Exam 22: International Financial Management

According to the international Fisher effect, the differences in nominal interest rates across countries reflect the differences in their expected rates of inflation.

Assume the spot exchange rate for the Swiss franc is $0.61/Sfr and the 1-year forward rate is $0.63/Sfr. If the 1-year interest rate in the U.S. is 5%, what is the 1-year interest rate in Switzerland?

If the international Fisher effect is valid, then real interest rates in all countries should be equal.

If the yen is trading at a forward discount relative to the dollar, then you'll receive less yen per dollar in the future.

If inflation is expected to be higher in the U.S. than in Mexico, then the peso is forecasted to depreciate against the dollar.

You're 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 2 million euro commitment if the spot rate is €1.6/$, the forward rate is €1.55/$, and the expected spot rate at the end of the hedge is €1.6/$?

Consider the following spot exchange rates: $1.60/£, ¥105/$, €1.6/$, and L2,020/$. Which one of the following prices for 1 troy ounce of gold seems to violate the law of one price if gold sells for $290 per troy ounce in the United States?

Assume that the British pound is selling at a forward premium to the U.S. dollar. Explain what this means in terms of the spot and forward markets. Which currency is expected to appreciate in this situation?

Forward rates are always equal to the actual future exchange rates.

If interest rates are higher in Italy than in the United States, you should expect the euro to:

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

Assume an exchange rate of R6.8344/$. Also assume the cost of living is the same in the United States and South Africa, and that the inflation rate is 8.5% in South Africa and 3.5% in the United States. Calculate the expected exchange rate at the end of one year.

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

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

If managers intend to adjust the projections of foreign investments, it is probably better to make the adjustments in:

If the spot exchange rate between euros and dollars is €1.5/$ before the dollar depreciates by 10%, how many dollars will it take after the depreciation has occurred to pay an invoice of €500?

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

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

What is the law of one price? When would you expect it to hold and when would you not expect it to hold?

A firm has a legal obligation to pay FFr5 million one year from now and is wondering how it can hedge the exchange risk. The spot exchange rate is FFr5.5/$ and the 1-year forward rate is FFr5.6/$. The 1-year U.S. interest rate is 5% and the French rate is 5.5%. What do you suggest?