Question 1

It is much easier for a firm to hedge non-contractual rather than contractual exchange rate risk.

Accepted Answer

A) True 
 B)False

Question 2

The nominal interest rate is the difference between real interest rate and inflation.

Accepted Answer

A) True 
 B)False

Question 3

A firm in Canada is due to receive payment of 1 million Australian Dollars in 10 year's time.It would like to protect itself against a decline in the value of the Australian Dollar but finds it difficult to arrange a forward sale for such a long period.Is there any other way that it can protect itself?

Accepted Answer

The firm can borrow the present value of

Question 4

A U.S.firm has a legal obligation to pay FFr5 million one year from now and is wondering how they can hedge the exchange risk.The spot exchange rate is FFr5.5/$and the forward rate is FFr5.6/$.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 5

If the spot indirect exchange rate of Mexican Pesos for U.S.Dollars is 9.8/1 and the peso is trading at a forward premium of 3%, then a U.S.trader will receive:

Accepted Answer

A) More than 9.8 Pesos per Dollar in the future 
B) Less than 9.8 Pesos per Dollar in the future 
C) 9.83 Pesos per Dollar in the future 
D) 10.09 Pesos per Dollar in the future 
A) More than 9.8 Pesos per Dollar in the future 
B) Less than 9.8 Pesos per Dollar in the future 
C) 9.83 Pesos per Dollar in the future 
D) 10.09 Pesos per Dollar in the future

Question 6

One of the drawbacks of using forward contracts to hedge foreign-exchange risk is that the:

Accepted Answer

A) Transaction costs in the forward market are high 
B) Forward rates are always lower than spot rates 
C) Hedged currency could appreciate during the period 
D) Hedged currency could depreciate during the period 
A) Transaction costs in the forward market are high 
B) Forward rates are always lower than spot rates 
C) Hedged currency could appreciate during the period 
D) Hedged currency could depreciate during the period

Question 7

The Treasurer has noticed that the interest rate in Japan is below most other countries.It was suggested that the company issue bonds in Japanese Yen.What considerations should be taken to account?

Accepted Answer

If international capital markets are com

Question 8

You have the opportunity to invest in the United States at 6% or invest in an equally risky Australian investment that offers 20%.This is too good to be true! The current exchange rate is A$1.65/$.Which of the following do you suspect about this one-year investment?

Accepted Answer

A) Expected inflation is higher in the United States 
B) The one-year forward exchange rate is A$1.8679/$ 
C) Real interest rates are higher in the United States 
D) The Australian Dollar is selling forward at an 8.48% premium relative to the U.S.Dollar 
A) Expected inflation is higher in the United States 
B) The one-year forward exchange rate is A$1.8679/$ 
C) Real interest rates are higher in the United States 
D) The Australian Dollar is selling forward at an 8.48% premium relative to the U.S.Dollar

Question 9

The spot exchange rate for Canadian Dollar(C$) is U.S.$0.68/C$.The six-month interest rate in U.S.is 2.5% and 3.0% in Canada.What is the six-month forward rate for Canadian Dollar?

Accepted Answer

A) U.S.$0.6734/C$ 
B) U.S.$0.6767/C$ 
C) U.S.$0.6833/C$ 
D) U.S.$0.6866/C$ forward rate = spot rate x 
A) U.S.$0.6734/C$ 
B) U.S.$0.6767/C$ 
C) U.S.$0.6833/C$ 
D) U.S.$0.6866/C$ forward rate = spot rate x

Question 10

The spot exchange rate of British Pound($\le$) is $2.56(Canadian)/$\le$.The annual inflation rate in Canadian $is 4% and 8% in Britain.What will be the anticipated exchange rate at the end of the year if PPP is valid?

Accepted Answer

A) $2.4652/$\le$ 
B) $2.1503/$\le$ 
C) $3.0804/$\le$ 
D) $2.5600/$\le$ E(exchange rate) = spot rate x 
A) $2.4652/$\le$ 
B) $2.1503/$\le$ 
C) $3.0804/$\le$ 
D) $2.5600/$\le$ E(exchange rate) = spot rate x

Question 11

Which of the following is correct when contracting ahead in the forward exchange market?

Accepted Answer

A) At contract close you pay either the forward rate that was contracted or the then-current rate 
B) Contracting ahead is always cheaper than waiting to pay spot rates 
C) Your cost is locked-in from the beginning of the contract, regardless of market changes 
D) Paying spot price is safer than contracting forward 
A) At contract close you pay either the forward rate that was contracted or the then-current rate 
B) Contracting ahead is always cheaper than waiting to pay spot rates 
C) Your cost is locked-in from the beginning of the contract, regardless of market changes 
D) Paying spot price is safer than contracting forward

Question 12

An indirect exchange rate can be converted to a direct exchange rate by:

Accepted Answer

A) Dividing the indirect rate by number of U.S.Dollars required to purchase one unit of the other currency 
B) Dividing the indirect rate by 100 
C) Multiplying the indirect rate by the spot rate 
D) Taking the inverse of the indirect rate 
A) Dividing the indirect rate by number of U.S.Dollars required to purchase one unit of the other currency 
B) Dividing the indirect rate by 100 
C) Multiplying the indirect rate by the spot rate 
D) Taking the inverse of the indirect rate

Question 13

What are some simple strategies to protect the firm against exchange rate risk?

