Exam 16: International Business Finance

A U.S.-based multinational corporation (MNC)currently has an investment portfolio that includes Japanese securities valued at 10,000,000 yen.The company also owes its Japanese suppliers 12,000,000 yen.Which of the following statements is MOST correct?

The forward-spot differential is the difference between the forward rate and the expected future spot rate.

A major source of long-term capital overseas is in the Eurocurrency market.

All of the following are examples of political risk for a U.S.company investing in a foreign country EXCEPT

A narrow spread indicates efficiency in the spot exchange market.

A British-made component costs 36 U.K.pounds.A company in the United States needs to buy these components and the current indirect quote indicates that one dollar will buy .6250 pounds.Ignoring transactions costs,how much will one component cost in U.S.dollars?

Three types of arbitrage are simple arbitrage,rectangular arbitrage,and covered-expense arbitrage.

A direct quote of $1.6255 dollars to buy one U.K.pound corresponds to an indirect quote of .6152 pounds per one dollar.

Arbitrage is the process of buying in one market and selling in another market in order to make a riskless profit.

A cross rate is the computation of an exchange rate for a currency from the exchange rates of two other currencies.

The law of one price suggests that all of the following will have the same price in different countries EXCEPT

Interest Rate Parity theory states that interest rates must be the same in all countries using floating exchange rates or else international markets will not be in equilibrium.

In addition to those risks faced by domestic corporations,multinational corporations face

Exchange rate risk exists in International Trade Contracts,Foreign Portfolio Investments,and in Direct Foreign Investments.

An exchange rate of $1.6 per British pound is an example of a direct quote in the United States.

Argentina experienced a period of extremely high inflation relative to its trading partners and Argentina's currency decreased in value.This is an example of purchasing power parity theory.

A direct quote of $1.9887 dollars to buy one U.K.pound corresponds to an indirect quote of .9887 pounds per one dollar.

The U.S.dollar is the most frequently traded currency in foreign currency markets,accounting for over 40% of total trading.

The asked rate is also known as the selling rate or the offer rate.

The existence of a forward-spot differential creates an arbitrage opportunity that will eliminate the differential almost immediately.