Question 1

Futures contracts represent a low-cost method of buying foreign currency forward.

Accepted Answer

A) True 
 B)False

Question 2

The Toronto Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market.

Accepted Answer

A) True 
 B)False

Question 3

What would you expect to occur if the rate of expected inflation in Canada is considerably lower than expected inflation in Germany?

Accepted Answer

A)  The expected spot rate of DM/$will increase. 
B)  The current spot rate of DM/$will increase. 
C)  The Dollar should appreciate against the DM. 
D)  The Dollar should depreciate against the DM. 
A)  The expected spot rate of DM/$will increase. 
B)  The current spot rate of DM/$will increase. 
C)  The Dollar should appreciate against the DM. 
D)  The Dollar should depreciate against the DM.

Question 4

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.

Accepted Answer

A)  0.0% 
B)  3.1% 
C)  5.0% 
D)  7.3% 
A)  0.0% 
B)  3.1% 
C)  5.0% 
D)  7.3%

Question 5

Current one-year interest rates are 4% and 8% in Canada and Spain respectively.The anticipated inflation in Canada is 2%.If international Fisher effect holds,what is the expected inflation in Spain?

Accepted Answer

A)  4.00% 
B)  4.04% 
C)  5.92% 
D)  6.00% 
A)  4.00% 
B)  4.04% 
C)  5.92% 
D)  6.00%

Question 6

If the direct exchange rate between U.S.Dollars and pounds sterling is 1.50/1,how much should you be willing to pay to receive 350 pounds?

Accepted Answer

A)  $175.00 
B)  $233.33 
C)  $367.50 
D)  $525.00 
A)  $175.00 
B)  $233.33 
C)  $367.50 
D)  $525.00

Question 7

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

Accepted Answer

A)  Sell pounds in the spot market. 
B)  Buy pounds in the forward market. 
C)  Sell Dollars in the spot market. 
D)  Buy Dollars in the forward market. 
A)  Sell pounds in the spot market. 
B)  Buy pounds in the forward market. 
C)  Sell Dollars in the spot market. 
D)  Buy Dollars in the forward market.

Question 8

The Yen is currently trading at ¥109.66 per USD,while the forward rate is ¥112.96 per USD.Given this information,calculate the forward premium or discount.

Accepted Answer

A)  5.92% premium 
B)  2.92% premium 
C)  5.92% discount 
D)  2.92% discount 
A)  5.92% premium 
B)  2.92% premium 
C)  5.92% discount 
D)  2.92% discount

Question 9

Where would you prefer to invest,and why,if nominal rates are 10% in Canada and 25% in Holland,while the expected rates of inflation are 5% and 19% respectively? Assume investments of equal risk.

Accepted Answer

A)  Invest in Holland due to higher nominal rate. 
B)  Invest in Canada; real return is 1.1% higher. 
C)  Invest in Canada; real return is 0.1% higher. 
D)  Invest in Holland; real return is 0.28% higher. 
A)  Invest in Holland due to higher nominal rate. 
B)  Invest in Canada; real return is 1.1% higher. 
C)  Invest in Canada; real return is 0.1% higher. 
D)  Invest in Holland; real return is 0.28% higher.

Question 10

If you are a currency speculator,you will always make money by:

Accepted Answer

A)  buying currency with high interest rate. 
B)  buying currency with low interest rate. 
C)  accurately predicting whether exchange rate will change more or less than the interest rate differential. 
D)  buying the currency with the highest interest rate differential. 
A)  buying currency with high interest rate. 
B)  buying currency with low interest rate. 
C)  accurately predicting whether exchange rate will change more or less than the interest rate differential. 
D)  buying the currency with the highest interest rate differential.

Question 11

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

Accepted Answer

A)  A Canadian importer will owe £50,000 and the pound is expected to appreciate. 
B)  A French airplane manufacturer has suppliers in Canada and the exchange rate has been unstable. 
C)  A Canadian distributor of Japanese electronic goods expects the Dollar to depreciate. 
D)  A Canadian subsidiary of a German manufacturer transfers DM100,000 to the parent annually. 
A)  A Canadian importer will owe £50,000 and the pound is expected to appreciate. 
B)  A French airplane manufacturer has suppliers in Canada and the exchange rate has been unstable. 
C)  A Canadian distributor of Japanese electronic goods expects the Dollar to depreciate. 
D)  A Canadian subsidiary of a German manufacturer transfers DM100,000 to the parent annually.

Question 12

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?

