Exam 24: International Financial Management

You are hoarse from explaining to your supervisor that the cost, if any, of hedging exchange-rate risk can be thought of as an insurance premium to avoid surprises.What is the cost of hedging a €2 million commitment if the spot rate is €1.6/$, the forward rate is €1.55/$, and the expected spot rate at the end of the hedge is €1.6/$?

On average, empirical evidence suggests that those who cover foreign exchange commitments in the forward market pay a premium of approximately _____ to avoid exchange-rate risk.

According to the expectations theory of exchange rates, what change is expected in the future spot exchange rate if the current spot rate is 8% lower than the forward exchange rate?

What would you expect to be the relationship between real rates of interest in Japan and Canada if inflation is expected to be 3% in Japan and 6% in Canada?

Yesterday the spot exchange rate of Yen-to-Canadian Dollar was 65.What is today's spot exchange rate if the Yen has appreciated 10% against the Dollar today?

How much would you expect to receive for a nominal interest rate in Holland if funds can be invested in the Canada at a rate of 7% when inflation is expected to be 4% in the Canada and 8% in Holland?

Explain the law of one price.

Which of the following illustrates non-contractual exchange-rate risk?

You are importing TV sets worth ¥10,000,000 from a Japanese manufacturer, and this amount is payable after six months.You can hedge your exchange risk by doing one of the following.

A foreign manufacturer must make a $2 million payment to its Canadian supplier in 60 days.Which of the following is correct?

The current one-year nominal interest in Canada is 7%.If the anticipated inflation for the coming year in Canada is 2.5%, what is the real interest rate?

The Yen is currently trading at ¥105.89 per USD, while the forward rate is ¥102.33 per USD.Given this information, calculate the forward premium.

The main purpose in contracting to purchase foreign currency in the forward market is to:

Buckingham Inc., a British corporation, owes Canuck Inc., a Canadian corporation, $1 million due in two months.How can Buckingham hedge the exchange risk?

It is much easier for a firm to hedge non-contractual rather than contractual exchange rate risk.

Why should interest rate parity mean that the forward premium should equal the interest rate differential between countries?

You have decided to hedge your exchange-rate risk in your U.S.-based firm by contracting forward to buy 500,000 Swiss Francs for delivery in one year.The current exchange rate is Sf1.6/$.The forward rate is Sf1.7/$(U.S.).How much better (worse) off are you if you don't buy the forward contract and instead pay the spot rate in one year if it turns out to be Sf1.65/$?

If the correlation of returns between foreign projects and domestic projects is less than 1.0, then:

Which of the following would you expect to be nearly equal across countries?

According to interest rate parity, the interest rate differential must be equal to the differential between forward and spot exchange rates.