Question 1

If interest rates are higher in Italy than in Canada, the market expects that the lira will:

Accepted Answer

A) Appreciate against the Dollar 
B) Depreciate against the Dollar 
C) Offer a higher real rate of return than the Dollar 
D) Be selling at a forward discount 
A) Appreciate against the Dollar 
B) Depreciate against the Dollar 
C) Offer a higher real rate of return than the Dollar 
D) Be selling at a forward discount

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

The international Fisher effect is valid in the long run, because:

Accepted Answer

A) Inflation rates are equal in different countries 
B) Investors will move their money into countries with high real interest rates 
C) Investors will move their money into countries with high nominal interest rates 
D) Investors will move their money into countries with low inflation 
A) Inflation rates are equal in different countries 
B) Investors will move their money into countries with high real interest rates 
C) Investors will move their money into countries with high nominal interest rates 
D) Investors will move their money into countries with low inflation

Question 4

A firm intends to hedge against exchange loss, a large future payment that must be made in a foreign currency.Which of the following identifies the cost of such a hedge?

Accepted Answer

A) Difference between expected and current spot rates 
B) Difference between expected and current forward rates 
C) Difference between the forward premium and the forward discount 
D) Difference between the forward rate and the expected future spot rate 
A) Difference between expected and current spot rates 
B) Difference between expected and current forward rates 
C) Difference between the forward premium and the forward discount 
D) Difference between the forward rate and the expected future spot rate

Question 5

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 0.24% higher r$(real) = 
A) Invest in Holland due to higher nominal rate 
B) Invest in Canada; real return is 1.1% higher 
C) Invest in Canada; real return is 0.1% higher 
D) Invest in Holland; real return is 0.24% higher r$(real) =

Question 6

A foreign manufacturer must make a $2 million payment to its Canadian supplier in 60 days.Which of the following is correct?

Accepted Answer

A) The firm hopes that the Canadian Dollar appreciates within the 60 days 
B) The firm's exchange rate risk is hedged 
C) The firm faces contractual exchange rate risk 
D) The current spot exchange rate is likely to be trading at a premium 
A) The firm hopes that the Canadian Dollar appreciates within the 60 days 
B) The firm's exchange rate risk is hedged 
C) The firm faces contractual exchange rate risk 
D) The current spot exchange rate is likely to be trading at a premium

Question 7

If the spot exchange rate between marks and Dollars is DM1.5/$before the Dollar depreciates by 10%, how many Dollars will it now take a U.S.payer to remit an invoice of DM500?

Accepted Answer

A) $366.67 
B) $370.37 
C) $750.00 
D) $825.00 
A) $366.67 
B) $370.37 
C) $750.00 
D) $825.00

Question 8

The French franc 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% 1.1 x 4.167 = 4.583 
A) 10.00% 
B) 11.62% 
C) 14.55% 
D) 20.00% 1.1 x 4.167 = 4.583

Question 9

Which of the following would you expect to improve the Dollar-NPV of a foreign capital budgeting proposal?

Accepted Answer

A) The Dollar is expected to appreciate against the foreign currency 
B) Lower inflation is expected in the foreign country than in the United States 
C) The foreign country has a less stable political environment 
D) The risk-free rate in the foreign country is higher than in the United States 
A) The Dollar is expected to appreciate against the foreign currency 
B) Lower inflation is expected in the foreign country than in the United States 
C) The foreign country has a less stable political environment 
D) The risk-free rate in the foreign country is higher than in the United States

Question 10

If exchange rates adjust to reflect inflation differentials across countries, then:

Accepted Answer

A) The law of one price will always hold 
B) No one will use forward currency markets 
C) Interest rates will be equal across countries 
D) PPP is said to hold 
A) The law of one price will always hold 
B) No one will use forward currency markets 
C) Interest rates will be equal across countries 
D) PPP is said to hold

Question 11

Suppose that:   If no other information is available, what will your guess about the spot rate in one year be?

Accepted Answer

A) 1.5331 
B) 1.5372 
C) 1.5502 
D) 2.0000 
A) 1.5331 
B) 1.5372 
C) 1.5502 
D) 2.0000

Question 12

How do we perform an NPV analysis for projects with cash flows in foreign currencies?

Accepted Answer

Overseas investment decisions are no dif

Question 13

Suppose that:   
What arbitrage gains can be achieved if the bank quotes a rate of 75Yen per Swiss Francs?

