Question 1

Exchange rate risk exists if the firm's free cash flows are correlated with the spot exchange rate.

Accepted Answer

A) True 
 B)False

Question 2

What is the amount of Canadian taxes paid,in dollars,on KT's Japanese operations?

Accepted Answer

A)  $0 
B)  $20.5 million 
C)  $17.5 million 
D)  $10.3 million 
E)  -$3 million 
A)  $0 
B)  $20.5 million 
C)  $17.5 million 
D)  $10.3 million 
E)  -$3 million

Question 3

Use the information for the question(s) below.
You are a Canadian investor who is trying to calculate the present value (PV) of a 15 million British pound cash inflow that will occur one year from now. The spot exchange rate is 1.5742 CAD/GBP and the forward rate is F₁ = 1.5682 CAD/GBP. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate British pound discount rate is 1.45%.
-What is the present value of the dollar cash inflow computed by first converting the pounds into dollars and then discounting the dollars?

Accepted Answer

A)  $23,275,505 
B)  $23,186,792 
C)  $23,367,640 
D)  $23,278,575 
E)  $23,310,005 
A)  $23,275,505 
B)  $23,186,792 
C)  $23,367,640 
D)  $23,278,575 
E)  $23,310,005

Question 4

One British pound can be purchased for $1.80.What is the exchange rate in terms of pounds per dollar?

Accepted Answer

A)  0.451 
B)  0.491 
C)  0.526 
D)  0.556 
E)  0.547 
A)  0.451 
B)  0.491 
C)  0.526 
D)  0.556 
E)  0.547

Question 5

Multinational firms often use currency forward contracts and options to hedge foreign exchange rate risk.

Accepted Answer

A) True 
 B)False

Question 6

A Brazilian firm owes you $2,000,000,payable in three months,however,they insist on paying in Brazilian Reals.The current spot exchange rate is 0.59305 CAD/BRL.The three-month forward exchange rate is 0.61255 CAD/BRL.How many Real should you demand in a forward contract to receive $2,000,000 in three months to hedge the exchange rate risk?

Accepted Answer

A)  1,186,100 Real 
B)  3,372,397 Real 
C)  3,265,040 Real 
D)  1,225,100 Real 
E)  2,450,721 Real 
A)  1,186,100 Real 
B)  3,372,397 Real 
C)  3,265,040 Real 
D)  1,225,100 Real 
E)  2,450,721 Real

Question 7

The spot exchange rate for the British pound is 0.5 GBP/CAD.The one-year interest rate in Canada is 4% and the one-year interest rate in Britain is 5%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

Accepted Answer

A)  0.606 
B)  0.612 
C)  0.617 
D)  0.505 
E)  0.631 
A)  0.606 
B)  0.612 
C)  0.617 
D)  0.505 
E)  0.631

Question 8

A Canadian exporter will receive $10 million USD in September,and decides to buy a put option on the USD for September delivery.Suppose a put option on the USD with a September expiration and a strike price of 1.25 USD/CADtrades for 0.0115CAD per put on 1 USD.If,by the September expiration date,the USD has depreciated to 1.26 USD/CAD,how much did the firm lose (in CAD)from hedging with the option,compared to remaining unhedged?

Accepted Answer

A)  -$51,508 
B)  -$63,492 
C)  -$115,000 
D)  $0 
E)  -$15,000 
A)  -$51,508 
B)  -$63,492 
C)  -$115,000 
D)  $0 
E)  -$15,000

Question 9

The one-year forward exchange rate for the British pound is 1.70 CAD/GBP.If the one-year Canadian interest rate is 5% and the one-year British interest rate is 6%,compute the implied spot exchange rate in CAD/GBP.

Accepted Answer

A)  1.69 
B)  1.72 
C)  1.75 
D)  1.78 
E)  1.81 
A)  1.69 
B)  1.72 
C)  1.75 
D)  1.78 
E)  1.81

Question 10

The one-year forward exchange rate is 40 INR/USD.If the one-year interest rate in the United States is 4% and in India is 7%,what is the spot exchange rate so as to preclude arbitrage?

Accepted Answer

A)  38.88 
B)  39.01 
C)  39.23 
D)  39.32 
E)  39.46 
A)  38.88 
B)  39.01 
C)  39.23 
D)  39.32 
E)  39.46

Question 11

A ________ is written between a firm and a bank and it fixes the currency exchange rate for a transaction that will occur at a future date.

Accepted Answer

A)  currency forward contract 
B)  currency options contract 
C)  currency call option 
D)  currency put option 
E)  currency loan contract 
A)  currency forward contract 
B)  currency options contract 
C)  currency call option 
D)  currency put option 
E)  currency loan contract

Question 12

A currency forward contract passes exchange rate risk from a firm to the bank that has written the forward contract.Why is the bank willing to bear this risk?

Accepted Answer

There are two reasons why a bank will ac

Question 13

IBM enters into a forward contract to purchase 100,000 euros at a rate of 1.60 USD/EUR one year from today.If the spot exchange rate is 2 USD/EUR one year later,what is the dollar amount that IBM must pay to receive the euros?

Accepted Answer

A)  $100,000 
B)  $160,000 
C)  $200,000 
D)  $300,000 
E)  $240,000 
A)  $100,000 
B)  $160,000 
C)  $200,000 
D)  $300,000 
E)  $240,000

Question 14

A Canadian firm is planning to make an investment in Europe.The firm estimates that the project will generate a single cash flow of 200,000 euros after one year.If the one year forward exchange rate is 1.34 CAD/EUR,and the Canadian cost of capital is 6%,what is the PV of the project cash flow?

