Question 1

All of the following items are needed to compute relative purchasing power parity EXCEPT:

Accepted Answer

A)  spot price 
B)  home country interest rate 
C)  benchmark tax rate 
D)  expected foreign country inflation rate 
A)  spot price 
B)  home country interest rate 
C)  benchmark tax rate 
D)  expected foreign country inflation rate

Question 2

An increase in the value of a foreign currency relative to the U.S. dollar ____ the conversion value of the foreign subsidiary's liabilities.

Accepted Answer

A)  decreases 
B)  increases 
C)  has no effect on 
D)  is an average of 
A)  decreases 
B)  increases 
C)  has no effect on 
D)  is an average of

Question 3

What is the real rate of return if the risk-free rate is 4 percent and the expected rate of inflation is 2.5 percent?

Accepted Answer

A)  0.43% 
B)  1.50% 
C)  6.35% 
D)  1.46% 
A)  0.43% 
B)  1.50% 
C)  6.35% 
D)  1.46%

Question 4

The theory of interest rate parity states that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in ____ prevailing in the two countries.

Accepted Answer

A)  inflation rates 
B)  interest rates 
C)  trade deficit rates 
D)  GNP growth rates 
A)  inflation rates 
B)  interest rates 
C)  trade deficit rates 
D)  GNP growth rates

Question 5

The law of one price, an economic principle, means that the price of a product in different markets should be:

Accepted Answer

A)  the same if the raw materials were obtained from a single source.. 
B)  the same if adjusted for inflation. 
C)  the same if taxes are adjusted based on a single currency. 
D)  the same if there are no significant costs associated with moving between markets. 
A)  the same if the raw materials were obtained from a single source.. 
B)  the same if adjusted for inflation. 
C)  the same if taxes are adjusted based on a single currency. 
D)  the same if there are no significant costs associated with moving between markets.

Question 6

If the annual nominal interest rate on 5-year U.S. Government Treasury bonds is 7 percent, and the annual nominal interest rate on 5-year Canadian bonds is 5.5 percent, what is the expected future spot rate in 5 years given that the current spot exchange rate between U.S. dollars and Canadian dollars is $0.587?

Accepted Answer

A)  $0.595 
B)  $0.547 
C)  $0.578 
D)  $0.630 
A)  $0.595 
B)  $0.547 
C)  $0.578 
D)  $0.630

Question 7

A less restrictive form of purchasing power parity is:

Accepted Answer

A)  Omnipotent purchasing power parity 
B)  Relative purchasing power parity 
C)  Absolute purchasing power parity 
D)  Exchange parity 
A)  Omnipotent purchasing power parity 
B)  Relative purchasing power parity 
C)  Absolute purchasing power parity 
D)  Exchange parity

Question 8

The (6 month) interest rate on 180 day U.S. Treasury bills is 7.64%. In the foreign exchange markets, the spot rate between U.S. dollars and British pounds is 1 pound = $1.5525. The 180-day (6 month) forward rate is 1 pound = $1.5188. Determine the expected rate of interest on 6 month British government debt securities, assuming interest rate parity between the dollar and pound exists.

Accepted Answer

A)  13.52% 
B)  5.47% 
C)  7.31% 
D)  10.03% 
A)  13.52% 
B)  5.47% 
C)  7.31% 
D)  10.03%

Question 9

What is the real rate of return if the risk-free rate is 3.25 percent and the expected rate of inflation is 2.75 percent?

Accepted Answer

A)  0.50% 
B)  0.51% 
C)  0.487% 
D)  1.49% 
A)  0.50% 
B)  0.51% 
C)  0.487% 
D)  1.49%

Question 10

How do market forces support the relative purchasing power parity?

Accepted Answer

Market forces that support the relative

Question 11

Primary sources of supply of British pounds in the foreign exchange market include:

Accepted Answer

A)  British importers who need to convert their pounds into foreign currency to pay for purchases 
B)  foreign investors who desire to make investments in physical or financial assets in Great Britain 
C)  speculators who expect British pounds to increase in value relative to other currencies 
D)  U.S. importers who need to convert dollars to pounds to pay for purchases 
A)  British importers who need to convert their pounds into foreign currency to pay for purchases 
B)  foreign investors who desire to make investments in physical or financial assets in Great Britain 
C)  speculators who expect British pounds to increase in value relative to other currencies 
D)  U.S. importers who need to convert dollars to pounds to pay for purchases

Question 12

A high rate of inflation within a country will tend to ____ the value of its currency with respect to the currencies of other countries that are experiencing lower rates of inflation.

