Question 1

Absolute purchasing power parity is most apt to exist for which one of the following items?

Accepted Answer

A)  A pound of beef 
B)  A computer 
C)  An ounce of silver 
D)  An automobile 
E)  A cell phone 
A)  A pound of beef 
B)  A computer 
C)  An ounce of silver 
D)  An automobile 
E)  A cell phone C

Question 2

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

Accepted Answer

A)  Empire: United Kingdom 
B)  Western: United States 
C)  Samurai: China 
D)  Bulldog: France 
E)  Dim sum: Hong Kong 
A)  Empire: United Kingdom 
B)  Western: United States 
C)  Samurai: China 
D)  Bulldog: France 
E)  Dim sum: Hong Kong E

Question 3

You are expecting a payment of C$100,000 two years from now. The risk-free rate of return is 3.8 percent in the U.S. and 4.1 percent in Canada. The inflation rate is 2 percent in the U.S. and 3 percent in Canada. Suppose the current exchange rate is C$1 = $.9132. How much will the payment two years from now be worth in U.S. dollars?

Accepted Answer

A)  $91,870 
B)  $102,414 
C)  $108,851 
D)  $88,202 
E)  $90,775 
A)  $91,870 
B)  $102,414 
C)  $108,851 
D)  $88,202 
E)  $90,775 E

Question 4

Assume you can exchange $100 today for C$109.58 or for 1,304 Mexican pesos. Assume that last year, $100 was equivalent to C$105.48 or 1,310 Mexican pesos. One hundred dollars converted into ________ last year can now be converted into ________.

Accepted Answer

A)  Canadian dollars; $103.89. 
B)  Mexican pesos; $99.54. 
C)  Mexican pesos; $100.38. 
D)  Canadian dollars; $96.26. 
E)  Canadian dollars; $101.20. 
A)  Canadian dollars; $103.89. 
B)  Mexican pesos; $99.54. 
C)  Mexican pesos; $100.38. 
D)  Canadian dollars; $96.26. 
E)  Canadian dollars; $101.20.

Question 5

You are planning a trip to Australia. Your hotel will cost you A$135 per night for six nights. You expect to spend another A$2,400 for meals, tours, souvenirs, and so forth. How much will this trip cost you in U.S. dollars if $1 = A$1.2904?

Accepted Answer

A)  $2,488 
B)  $3,498 
C)  $2,631 
D)  $4,452 
E)  $4,142 
A)  $2,488 
B)  $3,498 
C)  $2,631 
D)  $4,452 
E)  $4,142

Question 6

Assume quotes are based on units of foreign currency per dollar and the U.S. dollar appreciated against the euro today. This means that:

Accepted Answer

A)  it now takes more euros to buy one dollar. 
B)  the exchange rate between the dollar and euro weakened. 
C)  the U.S. inflation rate exceeds the inflation rate in Euroland. 
D)  it now takes more dollars to buy one euro. 
E)  the U.S. interest rate is less than the interest rate in Euroland. 
A)  it now takes more euros to buy one dollar. 
B)  the exchange rate between the dollar and euro weakened. 
C)  the U.S. inflation rate exceeds the inflation rate in Euroland. 
D)  it now takes more dollars to buy one euro. 
E)  the U.S. interest rate is less than the interest rate in Euroland.

Question 7

Interest rate parity:

Accepted Answer

A)  eliminates covered interest arbitrage opportunities. 
B)  exists when spot rates are equal for multiple countries. 
C)  means the nominal risk-free rate must be equal across countries. 
D)  exists when the spot rate is equal to the forward rate. 
E)  eliminates exchange rate fluctuations. 
A)  eliminates covered interest arbitrage opportunities. 
B)  exists when spot rates are equal for multiple countries. 
C)  means the nominal risk-free rate must be equal across countries. 
D)  exists when the spot rate is equal to the forward rate. 
E)  eliminates exchange rate fluctuations.

Question 8

Assume $1 is currently equal to £.7658. Also assume the expected inflation rate in the U.K. is 3.6 percent while it is 3.3 percent in the U.S. What is the expected exchange rate four years from now if relative purchasing power parity exists?

Accepted Answer

A)  £.7750 
B)  £.7635 
C)  £.7681 
D)  £.7623 
E)  £.7567 
A)  £.7750 
B)  £.7635 
C)  £.7681 
D)  £.7623 
E)  £.7567

Question 9

A large U.S. company has £500,000 in excess cash from its foreign operations. The company would like to exchange these funds for U.S. dollars. In which of the following markets can this exchange be arranged?

