Question 1

Long-run exposure to exchange rate risk relates to:

Accepted Answer

A)  daily variations in exchange rates. 
B)  variances between spot and future rates. 
C)  unexpected changes in relative economic conditions. 
D)  differences between future spot rates and related forward rates. 
E)  accounting gains and losses created by fluctuating exchange rates. 
A)  daily variations in exchange rates. 
B)  variances between spot and future rates. 
C)  unexpected changes in relative economic conditions. 
D)  differences between future spot rates and related forward rates. 
E)  accounting gains and losses created by fluctuating exchange rates.

Question 2

Which one of the following formulas correctly describes the relative purchasing power parity relationship?

Accepted Answer

A)  E(St) = S₀[1 + (hFC − hUS)]ᵗ 
B)  E(St) = S₀[1 - (hFC − hUS)]ᵗ 
C)  E(St) = S₀[1 + (hUS + hF
C) ]ᵗ 
D)  E(St) = S₀[1 − (hUS − hF
C) ]ᵗ 
E)  E(St) = S₀[1 + (hUS - hF
C) ]ᵗ 
A)  E(St) = S₀[1 + (hFC − hUS)]ᵗ 
B)  E(St) = S₀[1 - (hFC − hUS)]ᵗ 
C)  E(St) = S₀[1 + (hUS + hF
C) ]ᵗ 
D)  E(St) = S₀[1 − (hUS − hF
C) ]ᵗ 
E)  E(St) = S₀[1 + (hUS - hF
C) ]ᵗ

Question 3

Party A has agreed to exchange $1 million U.S. for $1.02 million Canadian. What is this agreement called?

Accepted Answer

A)  Gilt 
B)  LIBOR 
C)  SWIFT 
D)  Yankee agreements 
E)  Swap 
A)  Gilt 
B)  LIBOR 
C)  SWIFT 
D)  Yankee agreements 
E)  Swap

Question 4

How many euros can you get for $3,800 if one euro is worth $1.2987?

Accepted Answer

A)  €2,638 
B)  €2,926 
C)  €3,677 
D)  €4,935 
E)  €5,201 
A)  €2,638 
B)  €2,926 
C)  €3,677 
D)  €4,935 
E)  €5,201

Question 5

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

Accepted Answer

A)  the unbiased forward rates condition. 
B)  uncovered interest rate parity. 
C)  the international Fisher effect. 
D)  purchasing power parity. 
E)  interest rate parity. 
A)  the unbiased forward rates condition. 
B)  uncovered interest rate parity. 
C)  the international Fisher effect. 
D)  purchasing power parity. 
E)  interest rate parity.

Question 6

The international Fisher effect states that ________ rates are equal across countries.

Accepted Answer

A)  spot 
B)  one-year future 
C)  nominal interest 
D)  inflation 
E)  real interest 
A)  spot 
B)  one-year future 
C)  nominal interest 
D)  inflation 
E)  real interest

Question 7

Assume the spot exchange rate for the Hungarian forint is 267.767 HUF. Also assume the inflation rate in the United States is 1.6 percent per year while it is 3.5 percent in Hungary. What is the expected exchange rate three years from now?

Accepted Answer

A)  252.792 HUF 
B)  272.855 HUF 
C)  283.322 HUF 
D)  262.679 HUF 
E)  259.406 HUF 
A)  252.792 HUF 
B)  272.855 HUF 
C)  283.322 HUF 
D)  262.679 HUF 
E)  259.406 HUF

Question 8

Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £.78. The traders agree to settle this trade within two business days. What is this exchange called?

Accepted Answer

A)  Swap 
B)  Option trade 
C)  Futures trade 
D)  Forward trade 
E)  Spot trade 
A)  Swap 
B)  Option trade 
C)  Futures trade 
D)  Forward trade 
E)  Spot trade

Question 9

A basic interest rate swap generally involves trading a:

Accepted Answer

A)  short-term rate for a long-term rate. 
B)  foreign rate for a domestic rate. 
C)  government rate for a corporate rate. 
D)  fixed rate for a variable rate. 
E)  taxable rate for a tax-exempt rate. 
A)  short-term rate for a long-term rate. 
B)  foreign rate for a domestic rate. 
C)  government rate for a corporate rate. 
D)  fixed rate for a variable rate. 
E)  taxable rate for a tax-exempt rate.

Question 10

Suppose the current spot rate for the Norwegian krone is NKr5.5923 while the expected inflation rate in Norway is 2.2 percent compared to 1.8 percent in the U.S. A risk-free asset in the U.S. is yielding 3.4 percent. What approximate real rate of return should you expect on a risk-free Norwegian security?

