Exam 22: International Financial Management

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:

The direct exchange rate quotes the number of U.S. dollars that can be exchanged for one unit of a foreign currency.

Assume nominal rates are 10% in the United States and 25% in Holland, while the expected rates of inflation are 5% and 19%, respectively. Assuming investments of equal risk, you should invest in:

How do auto manufacturers in United States, Europe, and Japan hedge their economic risks?

Which one of the following is correct when foreign currency is contracted in the forward market?

The current 1-year nominal interest in the United States is 7%. If the anticipated inflation for the coming year in the United States is 2.5%, what is the real interest rate in the U.S.?

General Gadget Corp. (GGC) is a U.S.-based multinational firm that makes electrical coconut scrapers. These gadgets are made only in the United States using local inputs. The scrapers are sold mainly to Asian and West Indian countries where coconuts are grown. a. If GGC sells scrapers in Trinidad, what is the currency risk faced by the firm? b. In what currency should GGC borrow funds to pay for its investment in order to mitigate its foreign exchange exposure? c. Suppose that GGC begins manufacturing its products in Trinidad using local (Trinidadian) inputs and labor. How does this affect its exchange rate risk?

Current 1-year interest rates are 4% and 8% in the United States and Spain, respectively. The anticipated inflation in the United States is 2%. If the international Fisher effect holds, what is the expected inflation rate in Spain?

High inflation rates are usually associated with:

Assume PPP holds at a time when the exchange rate is €0.75/$ and a market basket of goods costs €500. How many dollars would you expect to spend on the goods? Germany is expecting 10% inflation while the United States is expecting 4% inflation. What would you predict to happen to exchange rates?

You have compiled the cash flows of a foreign project denominated in the foreign currency and also the dollar-based cost of capital for the project. To compute the project NPV denominated in dollars, you now need to compute the:

An American investor buys 100 shares of London Enterprises at a price of £50 when the exchange rate is $1.60/£. A year later the shares are selling at £52. No dividends have been paid. a. What is the rate of return to the American investor if the exchange rate is still $1.60/£? b. What if the exchange rate is $1.70/£? c. What if the exchange rate is $1.50/£?

An indirect quote is the rate of one unit of foreign currency expressed in U.S. dollars.

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 United States and that the current spot rate is ¥107/$1.

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 you will receive:

Suppose that: What rate do you think a Japanese bank would quote for buying or selling Swiss francs today?

According to the expectations theory of exchange rates, what change is expected in the future spot exchange rate if the current spot rate is 8% lower than the forward exchange rate?

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

Suppose the interest rate on 1-year loans in the United States is 5% while in the United Kingdom the interest rate is 6%. The spot exchange rate is $1.55/£ and the forward rate is $1.54/£. In what country would you choose to borrow? To lend? Can you profit from this situation?

According to the theory of purchasing power parity, exchange rates will adjust so that differences in: