Exam 16: International Business Finance

What does the law of one price say?

If the exchange rate quotes in two different countries were out of line with each other,an enterprising trader could make a profit by buying in the market where the currency was cheaper and simultaneously selling it in the market where the currency was more expensive.Such a person would be known as a(n)

The Eurodollar market is larger than any financial market in the United States.

Exchange-rate risk arises from the fact that the spot exchange rate on a future date is unknown today.

The spot exchange rate in New York is 1.600 dollars per British pound.The 360-day forward exchange rate is 1.680 dollars per pound.The one-year interest rate in Great Britain is 2% while the one-year interest rate in the United States is 4%. a.If the interest rate in Great Britain remains at 2%,what should the interest rate be in the United States according to the interest rate parity theory? b.An American investor with $40,000 decides to take advantage of the differences in rates.Ignoring transaction costs,how can the American investor exploit the disequilibrium? Compare the amount of money the investor will have at the end of the year if he or she invests in one-year U.S.securities versus one-year British securities.

In order to profit from an expected near-term increase in the relative value of the British pound versus the U.S.dollar,an investor would be wise to maintain a short position in pounds,then sell when the pound rises in relative value.

The cost of debt used in the international investment decision is the lesser of the parent's or the subsidiary's cost of debt.

A quote of .7645 euros per dollar in New York is an example of a direct quote.

IMXP Corp.enters into a 30-day forward exchange contract to buy 113,540,000 yen for $100,000.Which of the following statements is true concerning this transaction?

A Spot transaction occurs when

Short-term daily fluctuations in exchange rates are caused by supply and demand conditions in the foreign exchange market.

The bid-asked spread is much lower for currencies that are infrequently traded in order to compensate banks for providing the service.

Except for the effects of small transaction costs,the forward premium or discount should be equal and opposite in size to the difference in the national interest rates for securities of the same maturity.What is the name of this theory?

Describe exchange rate risk in direct foreign investment.

The direct quote in New York is .015 dollar per Pakistani rupee.The direct quote in Pakistan is 60 rupees per dollar.This imbalance in rates can be corrected by arbitrage.A trader will ________ rupees in New York and ________ rupees in Pakistan,causing the direct quote in New York to ________.

A direct quote is always denominated in U.S.dollars,since the dollar is the medium of exchange in international business.

Exceptions to purchase power parity exist if arbitrage opportunities are limited by characteristics such as perishability or high transportation costs.

Define the types of risk that are commonly referred to as political risk,and give some examples of them.

Suppose the current exchange rates are 1.3215 dollars per euro,and 84.19 yen per dollar.What is the current exchange rate between yen and euros?

Suppose a U.S.importer purchases an Italian product today but will not pay for it for 90 days.The cost of the product today is 35,000 euros.The spot exchange rate today is .6233 euros per dollar.The importer creates a forward-market hedge.The 90-day forward rate is .6100 euros per dollar.The amount the U.S.importer will pay in 90 days is