Accepted Answer

A)  1.2 percent 
B)  1.6 percent 
C)  2.0 percent 
D)  .4 percent 
E)  .6 percent 
A)  1.2 percent 
B)  1.6 percent 
C)  2.0 percent 
D)  .4 percent 
E)  .6 percent

Question 11

Assume $1 = C$1.1098 and $1 = £.6018. Also assume you can buy £55 for C$100. How much profit can you earn using triangle arbitrage if you start out with $100?

Accepted Answer

A)  $.78 
B)  $1.04 
C)  $1.43 
D)  $1.56 
E)  $1.54 
A)  $.78 
B)  $1.04 
C)  $1.43 
D)  $1.56 
E)  $1.54

Question 12

You observe that the inflation rate in the United States is .78 percent per year and that T-bills currently yield 2.94 percent annually. Using the approximate international Fisher effect, what do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 3.53 percent per year?

Accepted Answer

A)  4.22 percent 
B)  1.37 percent 
C)  2.24 percent 
D)  1.87 percent 
E)  .88 percent 
A)  4.22 percent 
B)  1.37 percent 
C)  2.24 percent 
D)  1.87 percent 
E)  .88 percent

Question 13

Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate?

Accepted Answer

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

Question 14

Relative purchasing power parity:

Accepted Answer

A)  states that identical items should cost the same regardless of the currency used to make the purchase. 
B)  relates differences in inflation rates to differences in exchange rates. 
C)  compares the real rate of return to the nominal rate of return. 
D)  explains the differences in real rates across national boundaries. 
E)  relates changes in exchange rates to changes in interest rates. 
A)  states that identical items should cost the same regardless of the currency used to make the purchase. 
B)  relates differences in inflation rates to differences in exchange rates. 
C)  compares the real rate of return to the nominal rate of return. 
D)  explains the differences in real rates across national boundaries. 
E)  relates changes in exchange rates to changes in interest rates.

Question 15

Assume $1 can buy you either ¥113.25 or £.7708. If a TV in London costs £995, what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

Accepted Answer

A)  ¥86,857 
B)  ¥60,554 
C)  ¥146,191 
D)  ¥161,855 
E)  ¥163,542 
A)  ¥86,857 
B)  ¥60,554 
C)  ¥146,191 
D)  ¥161,855 
E)  ¥163,542

Question 16

International Markets can purchase an item for ¥27,500. What will be the dollar change in the cost of that item in U.S. dollars if the exchange rate of ¥111.30 changes to ¥113.25?

Accepted Answer

A)  $3.74 
B)  $4.25 
C)  −$3.74 
D)  −$4.25 
E)  −$4.72 
A)  $3.74 
B)  $4.25 
C)  −$3.74 
D)  −$4.25 
E)  −$4.72

Question 17

A trader has just agreed to exchange British pounds for French francs three months from today. This exchange is an example of a:

Accepted Answer

A)  spot trade. 
B)  forward trade. 
C)  short sale. 
D)  floating swap. 
E)  triangle arbitrage. 
A)  spot trade. 
B)  forward trade. 
C)  short sale. 
D)  floating swap. 
E)  triangle arbitrage.

Question 18

A U.S. firm has significant profits that were earned overseas. When U.S. taxes are paid on these profits, the profits are considered to be:

Accepted Answer

A)  abrogated. 
B)  blocked. 
C)  repatriated. 
D)  confiscated. 
E)  taken over. 
A)  abrogated. 
B)  blocked. 
C)  repatriated. 
D)  confiscated. 
E)  taken over.

Exam 21: International Corporate Finance

Long-run exposure to exchange rate risk relates to:

Which one of the following formulas correctly describes the relative purchasing power parity relationship?

Party A has agreed to exchange $1 million U.S. for $1.02 million Canadian. What is this agreement called?

How many euros can you get for $3,800 if one euro is worth $1.2987?

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

The international Fisher effect states that ________ rates are equal across countries.

Assume the spot exchange rate for the Hungarian forint is 267.767 HUF. Also assume the inflation rate in the United States is 1.6 percent per year while it is 3.5 percent in Hungary. What is the expected exchange rate three years from now?

Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £.78. The traders agree to settle this trade within two business days. What is this exchange called?

A basic interest rate swap generally involves trading a:

Assume $1 = C$1.1098 and $1 = £.6018. Also assume you can buy £55 for C$100. How much profit can you earn using triangle arbitrage if you start out with $100?

Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate?

Relative purchasing power parity:

Assume $1 can buy you either ¥113.25 or £.7708. If a TV in London costs £995, what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

International Markets can purchase an item for ¥27,500. What will be the dollar change in the cost of that item in U.S. dollars if the exchange rate of ¥111.30 changes to ¥113.25?

A trader has just agreed to exchange British pounds for French francs three months from today. This exchange is an example of a:

A U.S. firm has significant profits that were earned overseas. When U.S. taxes are paid on these profits, the profits are considered to be:

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