Accepted Answer

A)  ADR 
B)  National registry 
C)  National discount exchange 
D)  Forex 
E)  Eurobond market 
A)  ADR 
B)  National registry 
C)  National discount exchange 
D)  Forex 
E)  Eurobond market

Question 10

The LIBOR is primarily used as the basis for the rate charged on:

Accepted Answer

A)  short-term debt in the Lisbon market. 
B)  mortgage loans in the Lisbon market. 
C)  Eurodollar loans in the London market. 
D)  U.S. federal funds. 
E)  interbank loans in the U.S. 
A)  short-term debt in the Lisbon market. 
B)  mortgage loans in the Lisbon market. 
C)  Eurodollar loans in the London market. 
D)  U.S. federal funds. 
E)  interbank loans in the U.S.

Question 11

The market value of the Blackwell Corporation just declined by 5 percent. Analysts believe this decrease in value was caused by recent legislation passed by Congress. Which type of risk does this illustrate?

Accepted Answer

A)  International risk 
B)  Diversifiable risk 
C)  Purchasing power risk 
D)  Exchange rate risk 
E)  Political risk 
A)  International risk 
B)  Diversifiable risk 
C)  Purchasing power risk 
D)  Exchange rate risk 
E)  Political risk

Question 12

Global Inc. just placed an order for 25,000 units at a cost of 162 Singapore dollars each, which will be payable when the shipment arrives in 120 days. Global sells these units at $148 each. The spot exchange rate is S$1.2537. What will the profit be on this order if the exchange rate increases to S$1.2602 over the next 120 days?

Accepted Answer

A)  $513,564 
B)  $508,121 
C)  $516,407 
D)  $486,224 
E)  $472,433 
A)  $513,564 
B)  $508,121 
C)  $516,407 
D)  $486,224 
E)  $472,433

Question 13

Assume the spot rate for the British pound currently is £.6369 per $1. Also assume the one-year forward rate is £.6421 per $1. A risk-free asset in the U.S. is currently earning 3.2 percent. If interest rate parity holds, what rate can you earn on a one-year risk-free British security?

Accepted Answer

A)  4.18 percent 
B)  4.57 percent 
C)  3.67 percent 
D)  4.04 percent 
E)  4.92 percent 
A)  4.18 percent 
B)  4.57 percent 
C)  3.67 percent 
D)  4.04 percent 
E)  4.92 percent

Question 14

Assume the spot rate for the Japanese yen currently is ¥102.32 per $1 and the one-year forward rate is ¥102.69 per $1. A risk-free asset in Japan is currently earning 2.5 percent. If interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S. security?

Accepted Answer

A)  1.63 percent 
B)  2.01 percent 
C)  2.14 percent 
D)  2.96 percent 
E)  1.01 percent 
A)  1.63 percent 
B)  2.01 percent 
C)  2.14 percent 
D)  2.96 percent 
E)  1.01 percent

Question 15

You would like to purchase a foreign bond that is issued by the Netherlands government. Which one of the following should you purchase?

Accepted Answer

A)  Samurai bond 
B)  Kronor bond 
C)  Rembrandt bond 
D)  Swap 
E)  Bulldog bond 
A)  Samurai bond 
B)  Kronor bond 
C)  Rembrandt bond 
D)  Swap 
E)  Bulldog bond

Question 16

Assume the spot rate on the Japanese yen is ¥110.05 while it is C$1.1379 on the Canadian dollar. The respective three-month forward rates are ¥111.75 and C$1.1339. The value of the U.S. dollar will ________ with respect to the yen and will ________ with respect to the Canadian dollar.

Accepted Answer

A)  appreciate; appreciate 
B)  appreciate; depreciate 
C)  depreciate; appreciate 
D)  depreciate; depreciate 
E)  depreciate; remain constant 
A)  appreciate; appreciate 
B)  appreciate; depreciate 
C)  depreciate; appreciate 
D)  depreciate; depreciate 
E)  depreciate; remain constant

Question 17

The foreign currency approach to capital budgeting analysis:

Accepted Answer

A)  produces different results than the home currency approach. 
B)  is computationally harder to use than the home currency approach. 
C)  computes the NPV of a project in both the foreign and the domestic currency. 
D)  requires an exchange rate for each time period for which there is a cash flow. 
E)  converts all foreign cash flows into dollar cash flows. 
A)  produces different results than the home currency approach. 
B)  is computationally harder to use than the home currency approach. 
C)  computes the NPV of a project in both the foreign and the domestic currency. 
D)  requires an exchange rate for each time period for which there is a cash flow. 
E)  converts all foreign cash flows into dollar cash flows.

