Question 1

You are importing TV sets worth ¥10 million from a Japanese manufacturer, and this amount is payable after 6 months. You can hedge your exchange risk by:

Accepted Answer

A)  buying Japanese yen in the forward market. 
B)  selling Japanese yen in the forward market. 
C)  borrowing Japanese yen. 
D) doing nothing. 
A)  buying Japanese yen in the forward market. 
B)  selling Japanese yen in the forward market. 
C)  borrowing Japanese yen. 
D) doing nothing.

Question 2

If the interest rate in one country increases, then the value of that country's currency increases in the forward market.

Accepted Answer

A) True 
 B)False

Question 3

Which one of the following is advised when evaluating a capital project in a foreign country if you are concerned about political risk?

Accepted Answer

A)  The project should be abandoned until this risk is eliminated. 
B)  The project's cost of capital rate should be decreased to offset the perceived risk. 
C)  The domestic discount rate should be increased to account for the added risk. 
D) The project cash flows should be decreased to account for the political risk. 
A)  The project should be abandoned until this risk is eliminated. 
B)  The project's cost of capital rate should be decreased to offset the perceived risk. 
C)  The domestic discount rate should be increased to account for the added risk. 
D) The project cash flows should be decreased to account for the political risk.

Question 4

The international Fisher effect states that nominal interest rates should be equal in all countries.

Accepted Answer

A) True 
 B)False

Question 5

If you buy yen forward when the yen is selling at a forward premium, you will get:

Accepted Answer

A)  more yen than if you buy yen on spot market. 
B)  fewer yen than if you buy yen on spot market. 
C)  the same number of yen as on the spot market, but with a lower commission. 
D) the expectation of more yen, but the difference is not locked in. 
A)  more yen than if you buy yen on spot market. 
B)  fewer yen than if you buy yen on spot market. 
C)  the same number of yen as on the spot market, but with a lower commission. 
D) the expectation of more yen, but the difference is not locked in.

Question 6

Yesterday the spot exchange rate of yen-to-dollar was 105. What is today's spot exchange rate if the yen has appreciated 10% against the dollar today?

Accepted Answer

A)  ¥94.5/$1 
B)  ¥94.5/$1.10 
C)  ¥115.5/$1 
D) ¥115.5/$1.10 
A)  ¥94.5/$1 
B)  ¥94.5/$1.10 
C)  ¥115.5/$1 
D) ¥115.5/$1.10

Question 7

What is the international Fisher effect and how would you test it, knowing that 6% inflation is expected in the United States but only 3% is expected in Spain. The nominal U.S. interest rate is 9%.

Accepted Answer

The international Fisher effect theorize

Question 8

Which one of the following is correct if you have contracted to purchase 1,000 Swiss francs 3 months forward at a rate of SFr1.6/$?

Accepted Answer

A)  You pay $625 today for the francs. 
B)  You pay $1,600 today for the francs. 
C)  You pay $625 three months from now for the francs. 
D) You pay $1,600 three months from now for the francs. 
A)  You pay $625 today for the francs. 
B)  You pay $1,600 today for the francs. 
C)  You pay $625 three months from now for the francs. 
D) You pay $1,600 three months from now for the francs.

Question 9

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 10

What is the difference between spot and forward exchange rates?

Accepted Answer

The exchange rate is the amount of one c

Question 11

Transaction risk is easily identified and hedged.

Accepted Answer

A) True 
 B)False

Question 12

Which one of these is probably the best means of reducing or offsetting political risk?

Accepted Answer

A)  Refusing any foreign government assistance in building the infrastructure required for your foreign operations 
B)  Borrowing money in the country in which you have foreign operations to fund those activities 
C)  Manufacturing a complete product in a foreign country using only resources from that country 
D) Paying for all foreign operations with cash originating in the home country 
A)  Refusing any foreign government assistance in building the infrastructure required for your foreign operations 
B)  Borrowing money in the country in which you have foreign operations to fund those activities 
C)  Manufacturing a complete product in a foreign country using only resources from that country 
D) Paying for all foreign operations with cash originating in the home country

Question 13

The spot exchange rate for the British pound is $1.60/£. The annual inflation rate in the U.S. is 4% compared to 8% in the U.K. What is the anticipated exchange rate at the end of the year if PPP is valid?

Accepted Answer

A)  $1.54/£ 
B)  $1.65/£ 
C)  $1.60/£ 
D) $1.63/£ 
A)  $1.54/£ 
B)  $1.65/£ 
C)  $1.60/£ 
D) $1.63/£

Question 14

Your firm, which operates in the United States, has a contractual payment of £1 million due in 3 months. Which one 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 3 months at the current spot rate. 
C)  Contract forward today to buy 1 million pounds in 3 months. 
D) Sell £1 million of goods in the United Kingdom now with payment due in 3 months. 
A)  Buy 1 million pounds now at the current spot rate. 
B)  Buy 1 million pounds in 3 months at the current spot rate. 
C)  Contract forward today to buy 1 million pounds in 3 months. 
D) Sell £1 million of goods in the United Kingdom now with payment due in 3 months.

Question 15

You can purchase a futures contract on any currency.

Accepted Answer

A) True 
 B)False

Question 16

A firm owes a large future payment that must be made in a foreign currency and wants to hedge the associated exchange rate risk. Which one 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 17

Assuming the international Fisher effect is holding, what will be the effect of an increase of a country's nominal interest rates on the country's currency?

Accepted Answer

A)  The currency will appreciate. 
B)  The currency will depreciate. 
C)  There will be no significant change in the currency's value. 
D) The currency will sell at a forward premium. 
A)  The currency will appreciate. 
B)  The currency will depreciate. 
C)  There will be no significant change in the currency's value. 
D) The currency will sell at a forward premium.

Question 18

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

Accepted Answer

Overseas investment decisions are no dif

Question 19

Interest rate parity tells us that the cost of buying yen forward is exactly the same as the cost of borrowing dollars, buying yen in the spot market, and leaving them on yen deposit.

Accepted Answer

A) True 
 B)False

Question 20

A U.S. firm owes ¥10 million three months from now. The spot exchange rate is ¥95/$ and the forward rate is ¥96/$. Is the yen selling at a forward premium or discount, related to the dollar? Does the firm face exchange risk? Should the firm buy yen now or later?

Accepted Answer

The yen is selling at a forward discount

Exam 22: International Financial Management

You are importing TV sets worth ¥10 million from a Japanese manufacturer, and this amount is payable after 6 months. You can hedge your exchange risk by:

If the interest rate in one country increases, then the value of that country's currency increases in the forward market.

Which one of the following is advised when evaluating a capital project in a foreign country if you are concerned about political risk?

The international Fisher effect states that nominal interest rates should be equal in all countries.

If you buy yen forward when the yen is selling at a forward premium, you will get:

Yesterday the spot exchange rate of yen-to-dollar was 105. What is today's spot exchange rate if the yen has appreciated 10% against the dollar today?

What is the international Fisher effect and how would you test it, knowing that 6% inflation is expected in the United States but only 3% is expected in Spain. The nominal U.S. interest rate is 9%.

Which one of the following is correct if you have contracted to purchase 1,000 Swiss francs 3 months forward at a rate of SFr1.6/$?

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

What is the difference between spot and forward exchange rates?

Transaction risk is easily identified and hedged.

Which one of these is probably the best means of reducing or offsetting political risk?

The spot exchange rate for the British pound is $1.60/£. The annual inflation rate in the U.S. is 4% compared to 8% in the U.K. What is the anticipated exchange rate at the end of the year if PPP is valid?

Your firm, which operates in the United States, has a contractual payment of £1 million due in 3 months. Which one of the following methods would be considered speculative regarding your exchange rate risk?

You can purchase a futures contract on any currency.

A firm owes a large future payment that must be made in a foreign currency and wants to hedge the associated exchange rate risk. Which one of the following identifies the cost of such a hedge?

Assuming the international Fisher effect is holding, what will be the effect of an increase of a country's nominal interest rates on the country's currency?

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

Interest rate parity tells us that the cost of buying yen forward is exactly the same as the cost of borrowing dollars, buying yen in the spot market, and leaving them on yen deposit.

A U.S. firm owes ¥10 million three months from now. The spot exchange rate is ¥95/$ and the forward rate is ¥96/$. Is the yen selling at a forward premium or discount, related to the dollar? Does the firm face exchange risk? Should the firm buy yen now or later?

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

Options

Risk Management

Filters