Accepted Answer

Our simple theories about forward rates

Question 14

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

Accepted Answer

A) A Canadian importer will owe $\le$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 $\le$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 15

The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in:

Accepted Answer

A) Real rates of interest 
B) Purchasing power parity 
C) The standard of living 
D) Expected inflation 
A) Real rates of interest 
B) Purchasing power parity 
C) The standard of living 
D) Expected inflation

Question 16

If the difference between forward and spot exchange rates is positive, interest rate parity would predict that:

Accepted Answer

A) The difference in interest rates between countries will be negative 
B) The difference in interest rates between countries will be positive 
C) There will be no difference in interest rates between countries 
D) The difference will be quickly eliminated 
A) The difference in interest rates between countries will be negative 
B) The difference in interest rates between countries will be positive 
C) There will be no difference in interest rates between countries 
D) The difference will be quickly eliminated

Question 17

Predict the expected spot exchange rate between the Japanese Yen and U.S.Dollar, given that inflation in Japan, at 8%, is 4% higher than in the U.S.and that the current spot rate is *107/$.

Accepted Answer

A) (*102.72/$) 
B) (*103.04/$) 
C) (*111.12/$) 
D) (*111.28/$) 
A) (*102.72/$) 
B) (*103.04/$) 
C) (*111.12/$) 
D) (*111.28/$)

Question 18

If the indirect exchange rate between French Francs and U.S.Dollars is 6.8/1, then the direct exchange rate between these currencies is:

Accepted Answer

A) $.1471/FFr 
B) $/6.8FFr 
C) FFr/$6.8 
D) FFr/$.1471 
A) $.1471/FFr 
B) $/6.8FFr 
C) FFr/$6.8 
D) FFr/$.1471

Question 19

Assuming that the international Fisher effect is holding, what will be the effect of an increase in nominal interest rate on the currency?

Accepted Answer

A) Currency will appreciate 
B) Currency will depreciate 
C) No significant change in exchange rate 
D) Currency will sell at a forward premium 
A) Currency will appreciate 
B) Currency will depreciate 
C) No significant change in exchange rate 
D) Currency will sell at a forward premium

Question 20

The theory that goods in a foreign country should be priced approximately equal after currency translation to goods in a host country is referred to as the law of:

Accepted Answer

A) Exchange rates 
B) Large numbers 
C) Spot rates 
D) One price 
A) Exchange rates 
B) Large numbers 
C) Spot rates 
D) One price

Exam 24: Risk Management

It is much easier for a firm to hedge non-contractual rather than contractual exchange rate risk.

The nominal interest rate is the difference between real interest rate and inflation.

A U.S.firm has a legal obligation to pay FFr5 million one year from now and is wondering how they can hedge the exchange risk.The spot exchange rate is FFr5.5/$and the forward rate is FFr5.6/$.The one-year U.S.interest rate is 5% and the French rate is 5.5%.What do you suggest?

If the spot indirect exchange rate of Mexican Pesos for U.S.Dollars is 9.8/1 and the peso is trading at a forward premium of 3%, then a U.S.trader will receive:

One of the drawbacks of using forward contracts to hedge foreign-exchange risk is that the:

The Treasurer has noticed that the interest rate in Japan is below most other countries.It was suggested that the company issue bonds in Japanese Yen.What considerations should be taken to account?

You have the opportunity to invest in the United States at 6% or invest in an equally risky Australian investment that offers 20%.This is too good to be true! The current exchange rate is A$1.65/$.Which of the following do you suspect about this one-year investment?

The spot exchange rate for Canadian Dollar(C$) is U.S.$0.68/C$.The six-month interest rate in U.S.is 2.5% and 3.0% in Canada.What is the six-month forward rate for Canadian Dollar?

The spot exchange rate of British Pound( ≤\le≤ ) is $2.56(Canadian)/ ≤\le≤ .The annual inflation rate in Canadian $is 4% and 8% in Britain.What will be the anticipated exchange rate at the end of the year if PPP is valid?

Which of the following is correct when contracting ahead in the forward exchange market?

An indirect exchange rate can be converted to a direct exchange rate by:

What are some simple strategies to protect the firm against exchange rate risk?

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

The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in:

If the difference between forward and spot exchange rates is positive, interest rate parity would predict that:

Predict the expected spot exchange rate between the Japanese Yen and U.S.Dollar, given that inflation in Japan, at 8%, is 4% higher than in the U.S.and that the current spot rate is *107/$.

If the indirect exchange rate between French Francs and U.S.Dollars is 6.8/1, then the direct exchange rate between these currencies is:

Assuming that the international Fisher effect is holding, what will be the effect of an increase in nominal interest rate on the currency?

The theory that goods in a foreign country should be priced approximately equal after currency translation to goods in a host country is referred to as the law of:

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 Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Conclusion

What We Do and Do Not Know About Finance

Filters

The spot exchange rate of British Pound( $\le$ ) is $2.56(Canadian)/ $\le$ .The annual inflation rate in Canadian $is 4% and 8% in Britain.What will be the anticipated exchange rate at the end of the year if PPP is valid?