Question 1

Which one of the following statements is correct?

Accepted Answer

A)  The use of forward rates increases the short-run exposure to exchange rate risk. 
B)  Accounting translation gains and losses are recorded in the equity section of the balance sheet. 
C)  There is no known method of reducing long-run exchange rate risk. 
D)  A firm can record a profit on its income statement from a foreign subsidiary even when that subsidiary has no profit thanks to exchange rate risk. 
E)  Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk. 
A)  The use of forward rates increases the short-run exposure to exchange rate risk. 
B)  Accounting translation gains and losses are recorded in the equity section of the balance sheet. 
C)  There is no known method of reducing long-run exchange rate risk. 
D)  A firm can record a profit on its income statement from a foreign subsidiary even when that subsidiary has no profit thanks to exchange rate risk. 
E)  Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

Question 2

You want to invest in a project in Canada that has an initial cost of C$812,000 and is expected to produce cash inflows of C$340,000 a year for three years. The project will be worthless after the three years. The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S. The applicable interest rate for the project in Canada is 12 percent. Assume the current spot rate is C$1 = $.7874. What is the net present value of this project in Canadian dollars?

Accepted Answer

A)  −C$1,889 
B)  −C$2,924 
C)  C$4,623 
D)  C$6,139 
E)  C$7,528 
A)  −C$1,889 
B)  −C$2,924 
C)  C$4,623 
D)  C$6,139 
E)  C$7,528

Question 3

Assume a firm has $5 million of overseas profits that are invested in U.S. financial assets. These profits have not been repatriated. Given this, the firm is prohibited from using any of the $5 million to:

Accepted Answer

A)  build a new factory in Europe. 
B)  pay bonuses to its foreign managers. 
C)  acquire new equipment for installation in its Asian plant. 
D)  pay dividends. 
E)  invest in euros. 
A)  build a new factory in Europe. 
B)  pay bonuses to its foreign managers. 
C)  acquire new equipment for installation in its Asian plant. 
D)  pay dividends. 
E)  invest in euros.

Question 4

Which one of the following is a suggested method of reducing a U.S. importer's short-run exposure to exchange rate risk?

Accepted Answer

A)  Entering a forward exchange agreement timed to match the invoice date 
B)  Investing U.S. dollars when an order is placed and using the investment proceeds to pay the invoice 
C)  Exchanging funds on the spot market at the time an order is placed with a foreign supplier 
D)  Exchanging funds on the spot market at the time an order is received 
E)  Exchanging funds on the spot market at the time an invoice is payable 
A)  Entering a forward exchange agreement timed to match the invoice date 
B)  Investing U.S. dollars when an order is placed and using the investment proceeds to pay the invoice 
C)  Exchanging funds on the spot market at the time an order is placed with a foreign supplier 
D)  Exchanging funds on the spot market at the time an order is received 
E)  Exchanging funds on the spot market at the time an invoice is payable

Question 5

Assume you just returned from some extensive traveling throughout the Americas. You started your trip with $20,000 in your pocket. You spent 3.1 million pesos while in Chile and 548,200 pesos in Colombia. Then on the way home, you spent 47,500 pesos in Mexico. Assume the exchanges rates you encountered were $1 = Ps562 in Chile; $1 = Ps1,928 in Colombia; and $.0767 = Ps in Mexico. How many dollars did you have left by the time you returned to the U.S.?

Accepted Answer

A)  $11,113 
B)  $10,556 
C)  $4,117 
D)  $4,244 
E)  $8,575 
A)  $11,113 
B)  $10,556 
C)  $4,117 
D)  $4,244 
E)  $8,575

Question 6

The interest rate parity approximation formula is:

Accepted Answer

A)  Ft = S₀[1 + (RFC + RUS)]ᵗ. 
B)  Ft = S₀[1 − (RFC − RUS)]ᵗ. 
C)  Ft = S₀[1 + (RFC - RUS)]ᵗ. 
D)  Ft = S₀[1 + RFC(RUS)]ᵗ. 
E)  Ft = S₀(1 − RFC/RUS)ᵗ. 
A)  Ft = S₀[1 + (RFC + RUS)]ᵗ. 
B)  Ft = S₀[1 − (RFC − RUS)]ᵗ. 
C)  Ft = S₀[1 + (RFC - RUS)]ᵗ. 
D)  Ft = S₀[1 + RFC(RUS)]ᵗ. 
E)  Ft = S₀(1 − RFC/RUS)ᵗ.

Question 7

Which one of the following statements is correct concerning the foreign exchange market?

