Question 1

The type of exchange rate risk known as translation exposure is best described as the:

Accepted Answer

A)  risk that a positive net present value (NPV) project could turn into a negative NPV project because of changes in the exchange rate between two countries. 
B)  problem encountered by an accountant of an international firm who is trying to record balance sheet account values. 
C)  fluctuation in prices faced by importers of foreign goods. 
D)  variance in relative pay rates based on the currency used to pay an employee. 
E)  variance between the revenue of an exporter who uses forward rates and an equivalent exporter who does not use forward rates. 
A)  risk that a positive net present value (NPV) project could turn into a negative NPV project because of changes in the exchange rate between two countries. 
B)  problem encountered by an accountant of an international firm who is trying to record balance sheet account values. 
C)  fluctuation in prices faced by importers of foreign goods. 
D)  variance in relative pay rates based on the currency used to pay an employee. 
E)  variance between the revenue of an exporter who uses forward rates and an equivalent exporter who does not use forward rates.

Question 2

Assume that today you can exchange $1 for £.5926 and that last week, £1 was worth $1.6729. How much profit or loss would you now have in pounds if you had converted £100 into dollars last week and then converted the dollars back into pounds this week?

Accepted Answer

A)  £.86 loss 
B)  £.39 loss 
C)  £.07 loss 
D)  £1.03 profit 
E)  £1.59 profit 
A)  £.86 loss 
B)  £.39 loss 
C)  £.07 loss 
D)  £1.03 profit 
E)  £1.59 profit

Question 3

Uncovered interest parity is defined as:

Accepted Answer

A)  E(St) = S₀[1 + (hFC − hUS)]ᵗ. 
B)  E(St) = S₀[1 + (RFC − RUS)]ᵗ. 
C)  E(St) = S₀[1 − (RFC − RUS)]ᵗ. 
D)  E(St) = S₀[1 + (RUS − RF
C) ]ᵗ. 
E)  E(St) = S₀[1 + (hFC + hUS)]ᵗ. 
A)  E(St) = S₀[1 + (hFC − hUS)]ᵗ. 
B)  E(St) = S₀[1 + (RFC − RUS)]ᵗ. 
C)  E(St) = S₀[1 − (RFC − RUS)]ᵗ. 
D)  E(St) = S₀[1 + (RUS − RF
C) ]ᵗ. 
E)  E(St) = S₀[1 + (hFC + hUS)]ᵗ.

Question 4

Assume the current spot rate is C$1.0875 and the one-year forward rate is C$1.0724. Also assume the nominal risk-free rate in Canada is 3.9 percent while it is 4.1 percent in the U.S. How much additional income can you earn by using covered interest arbitrage as compared to investing $1 in the U.S for one year?

Accepted Answer

A)  $.0118 
B)  $.0126 
C)  $.0020 
D)  $.0110 
E)  $.0087 
A)  $.0118 
B)  $.0126 
C)  $.0020 
D)  $.0110 
E)  $.0087

Question 5

One goal of the Tax Cuts and Jobs Act of 2017 is to encourage corporations to:

Accepted Answer

A)  claim all overseas profits as U.S. profits to avoid paying taxes to foreign governments. 
B)  bring their overseas cash back to the U.S. at a one-time tax rate of 8 percent. 
C)  distribute all of their overseas profits as dividends to avoid all U.S. taxes. 
D)  bring all of their foreign assets back to the U.S. by paying a one-time tax rate of 15.5 percent on those assets. 
E)  repatriate their untaxed overseas profits. 
A)  claim all overseas profits as U.S. profits to avoid paying taxes to foreign governments. 
B)  bring their overseas cash back to the U.S. at a one-time tax rate of 8 percent. 
C)  distribute all of their overseas profits as dividends to avoid all U.S. taxes. 
D)  bring all of their foreign assets back to the U.S. by paying a one-time tax rate of 15.5 percent on those assets. 
E)  repatriate their untaxed overseas profits.

Question 6

Suppose the spot and six-month forward rates on the Norwegian krone are NKr5.94 and NKr6.05 respectively. The annual risk-free rate in the United States is 4.5 percent, and the annual risk-free rate in Norway is 7 percent. What would the six-month forward rate have to be on the Norwegian krone to prevent arbitrage?

Accepted Answer

A)  NKr6.0138 
B)  NKr6.0072 
C)  NKr6.0103 
D)  NKr6.0174 
E)  NKr6.0067 
A)  NKr6.0138 
B)  NKr6.0072 
C)  NKr6.0103 
D)  NKr6.0174 
E)  NKr6.0067

Question 7

Assume ¥102.36 equal $1. Also assume that SKr6.5103 equal $1. How many Japanese yen can you acquire in exchange for 5,000 Swedish kronor?