Accepted Answer

A)  $252,830 
B)  $158,209 
C)  $140,805 
D)  $188,679 
E)  $268,000 
A)  $252,830 
B)  $158,209 
C)  $140,805 
D)  $188,679 
E)  $268,000

Question 15

If the cash flows generated by a foreign investment are ________ with ________,we do not need to consider the impact of exchange rate risk.

Accepted Answer

A)  uncorrelated, costs 
B)  negatively correlated, revenues 
C)  uncorrelated, cash flows 
D)  correlated, cash flows 
E)  correlated, costs 
A)  uncorrelated, costs 
B)  negatively correlated, revenues 
C)  uncorrelated, cash flows 
D)  correlated, cash flows 
E)  correlated, costs

Question 16

The spot exchange rate for the Mexican peso is 12.35 MXN/CAD.If the one-year Canadian interest rate is 5.5% and the one-year Mexican interest rate is 3.75%,compute the implied one-year forward rate in CAD/MXN.

Accepted Answer

A)  0.079 CAD/MXN 
B)  0.080 CAD/MXN 
C)  0.082 CAD/MXN 
D)  0.085 CAD/MXN 
E)  0.081 CAD/MXN 
A)  0.079 CAD/MXN 
B)  0.080 CAD/MXN 
C)  0.082 CAD/MXN 
D)  0.085 CAD/MXN 
E)  0.081 CAD/MXN

Question 17

A Canadian importer needs 10 million U.S.dollars in September,and decides to buy a call option on the USD for September delivery.Suppose a call option on the USD with a September expiration and a strike price of 1.30 USD/CAD trades for 0.0515 CAD per call on 1 USD.If,by the September expiration date,the USD has appreciated to 1.25 USD/CAD,how much did the firm lose (in CAD)from hedging with the option,compared to remaining unhedged?

Accepted Answer

A)  -$15,000 
B)  -$207,308 
C)  $0 
D)  -$307,692 
E)  -$500,000 
A)  -$15,000 
B)  -$207,308 
C)  $0 
D)  -$307,692 
E)  -$500,000

Question 18

Firms must consider the impact of exchange rate risk if ________ of the project are affected by exchange rate changes.

Accepted Answer

A)  cash flows 
B)  revenues 
C)  costs 
D)  capital costs 
E)  depreciation expenses 
A)  cash flows 
B)  revenues 
C)  costs 
D)  capital costs 
E)  depreciation expenses

Question 19

The spot exchange rate for the British pound is 0.6 GBP/CAD.The one-year interest rate in Canada is 5% and the one-year interest rate in Britain is 6%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

Accepted Answer

A)  0.606 
B)  0.612 
C)  0.617 
D)  0.624 
E)  0.631 
A)  0.606 
B)  0.612 
C)  0.617 
D)  0.624 
E)  0.631

Question 20

The amount of taxes paid by a foreign subsidiary does not depend on the amount repatriated back to the home country.

Accepted Answer

A) True 
 B)False

Exam 22: International Corporate Finance

Exchange rate risk exists if the firm's free cash flows are correlated with the spot exchange rate.

What is the amount of Canadian taxes paid,in dollars,on KT's Japanese operations?

One British pound can be purchased for $1.80.What is the exchange rate in terms of pounds per dollar?

Multinational firms often use currency forward contracts and options to hedge foreign exchange rate risk.

The spot exchange rate for the British pound is 0.5 GBP/CAD.The one-year interest rate in Canada is 4% and the one-year interest rate in Britain is 5%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

The one-year forward exchange rate for the British pound is 1.70 CAD/GBP.If the one-year Canadian interest rate is 5% and the one-year British interest rate is 6%,compute the implied spot exchange rate in CAD/GBP.

The one-year forward exchange rate is 40 INR/USD.If the one-year interest rate in the United States is 4% and in India is 7%,what is the spot exchange rate so as to preclude arbitrage?

A ________ is written between a firm and a bank and it fixes the currency exchange rate for a transaction that will occur at a future date.

A currency forward contract passes exchange rate risk from a firm to the bank that has written the forward contract.Why is the bank willing to bear this risk?

IBM enters into a forward contract to purchase 100,000 euros at a rate of 1.60 USD/EUR one year from today.If the spot exchange rate is 2 USD/EUR one year later,what is the dollar amount that IBM must pay to receive the euros?

A Canadian firm is planning to make an investment in Europe.The firm estimates that the project will generate a single cash flow of 200,000 euros after one year.If the one year forward exchange rate is 1.34 CAD/EUR,and the Canadian cost of capital is 6%,what is the PV of the project cash flow?

If the cash flows generated by a foreign investment are ________ with ________,we do not need to consider the impact of exchange rate risk.

The spot exchange rate for the Mexican peso is 12.35 MXN/CAD.If the one-year Canadian interest rate is 5.5% and the one-year Mexican interest rate is 3.75%,compute the implied one-year forward rate in CAD/MXN.

Firms must consider the impact of exchange rate risk if ________ of the project are affected by exchange rate changes.

The spot exchange rate for the British pound is 0.6 GBP/CAD.The one-year interest rate in Canada is 5% and the one-year interest rate in Britain is 6%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

The amount of taxes paid by a foreign subsidiary does not depend on the amount repatriated back to the home country.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

If the cash flows generated by a foreign investment are with ,we do not need to consider the impact of exchange rate risk.