Accepted Answer

A) 8% 
B) 9% 
C) 10% 
D) 11% Suppose that the exchange rate were *1075/Swiss franc.Then an investor could: 
A) 8% 
B) 9% 
C) 10% 
D) 11% Suppose that the exchange rate were *1075/Swiss franc.Then an investor could:

Question 14

You are hoarse from explaining to your supervisor that the cost, if any, of hedging exchange-rate risk can be thought of as an insurance premium to avoid surprises.What is the cost of hedging a DM2 million commitment if the spot rate is DM1.6/$, the forward rate is DM1.55/$, and the expected spot rate at the end of the hedge is DM1.6/$?

Accepted Answer

A) $0 
B) $25,000 
C) $40,323 
D) $68,966 current Dollar commitment = 
A) $0 
B) $25,000 
C) $40,323 
D) $68,966 current Dollar commitment =

Question 15

A Canadian firm owes *10 million three months from now.The spot exchange rate is *60/$and the forward rate is *61/$.Is the Yen selling at a forward premium or discount, related to the Dollar? Does the firm face exchange risk? Would you suggest that they buy now or later?

Accepted Answer

The Yen is selling at a forward discount

Question 16

The ratio of expected spot rate to current spot rate for $$\le$ is 1.02 and the inflation rate in the U.S.is 5%.What is the approximate inflation rate in the United Kingdom?

Accepted Answer

A) 1.3% 
B) 2.9% 
C) 4.1% 
D) 7.0% 
A) 1.3% 
B) 2.9% 
C) 4.1% 
D) 7.0%

Question 17

Your firm, which operates in the United States, has a contractual payment of $\le$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

Suppose that the current spot rate for the euro is $1.6215/€ and that the six-month forward rate is $1.614/€.What is the cost to a Canadian company of hedging its future need for euros by buying them in the forward market? Assume the expectation theory of exchange rates.

Accepted Answer

According to the expectation theory of e

Question 19

The law of one price implies that the same commodity should be sold at the same price in all countries.

Accepted Answer

A) True 
 B)False

Question 20

If the mark is trading at a forward discount relative to the Dollar, then you'll receive fewer marks per Dollar in the future.

Accepted Answer

A) True 
 B)False

Exam 24: Risk Management

If interest rates are higher in Italy than in Canada, the market expects that the lira will:

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

The international Fisher effect is valid in the long run, because:

A firm intends to hedge against exchange loss, a large future payment that must be made in a foreign currency.Which of the following identifies the cost of such a hedge?

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.

A foreign manufacturer must make a $2 million payment to its Canadian supplier in 60 days.Which of the following is correct?

If the spot exchange rate between marks and Dollars is DM1.5/$before the Dollar depreciates by 10%, how many Dollars will it now take a U.S.payer to remit an invoice of DM500?

The French franc 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?

Which of the following would you expect to improve the Dollar-NPV of a foreign capital budgeting proposal?

If exchange rates adjust to reflect inflation differentials across countries, then:

Suppose that: If no other information is available, what will your guess about the spot rate in one year be?

How do we perform an NPV analysis for projects with cash flows in foreign currencies?

Suppose that: What arbitrage gains can be achieved if the bank quotes a rate of 75Yen per Swiss Francs?

A Canadian firm owes *10 million three months from now.The spot exchange rate is *60/$and the forward rate is *61/$.Is the Yen selling at a forward premium or discount, related to the Dollar? Does the firm face exchange risk? Would you suggest that they buy now or later?

The ratio of expected spot rate to current spot rate for $ ≤\le≤ is 1.02 and the inflation rate in the U.S.is 5%.What is the approximate inflation rate in the United Kingdom?

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

Suppose that the current spot rate for the euro is $1.6215/€ and that the six-month forward rate is $1.614/€.What is the cost to a Canadian company of hedging its future need for euros by buying them in the forward market? Assume the expectation theory of exchange rates.

The law of one price implies that the same commodity should be sold at the same price in all countries.

If the mark is trading at a forward discount relative to the Dollar, then you'll receive fewer marks per Dollar in the future.

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

A Canadian firm owes 10 million three months from now.The spot exchange rate is 60/$and the forward rate is *61/$.Is the Yen selling at a forward premium or discount, related to the Dollar? Does the firm face exchange risk? Would you suggest that they buy now or later?

The ratio of expected spot rate to current spot rate for $ $\le$ is 1.02 and the inflation rate in the U.S.is 5%.What is the approximate inflation rate in the United Kingdom?

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