Accepted Answer

A)  ¥318 
B)  ¥261 
C)  ¥78,614 
D)  ¥33,320 
E)  ¥49,520 
A)  ¥318 
B)  ¥261 
C)  ¥78,614 
D)  ¥33,320 
E)  ¥49,520

Question 8

You want to import $225,000 worth of rugs from India. How many rupees will you need to pay for this purchase if one rupee is worth $.01552?

Accepted Answer

A)  Rs14,887,424 
B)  Rs15,238,911 
C)  Rs14,497,423 
D)  Rs13,367,594 
E)  Rs13,415,096 
A)  Rs14,887,424 
B)  Rs15,238,911 
C)  Rs14,497,423 
D)  Rs13,367,594 
E)  Rs13,415,096

Question 9

Suppose the spot exchange rate is C$1.273 and the six-month forward rate is C$1.275. The U.S. dollar is selling at a ________ relative to the Canadian dollar and the U.S. dollar is expected to ________ relative to the Canadian dollar.

Accepted Answer

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

Question 10

Assume the expected inflation rate in Finland is 3.3 percent compared to 2.4 percent in the U.S. A risk-free asset in the U.S. is yielding 4.3 percent. What approximate real rate of return should you expect on a risk-free Finnish security?

Accepted Answer

A)  .9 percent 
B)  1.9 percent 
C)  2.1 percent 
D)  2.5 percent 
E)  3.4 percent 
A)  .9 percent 
B)  1.9 percent 
C)  2.1 percent 
D)  2.5 percent 
E)  3.4 percent

Question 11

Assume a risk-free asset in the U.S. is currently yielding 4.1 percent, a Canadian risk-free asset is yielding 3.7 percent, and the current spot rate is C$1.2633. What is the approximate three-year forward rate if interest rate parity holds?

Accepted Answer

A)  C$1.2482 
B)  C$1.2684 
C)  C$1.2541 
D)  C$1.2785 
E)  C$1.2582 
A)  C$1.2482 
B)  C$1.2684 
C)  C$1.2541 
D)  C$1.2785 
E)  C$1.2582

Question 12

You want to invest in a riskless project in Sweden. The project has an initial cost of SKr3.86 million and is expected to produce cash inflows of SKr1.76 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 2.8 percent in the U.S. A risk-free security is paying 4.1 percent in the U.S. The current spot rate is SKr7.7274. What is the net present value of this project in Swedish krona if the international Fisher effect applies?

Accepted Answer

A)  SKr1,087,561 
B)  SKr701,458 
C)  SKr823,333 
D)  SKr958,029 
E)  SKr978,177 
A)  SKr1,087,561 
B)  SKr701,458 
C)  SKr823,333 
D)  SKr958,029 
E)  SKr978,177

Question 13

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

Accepted Answer

A)  Spot exchange rate 
B)  Forward exchange rate 
C)  Triangle rate 
D)  Cross rate 
E)  Current rate 
A)  Spot exchange rate 
B)  Forward exchange rate 
C)  Triangle rate 
D)  Cross rate 
E)  Current rate

Question 14

Assume $1 is currently equal to £.7741 in the spot market. Assume the expected inflation rate in the U.S. is 2.6 percent while it is 2.3 percent in the U.K. What is the expected exchange rate one year from now if relative purchasing power parity exists?

Accepted Answer

A)  £.7764 
B)  £.7878 
C)  £.7839 
D)  £.7718 
E)  £.7791 
A)  £.7764 
B)  £.7878 
C)  £.7839 
D)  £.7718 
E)  £.7791

Question 15

You are expecting a payment of NKr450,000 three years from now. The risk-free rate of return is 3 percent in the U.S. and 4 percent in Norway. The inflation rate is 2.5 percent in the U.S. and 3 percent in Norway. Currently, you can buy NKr5.94 for $1. How much will the payment three years from now be worth in U.S. dollars?

Accepted Answer

A)  $75,758 
B)  $73,530 
C)  $81,511 
D)  $78,077 
E)  $69,888 
A)  $75,758 
B)  $73,530 
C)  $81,511 
D)  $78,077 
E)  $69,888

Question 16

Which one of the following is the risk that a firm faces when it opens a facility in a foreign country, given that the exchange rate between the firm's home country and this foreign country fluctuates over time?