Accepted Answer

A)  The trading floor of the foreign exchange market is located in London. 
B)  The foreign exchange market is the world's second largest financial market. 
C)  The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the British pound, the French franc, and the euro. 
D)  A cross-rate is the exchange rate of a non-U.S. currency expressed in another non-U.S. currency. 
E)  The price in U.S. dollars of a foreign currency is referred to as an indirect quote. 
A)  The trading floor of the foreign exchange market is located in London. 
B)  The foreign exchange market is the world's second largest financial market. 
C)  The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the British pound, the French franc, and the euro. 
D)  A cross-rate is the exchange rate of a non-U.S. currency expressed in another non-U.S. currency. 
E)  The price in U.S. dollars of a foreign currency is referred to as an indirect quote.

Question 8

Assume $1 is currently equal to A$1.2924 in the spot market. Also assume the expected inflation rate in Australia is 2.8 percent as compared to 2.4 percent in the U.S. What is the expected exchange rate one year from now if relative purchasing power parity exists?

Accepted Answer

A)  A$1.2952 
B)  A$1.2976 
C)  A$1.2872 
D)  A$1.2853 
E)  A$1.3005 
A)  A$1.2952 
B)  A$1.2976 
C)  A$1.2872 
D)  A$1.2853 
E)  A$1.3005

Question 9

You are considering a project in South Africa which has an initial cost of R385,000. The project is expected to return a one-time payment of R428,900 four years from now. The risk-free rate of return is 3.5 percent in the U.S. and 2.4 percent in South Africa. The inflation rate is 4 percent in the U.S. and 3 percent in South Africa. Currently, you can buy R10.48 for $1. How much will the payment of R428,900 be worth in U.S. dollars four years from now?

Accepted Answer

A)  $42,777 
B)  $40,560 
C)  $47,251 
D)  $46,926 
E)  $44,357 
A)  $42,777 
B)  $40,560 
C)  $47,251 
D)  $46,926 
E)  $44,357

Question 10

Currently, $1 will buy C$1.1028 while $1.2334 will buy €1. What is the exchange rate between the Canadian dollar and the euro?

Accepted Answer

A)  C$1 = €.8941 
B)  C$1 = €.6539 
C)  C$1 = €1.3602 
D)  C$1.3602 = €1 
E)  C$.8941 = €1 
A)  C$1 = €.8941 
B)  C$1 = €.6539 
C)  C$1 = €1.3602 
D)  C$1.3602 = €1 
E)  C$.8941 = €1

Question 11

Assume the spot rate on the Canadian dollar is C$1.0926, the risk-free nominal rate in the U.S. is 3.8 percent and 4.1 percent in Canada. Which one of the following four-year forward rates best establishes the approximate interest rate parity condition?

Accepted Answer

A)  C$1.1058 
B)  C$1.1012 
C)  C$1.0959 
D)  C$1.0893 
E)  C$1.0795 
A)  C$1.1058 
B)  C$1.1012 
C)  C$1.0959 
D)  C$1.0893 
E)  C$1.0795

Question 12

Triangle arbitrage:

Accepted Answer

A)  is illegal in the U.S. 
B)  prevents the currency markets from obtaining equilibrium. 
C)  is a profitable opportunity involving three separate currency exchange transactions. 
D)  opportunities can exist only in the forward markets. 
E)  is based solely on differences in exchange rates between spot and futures markets. 
A)  is illegal in the U.S. 
B)  prevents the currency markets from obtaining equilibrium. 
C)  is a profitable opportunity involving three separate currency exchange transactions. 
D)  opportunities can exist only in the forward markets. 
E)  is based solely on differences in exchange rates between spot and futures markets.

Question 13

Assume the spot rate on the pound is £.5920 and the 6-month forward rate is £.5929. Also assume interest rate parity holds and the current six-month risk-free rate in the United States is 3.1 percent. What must the six-month risk-free rate be in Great Britain?

Accepted Answer

A)  3.25 percent 
B)  2.87 percent 
C)  2.94 percent 
D)  3.10 percent 
E)  3.52 percent 
A)  3.25 percent 
B)  2.87 percent 
C)  2.94 percent 
D)  3.10 percent 
E)  3.52 percent

Question 14

You are analyzing a project with an initial cost of £130,000. The project is expected to return £20,000 the first year, £50,000 the second year, and £90,000 the third and final year. There is no salvage value. The current spot rate is £.6211. The nominal risk-free return is 5.5 percent in the U.K. and 6 percent in the U.S. The return relevant to the project is 14 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

Accepted Answer

A)  −$19,062 
B)  −$5,409 
C)  $5,505 
D)  $9,730 
E)  $18,947 
A)  −$19,062 
B)  −$5,409 
C)  $5,505 
D)  $9,730 
E)  $18,947

Question 15

Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127?