Accepted Answer

A)  4.21% 
B)  4.39% 
C)  4.50% 
D)  7.18% 
A)  4.21% 
B)  4.39% 
C)  4.50% 
D)  7.18%

Question 13

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

Accepted Answer

A)  foreign projects should be discounted with a higher rate. 
B)  the domestic firm would be better off without the foreign projects. 
C)  the foreign project may not add much risk to the existing domestic operation. 
D)  the foreign projects will experience a higher degree of inflation. 
A)  foreign projects should be discounted with a higher rate. 
B)  the domestic firm would be better off without the foreign projects. 
C)  the foreign project may not add much risk to the existing domestic operation. 
D)  the foreign projects will experience a higher degree of inflation.

Question 14

History has shown a positive relationship between higher interest rates and higher subsequent rates of inflation.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?

Accepted Answer

A)  The countries have equal nominal interest rates. 
B)  The spot rate is expected to change. 
C)  Expected inflation is less than the nominal rate. 
D)  Both currencies are selling at a premium relative to the other. 
A)  The countries have equal nominal interest rates. 
B)  The spot rate is expected to change. 
C)  Expected inflation is less than the nominal rate. 
D)  Both currencies are selling at a premium relative to the other.

Question 16

The French Euro is currently worth $0.24 and it's selling in the one-year forward market at a 10% premium relative to the Canadian Dollar.Approximately what rate would you expect to pay for a one-year loan in France if the rate would be 10% in Canada?

Accepted Answer

A)  10.00% 
B)  11.62% 
C)  14.55% 
D)  20.00% 
A)  10.00% 
B)  11.62% 
C)  14.55% 
D)  20.00%

Question 17

Your firm,which operates in the United States,has a contractual payment of £1 million due in three months.Which of the following methods would be considered speculative regarding your exchange-rate risk?

Accepted Answer

A)  Buy 1 million pounds now at the current spot rate. 
B)  Buy 1 million pounds in three months at the current spot rate. 
C)  Contract forward to buy 1 million pounds in three months. 
D)  Borrow Dollars, convert to pounds at spot, invest for three months. 
A)  Buy 1 million pounds now at the current spot rate. 
B)  Buy 1 million pounds in three months at the current spot rate. 
C)  Contract forward to buy 1 million pounds in three months. 
D)  Borrow Dollars, convert to pounds at spot, invest for three months.

Question 18

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?

Accepted Answer

A)  ¥58.50/$ 
B)  ¥60/$1.10 
C)  ¥65/$ 
D)  ¥75/$1.10 
A)  ¥58.50/$ 
B)  ¥60/$1.10 
C)  ¥65/$ 
D)  ¥75/$1.10

Question 19

A U.S.firm has a legal obligation to pay €5 million one year from now and is wondering how they can hedge the exchange risk.The spot exchange rate is €5.5/$and the forward rate is €5.6/$.The one-year U.S.interest rate is 5% and the French rate is 5.5%.What do you suggest?

Accepted Answer

The options for hedging this exchange ri

Question 20

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

Accepted Answer

A)  earn a premium (interest) on the exchange. 
B)  lock into a price now. 
C)  take advantage of future price reductions. 
D)  avoid the more expensive spot rates. 
A)  earn a premium (interest) on the exchange. 
B)  lock into a price now. 
C)  take advantage of future price reductions. 
D)  avoid the more expensive spot rates.

Exam 24: International Financial Management

Futures contracts represent a low-cost method of buying foreign currency forward.

The Toronto Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market.

What would you expect to occur if the rate of expected inflation in Canada is considerably lower than expected inflation in Germany?

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.

Current one-year interest rates are 4% and 8% in Canada and Spain respectively.The anticipated inflation in Canada is 2%.If international Fisher effect holds,what is the expected inflation in Spain?

If the direct exchange rate between U.S.Dollars and pounds sterling is 1.50/1,how much should you be willing to pay to receive 350 pounds?

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

The Yen is currently trading at ¥109.66 per USD,while the forward rate is ¥112.96 per USD.Given this information,calculate the forward premium or discount.

Where would you prefer to invest,and why,if nominal rates are 10% in Canada and 25% in Holland,while the expected rates of inflation are 5% and 19% respectively? Assume investments of equal risk.

If you are a currency speculator,you will always make money by:

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

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?

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

History has shown a positive relationship between higher interest rates and higher subsequent rates of inflation.

Which of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?

The French Euro is currently worth $0.24 and it's selling in the one-year forward market at a 10% premium relative to the Canadian Dollar.Approximately what rate would you expect to pay for a one-year loan in France if the rate would be 10% in Canada?

Your firm,which operates in the United States,has a contractual payment of £1 million due in three months.Which of the following methods would be considered speculative regarding your exchange-rate risk?

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?

A U.S.firm has a legal obligation to pay €5 million one year from now and is wondering how they can hedge the exchange risk.The spot exchange rate is €5.5/$and the forward rate is €5.6/$.The one-year U.S.interest rate is 5% and the French rate is 5.5%.What do you suggest?

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

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

Options

Risk Management

Filters