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 17

The home currency approach:

Accepted Answer

A)  generally produces more reliable results than those found using the foreign currency approach. 
B)  requires an applicable exchange rate for every time period for which there is a cash flow. 
C)  uses the current risk-free nominal rate to discount all cash flows related to a project. 
D)  stresses the use of the real rate of return to compute the net present value (NPV) of a project. 
E)  converts a foreign denominated NPV into a dollar denominated NPV. 
A)  generally produces more reliable results than those found using the foreign currency approach. 
B)  requires an applicable exchange rate for every time period for which there is a cash flow. 
C)  uses the current risk-free nominal rate to discount all cash flows related to a project. 
D)  stresses the use of the real rate of return to compute the net present value (NPV) of a project. 
E)  converts a foreign denominated NPV into a dollar denominated NPV.

Question 18

Assume that $1 is equal to £.77 and equal to C$1.27. Based on this, you could say that C$1 is equal to: C$1(£.77/C$1.27) = £.61. The exchange rate of C$1 = £.61 is referred to as the:

Accepted Answer

A)  open exchange rate. 
B)  cross-rate. 
C)  backward rate. 
D)  forward rate. 
E)  interest rate. 
A)  open exchange rate. 
B)  cross-rate. 
C)  backward rate. 
D)  forward rate. 
E)  interest rate.

Question 19

The camera you want to buy costs $495 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $.9128? Assume absolute purchasing power parity exists.

Accepted Answer

A)  C$452 
B)  C$468 
C)  C$491 
D)  C$527 
E)  C$542 
A)  C$452 
B)  C$468 
C)  C$491 
D)  C$527 
E)  C$542

Question 20

Assume the direct quote on the euro is 1.23 and the indirect quote on the Swiss franc is .88. What is the cross-rate for euros in terms of Swiss francs?

Accepted Answer

A)  €.1.0824/SF1 
B)  €.1.3977/SF1 
C)  €.9239/SF1 
D)  €1/SF1 
E)  €.7154/SF1 
A)  €.1.0824/SF1 
B)  €.1.3977/SF1 
C)  €.9239/SF1 
D)  €1/SF1 
E)  €.7154/SF1

Exam 21: International Corporate Finance

The type of exchange rate risk known as translation exposure is best described as the:

Assume that today you can exchange $1 for £.5926 and that last week, £1 was worth $1.6729. How much profit or loss would you now have in pounds if you had converted £100 into dollars last week and then converted the dollars back into pounds this week?

Uncovered interest parity is defined as:

One goal of the Tax Cuts and Jobs Act of 2017 is to encourage corporations to:

Assume ¥102.36 equal $1. Also assume that SKr6.5103 equal $1. How many Japanese yen can you acquire in exchange for 5,000 Swedish kronor?

You want to import $225,000 worth of rugs from India. How many rupees will you need to pay for this purchase if one rupee is worth $.01552?

Suppose the spot exchange rate is C$1.273 and the six-month forward rate is C$1.275. The U.S. dollar is selling at a ________ relative to the Canadian dollar and the U.S. dollar is expected to ________ relative to the Canadian dollar.

Assume the expected inflation rate in Finland is 3.3 percent compared to 2.4 percent in the U.S. A risk-free asset in the U.S. is yielding 4.3 percent. What approximate real rate of return should you expect on a risk-free Finnish security?

Assume a risk-free asset in the U.S. is currently yielding 4.1 percent, a Canadian risk-free asset is yielding 3.7 percent, and the current spot rate is C$1.2633. What is the approximate three-year forward rate if interest rate parity holds?

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

Assume $1 is currently equal to £.7741 in the spot market. Assume the expected inflation rate in the U.S. is 2.6 percent while it is 2.3 percent in the U.K. What is the expected exchange rate one year from now if relative purchasing power parity exists?

Which one of the following is the risk that a firm faces when it opens a facility in a foreign country, given that the exchange rate between the firm's home country and this foreign country fluctuates over time?

The home currency approach:

Assume that $1 is equal to £.77 and equal to C$1.27. Based on this, you could say that C$1 is equal to: C$1(£.77/C$1.27) = £.61. The exchange rate of C$1 = £.61 is referred to as the:

The camera you want to buy costs $495 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $.9128? Assume absolute purchasing power parity exists.

Assume the direct quote on the euro is 1.23 and the indirect quote on the Swiss franc is .88. What is the cross-rate for euros in terms of Swiss francs?

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

Suppose the spot exchange rate is C$1.273 and the six-month forward rate is C$1.275. The U.S. dollar is selling at a relative to the Canadian dollar and the U.S. dollar is expected to relative to the Canadian dollar.