Accepted Answer

A)  Unbiased forward rates condition 
B)  Uncovered interest rate parity 
C)  International fisher effect 
D)  Purchasing power parity 
E)  Interest rate parity 
A)  Unbiased forward rates condition 
B)  Uncovered interest rate parity 
C)  International fisher effect 
D)  Purchasing power parity 
E)  Interest rate parity

Question 16

Which one of the following types of operations would be subject to the most political risk if the operation were conducted outside of a firm's home country?

Accepted Answer

A)  Accounting and payroll functions 
B)  Partial assembly of components unique to the finished product 
C)  Raw materials production 
D)  Packing materials manufacturing 
E)  Production of minor parts such as nuts and bolts 
A)  Accounting and payroll functions 
B)  Partial assembly of components unique to the finished product 
C)  Raw materials production 
D)  Packing materials manufacturing 
E)  Production of minor parts such as nuts and bolts

Question 17

Assume €1 = $1.1364 and $1 = S$1.2408. A new coat costs S$213 in Singapore. How much will the identical coat cost in euros if absolute purchasing power parity exists?

Accepted Answer

A)  €300 
B)  €151 
C)  €119 
D)  €195 
E)  €233 
A)  €300 
B)  €151 
C)  €119 
D)  €195 
E)  €233

Question 18

Where does most of the trading in Eurobonds occur?

Accepted Answer

A)  Munich 
B)  Frankfurt 
C)  London 
D)  New York 
E)  Paris 
A)  Munich 
B)  Frankfurt 
C)  London 
D)  New York 
E)  Paris

Question 19

Assume the spot rate on the Canadian dollar is C$1.2648, the risk-free nominal rate in the U.S. is 3.3 percent, and the risk-free nominal rate in Canada is 3.8 percent. What one-year forward rate will create interest rate parity?

Accepted Answer

A)  C$1.2362 
B)  C$1.2429 
C)  C$1.2709 
D)  C$1.2587 
E)  C$1.2515 
A)  C$1.2362 
B)  C$1.2429 
C)  C$1.2709 
D)  C$1.2587 
E)  C$1.2515

Question 20

You have £100. A friend of yours wants to exchange C$175 for your £100. What will be your profit or loss in pounds if you accept your friend's offer assuming you can exchange C$1 for $.9134 and exchange £1 for $1.7240?

Accepted Answer

A)  £7.28 loss 
B)  £3.29 loss 
C)  £2.51 loss 
D)  £1.20 profit 
E)  £2.51 profit 
A)  £7.28 loss 
B)  £3.29 loss 
C)  £2.51 loss 
D)  £1.20 profit 
E)  £2.51 profit

Exam 21: International Corporate Finance

Which one of the following statements is correct?

Assume a firm has $5 million of overseas profits that are invested in U.S. financial assets. These profits have not been repatriated. Given this, the firm is prohibited from using any of the $5 million to:

Which one of the following is a suggested method of reducing a U.S. importer's short-run exposure to exchange rate risk?

The interest rate parity approximation formula is:

Which one of the following statements is correct concerning the foreign exchange market?

Assume $1 is currently equal to A$1.2924 in the spot market. Also assume the expected inflation rate in Australia is 2.8 percent as compared to 2.4 percent in the U.S. What is the expected exchange rate one year from now if relative purchasing power parity exists?

Currently, $1 will buy C$1.1028 while $1.2334 will buy €1. What is the exchange rate between the Canadian dollar and the euro?

Assume the spot rate on the Canadian dollar is C$1.0926, the risk-free nominal rate in the U.S. is 3.8 percent and 4.1 percent in Canada. Which one of the following four-year forward rates best establishes the approximate interest rate parity condition?

Triangle arbitrage:

Assume the spot rate on the pound is £.5920 and the 6-month forward rate is £.5929. Also assume interest rate parity holds and the current six-month risk-free rate in the United States is 3.1 percent. What must the six-month risk-free rate be in Great Britain?

Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127?

Which one of the following types of operations would be subject to the most political risk if the operation were conducted outside of a firm's home country?

Assume €1 = $1.1364 and $1 = S$1.2408. A new coat costs S$213 in Singapore. How much will the identical coat cost in euros if absolute purchasing power parity exists?

Where does most of the trading in Eurobonds occur?

Assume the spot rate on the Canadian dollar is C$1.2648, the risk-free nominal rate in the U.S. is 3.3 percent, and the risk-free nominal rate in Canada is 3.8 percent. What one-year forward rate will create interest rate parity?

You have £100. A friend of yours wants to exchange C$175 for your £100. What will be your profit or loss in pounds if you accept your friend's offer assuming you can exchange C$1 for $.9134 and exchange £1 for $1.7240?

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