percent. If the required rate of return for a project in Switzerland is 15 percent, calculate the required rate of return in the United States for a similar project.

Accepted Answer

A) 17.2 percent 
B) 12.8 percent 
C) 15 percent 
D) 8.5 percent 
A) 17.2 percent 
B) 12.8 percent 
C) 15 percent 
D) 8.5 percent

Question 6

The spot yen/$US exchange rate is Yen119.795/$US, and the one-year forward rate is yen114.571/$US. If the annual interest rate on dollar CDs is 6 percent, what annual interest rate would you expect on Yen CDs?

Accepted Answer

A) 1.38 percent 
B) 5.32 percent 
C) 8.06 percent 
D) 17.14 percent 
A) 1.38 percent 
B) 5.32 percent 
C) 8.06 percent 
D) 17.14 percent

Question 7

Briefly explain the concept of interest rate parity.

Accepted Answer

Interest rate parity provides the relati

Question 8

Which of the following statement(s)about currency futures market is (are)true?
I.Futures contracts are highly standardized.
II.Futures contracts are made-to-measure contracts.
III.Futures contracts are for specified amounts and for a limited choice of delivery dates.

Accepted Answer

A) I only 
B) II only 
C) I and III only 
D) I, II, and III 
A) I only 
B) II only 
C) I and III only 
D) I, II, and III

Question 9

The beta of a firm's equity in Switzerland is 1.25. The risk-free rate is 4 percent and market risk premium is 8.4 percent. Calculate the required rate of return for the equity of this firm.

Accepted Answer

A) 10.5 percent 
B) 8.4 percent 
C) 14.5 percent 
D) 9.5 percent 
A) 10.5 percent 
B) 8.4 percent 
C) 14.5 percent 
D) 9.5 percent

Question 10

Currency risk exposure can be categorized as

Accepted Answer

A) transaction exposure. 
B) economic exposure. 
C) Neither of these options are correct. 
D) Both transaction and economic exposure are correct. 
A) transaction exposure. 
B) economic exposure. 
C) Neither of these options are correct. 
D) Both transaction and economic exposure are correct.

Question 11

If the direct quotation for the euro is $1.3565/euro, what is the size of the indirect quotation?

Accepted Answer

A) 0.2415 
B) 0.6435 
C) 0.7372 
D) 0.3565 
A) 0.2415 
B) 0.6435 
C) 0.7372 
D) 0.3565

Question 12

The phrase "stronger currency" implies a forward premium. Given a euro-U.S. dollar exchange rate of $1.45/euro, which of the following values for the forward rate shows the strongest dollar?

Accepted Answer

A) 1.55 
B) 1.65 
C) 1.35 
D) 1.25 
A) 1.55 
B) 1.65 
C) 1.35 
D) 1.25

Question 13

If the price of a Big Mac in the United States is $2.56, and in Japan it is yen 300, then the implied exchange rate is yen 117.19/$US.

Accepted Answer

A) True 
 B)False

Question 14

Political risk is can be thought of as

Accepted Answer

A) unanticipated changes in exchange rates. 
B) unanticipated actions by the host government affecting the cash flows of a project. 
C) unanticipated actions by the World Bank affecting the cash flows of a project. 
D) All of these options are correct. 
A) unanticipated changes in exchange rates. 
B) unanticipated actions by the host government affecting the cash flows of a project. 
C) unanticipated actions by the World Bank affecting the cash flows of a project. 
D) All of these options are correct.

Question 15

A quotation in the form yen 89.33/$US is called

Accepted Answer

A) an indirect quote in the United States. 
B) a direct quote in the United States. 
C) a cross-rate in Japan. 
D) None of these options are correct. 
A) an indirect quote in the United States. 
B) a direct quote in the United States. 
C) a cross-rate in Japan. 
D) None of these options are correct.

Question 16

The true cost of hedging foreign currency risk is the difference between the forward rate and today's spot rate.

Accepted Answer

A) True 
 B)False

Question 17

Assume that international capital markets are competitive and that global real interest rates are the same. The one-year interest rate is 9 percent in the United States and 5 percent in Switzerland. If the expected inflation rate is 6 percent in the United States, what is the expected inflation rate in Switzerland?

Accepted Answer

A) 5 percent 
B) 4 percent 
C) 3 percent 
D) 2 percent 
A) 5 percent 
B) 4 percent 
C) 3 percent 
D) 2 percent

Question 18

The spot exchange rate for British pounds is 0.5025 (GBP/USD). The one-year risk-free rates in the United States and Britain are 3 percent and 2.75 percent, respectively. What is the forward exchange rate in GBP/USD?

Accepted Answer

A) 0.6170 
B) 0.5037 
C) 0.5013 
D) 0.6050 
A) 0.6170 
B) 0.5037 
C) 0.5013 
D) 0.6050

Question 19

Briefly explain the term economic exposure.

Accepted Answer

Economic exposure is the risk that an un

Question 20

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 $US is 12 percent. The spot rate is $US1.99/BP. Calculate the NPV of the project in BP.

Accepted Answer

A) +28.69 
B) +25.86 
C) +42.67 
D) +22.68 
A) +28.69 
B) +25.86 
C) +42.67 
D) +22.68

Exam 27: Managing International Risks

Briefly explain the concept of purchasing power parity.

If a government were to seize the assets of a multinational company and not provide adequate compensation to its owners, the government would be following which practice?

The country with the most favorable political risk score is

The expectations theory of exchange implies that

The dollar interest rate is 6 percent, and the Swiss franc interest rate is 4 percent. If the required rate of return for a project in Switzerland is 15 percent, calculate the required rate of return in the United States for a similar project.

The spot yen/$US exchange rate is Yen119.795/$US, and the one-year forward rate is yen114.571/$US. If the annual interest rate on dollar CDs is 6 percent, what annual interest rate would you expect on Yen CDs?

Briefly explain the concept of interest rate parity.

Which of the following statement(s)about currency futures market is (are)true? I.Futures contracts are highly standardized. II.Futures contracts are made-to-measure contracts. III.Futures contracts are for specified amounts and for a limited choice of delivery dates.

The beta of a firm's equity in Switzerland is 1.25. The risk-free rate is 4 percent and market risk premium is 8.4 percent. Calculate the required rate of return for the equity of this firm.

Currency risk exposure can be categorized as

If the direct quotation for the euro is $1.3565/euro, what is the size of the indirect quotation?

The phrase "stronger currency" implies a forward premium. Given a euro-U.S. dollar exchange rate of $1.45/euro, which of the following values for the forward rate shows the strongest dollar?

If the price of a Big Mac in the United States is $2.56, and in Japan it is yen 300, then the implied exchange rate is yen 117.19/$US.

Political risk is can be thought of as

A quotation in the form yen 89.33/$US is called

The true cost of hedging foreign currency risk is the difference between the forward rate and today's spot rate.

The spot exchange rate for British pounds is 0.5025 (GBP/USD). The one-year risk-free rates in the United States and Britain are 3 percent and 2.75 percent, respectively. What is the forward exchange rate in GBP/USD?

Briefly explain the term economic exposure.

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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