Accepted Answer

A)  increase 
B)  decrease 
C)  have no effect on 
D)  cannot be determined because of insufficient information 
A)  increase 
B)  decrease 
C)  have no effect on 
D)  cannot be determined because of insufficient information

Question 13

In considering purchasing power parity, the relationship is:
I. not applicable due to tariffs.
II. is applicable in spite of trade barriers.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 14

Under current accounting procedures, all of the following balance sheet items are translated into dollars at the rate of exchange prevailing on the date of the balance sheet except:

Accepted Answer

A)  stockholder's equity 
B)  fixed assets 
C)  current liabilities payable in a foreign currency 
D)  long-term liabilities payable in a foreign currency 
A)  stockholder's equity 
B)  fixed assets 
C)  current liabilities payable in a foreign currency 
D)  long-term liabilities payable in a foreign currency

Question 15

When a multinational firm has one or more foreign subsidiaries with assets and liabilities denominated in a foreign currency, it faces ____ exposure.

Accepted Answer

A)  economic 
B)  operating 
C)  translation 
D)  transaction 
A)  economic 
B)  operating 
C)  translation 
D)  transaction

Question 16

If the annual nominal interest rate on 10-year U.S. Government Treasury bonds is 7.35 percent and the annual nominal interest rate on 10-year Japanese bonds is 5.75 percent, what is the expected future spot rate in 10 years given that the current spot exchange rate between U.S dollars and Japanese yen is $0.00959?

Accepted Answer

A)  $0.00834 
B)  $0.01114 
C)  $0.00973 
D)  $0.00946 
A)  $0.00834 
B)  $0.01114 
C)  $0.00973 
D)  $0.00946

Question 17

There are two methods used to forecast future exchange rates. What are they and how do companies use them to protect against risk?

Accepted Answer

Forecasting future exchange rates can be

Question 18

Crown Honda purchased one of its most popular models for 965,600 yen. The exchange rate for the yen was 142 yen per U.S. dollar at the time of purchase but then rose to 171.8 yen by the time payment was made. What was the dealer's gain or loss on the change in rates?

Accepted Answer

A)  gain of $1,180 
B)  loss of $1,427 
C)  loss of $1,180 
D)  gain of $1,427 
A)  gain of $1,180 
B)  loss of $1,427 
C)  loss of $1,180 
D)  gain of $1,427

Question 19

If the spot rate (in U.S. dollars) for the Australian dollar is $0.559 and the 180 day forward rate is trading at a premium of 2.86%, then the 180 day forward rate is:

Accepted Answer

A)  $0.551 
B)  $0.567 
C)  $0.575 
D)  $0.583 
A)  $0.551 
B)  $0.567 
C)  $0.575 
D)  $0.583

Question 20

If U.S. prices are expected to rise by 3.5 percent over the coming year and prices in Great Britain are expected to rise by 5.25 percent during the same time, what is the expected spot rate in one year given that the current spot exchange rate is $1.497?

Accepted Answer

A)  $1.522 
B)  $1.470 
C)  $1.472 
D)  $1.499 
A)  $1.522 
B)  $1.470 
C)  $1.472 
D)  $1.499

Exam 22: International Financial Management

All of the following items are needed to compute relative purchasing power parity EXCEPT:

An increase in the value of a foreign currency relative to the U.S. dollar ____ the conversion value of the foreign subsidiary's liabilities.

What is the real rate of return if the risk-free rate is 4 percent and the expected rate of inflation is 2.5 percent?

The theory of interest rate parity states that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in ____ prevailing in the two countries.

The law of one price, an economic principle, means that the price of a product in different markets should be:

A less restrictive form of purchasing power parity is:

What is the real rate of return if the risk-free rate is 3.25 percent and the expected rate of inflation is 2.75 percent?

How do market forces support the relative purchasing power parity?

Primary sources of supply of British pounds in the foreign exchange market include:

A high rate of inflation within a country will tend to ____ the value of its currency with respect to the currencies of other countries that are experiencing lower rates of inflation.

In considering purchasing power parity, the relationship is: I. not applicable due to tariffs. II. is applicable in spite of trade barriers.

Under current accounting procedures, all of the following balance sheet items are translated into dollars at the rate of exchange prevailing on the date of the balance sheet except:

When a multinational firm has one or more foreign subsidiaries with assets and liabilities denominated in a foreign currency, it faces ____ exposure.

There are two methods used to forecast future exchange rates. What are they and how do companies use them to protect against risk?

Crown Honda purchased one of its most popular models for 965,600 yen. The exchange rate for the yen was 142 yen per U.S. dollar at the time of purchase but then rose to 171.8 yen by the time payment was made. What was the dealer's gain or loss on the change in rates?

If the spot rate (in U.S. dollars) for the Australian dollar is $0.559 and the 180 day forward rate is trading at a premium of 2.86%, then the 180 day forward rate is:

If U.S. prices are expected to rise by 3.5 percent over the coming year and prices in Great Britain are expected to rise by 5.25 percent during the same time, what is the expected spot rate in one year given that the current spot exchange rate is $1.497?

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-term Financing

The Management of Cash and Marketable Securities

Management of Accounts Receivable and Inventories

Lease and Intermediate-term Financing

Financing With Derivatives

Risk Management

Corporate Restructuring

Continuous Compounding and Discounting

Mutually Exclusive Investments Having Unequal Lives

Breakeven Analysis

Bond Refunding Analysis

Taxes

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