Exam 27: Multinational Financial Management

Individuals and corporations buy or sell forward currencies as a means of hedging exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

In Japan, 90-day securities have a 4 percent annualized return and 180-day securities have a 5 percent annualized return. In the United States, 90- day securities have a 4 percent annualized return and 180-day securities have an annualized return of 4.5 percent. All securities are of equal risk. Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most correct?

The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates of return available on U.S. money market instruments.

If one Swiss franc can purchase $0.71 U.S. dollars, how many Swiss francs can one U.S. dollar buy?

Suppose a U.S. firm buys $200,000 worth of television tubes from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

Suppose that 144 yen could be purchased in the foreign exchange market for one U.S. dollars today. If the yen is expected to depreciate by 8 percent tomorrow, how many yen could one U.S. dollar buy tomorrow?

A product sells for $750 in the United States. The exchange rate is such that $1 equals 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland?

When considering the risk of foreign investment, higher risk could arise from exchange rate risk and political risk while lower risk might result from international diversification.

Currently, 1 British pound equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross exchange rate between the pound and the franc?

If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ________________ to the spot rate.