Question 18

Mr. Black and Mr. White have agreed to exchange C$12,500 for $10,000 with the exchange occurring four months from now. This agreed-upon exchange rate is called the:

Accepted Answer

A)  spot rate. 
B)  swap rate. 
C)  forward rate. 
D)  parity rate. 
E)  triangle rate. 
A)  spot rate. 
B)  swap rate. 
C)  forward rate. 
D)  parity rate. 
E)  triangle rate.

Question 19

Suppose the spot exchange rates are ¥102 = $1 and £1 = $1.57. Also suppose the cross-rate is ¥159 = £1. What is the arbitrage profit per one U.S. dollar?

Accepted Answer

A)  $.0164 
B)  $.0106 
C)  $.0057 
D)  $.0072 
E)  $.0148 
A)  $.0164 
B)  $.0106 
C)  $.0057 
D)  $.0072 
E)  $.0148

Question 20

Which of the following variables used in the covered interest arbitrage formula is correctly defined?

Accepted Answer

A)  S₀: Current spot rate expressed in dollars per unit of foreign currency. 
B)  Ft: Future inflation rate at Time t. 
C)  F₁: 360-day forward rate. 
D)  RUS: U.S. real risk-free interest rate. 
E)  RFC: Foreign country real interest rate. 
A)  S₀: Current spot rate expressed in dollars per unit of foreign currency. 
B)  Ft: Future inflation rate at Time t. 
C)  F₁: 360-day forward rate. 
D)  RUS: U.S. real risk-free interest rate. 
E)  RFC: Foreign country real interest rate.

Exam 21: International Corporate Finance

Absolute purchasing power parity is most apt to exist for which one of the following items?

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

Assume you can exchange $100 today for C$109.58 or for 1,304 Mexican pesos. Assume that last year, $100 was equivalent to C$105.48 or 1,310 Mexican pesos. One hundred dollars converted into ________ last year can now be converted into ________.

You are planning a trip to Australia. Your hotel will cost you A$135 per night for six nights. You expect to spend another A$2,400 for meals, tours, souvenirs, and so forth. How much will this trip cost you in U.S. dollars if $1 = A$1.2904?

Assume quotes are based on units of foreign currency per dollar and the U.S. dollar appreciated against the euro today. This means that:

Interest rate parity:

Assume $1 is currently equal to £.7658. Also assume the expected inflation rate in the U.K. is 3.6 percent while it is 3.3 percent in the U.S. What is the expected exchange rate four years from now if relative purchasing power parity exists?

A large U.S. company has £500,000 in excess cash from its foreign operations. The company would like to exchange these funds for U.S. dollars. In which of the following markets can this exchange be arranged?

The LIBOR is primarily used as the basis for the rate charged on:

The market value of the Blackwell Corporation just declined by 5 percent. Analysts believe this decrease in value was caused by recent legislation passed by Congress. Which type of risk does this illustrate?

Assume the spot rate for the British pound currently is £.6369 per $1. Also assume the one-year forward rate is £.6421 per $1. A risk-free asset in the U.S. is currently earning 3.2 percent. If interest rate parity holds, what rate can you earn on a one-year risk-free British security?

Assume the spot rate for the Japanese yen currently is ¥102.32 per $1 and the one-year forward rate is ¥102.69 per $1. A risk-free asset in Japan is currently earning 2.5 percent. If interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S. security?

You would like to purchase a foreign bond that is issued by the Netherlands government. Which one of the following should you purchase?

Assume the spot rate on the Japanese yen is ¥110.05 while it is C$1.1379 on the Canadian dollar. The respective three-month forward rates are ¥111.75 and C$1.1339. The value of the U.S. dollar will ________ with respect to the yen and will ________ with respect to the Canadian dollar.

The foreign currency approach to capital budgeting analysis:

Mr. Black and Mr. White have agreed to exchange C$12,500 for $10,000 with the exchange occurring four months from now. This agreed-upon exchange rate is called the:

Suppose the spot exchange rates are ¥102 = $1 and £1 = $1.57. Also suppose the cross-rate is ¥159 = £1. What is the arbitrage profit per one U.S. dollar?

Which of the following variables used in the covered interest arbitrage formula is correctly defined?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters

Assume you can exchange $100 today for C$109.58 or for 1,304 Mexican pesos. Assume that last year, $100 was equivalent to C$105.48 or 1,310 Mexican pesos. One hundred dollars converted into last year can now be converted into .

Assume the spot rate on the Japanese yen is ¥110.05 while it is C$1.1379 on the Canadian dollar. The respective three-month forward rates are ¥111.75 and C$1.1339. The value of the U.S. dollar will with respect to the yen and will with respect to the Canadian dollar.