Question 1

Buying currency in the forward market is a common method of hedging currency risk.

Accepted Answer

A) True 
 B)False

Question 2

A firm can invest €10 million in its German subsidiary and receive a return of €4.3 million annually for 3 years. The spot rate is €1.6/$, the U.S. rate of inflation is expected to be 4% annually, and the German rate is expected to be 3% annually. If the appropriate risk-adjusted cost of capital in dollars is 14%, does the project appear to have a positive NPV?

Accepted Answer

The euro should appreciate against the d

Question 3

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

Accepted Answer

A)  The risk-free rate in the foreign country is higher than in the United States. 
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) An increase in domestic discount rate. 
A)  The risk-free rate in the foreign country is higher than in the United States. 
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) An increase in domestic discount rate.

Question 4

Assume you can exchange $1 for either C$1.03 or €0.74. How many Canadian dollars can be acquired with one euro?

Accepted Answer

A)  C$0.7622 
B)  C$1.2900 
C)  C$1.3919 
D) C$0.7184 
A)  C$0.7622 
B)  C$1.2900 
C)  C$1.3919 
D) C$0.7184

Question 5

Interest rate parity suggests that it is cheaper to borrow in a currency with a low nominal rate of interest.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A)  dividing the indirect rate by the 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 the 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 7

What would you expect to be the relationship between real rates of interest in Japan and the United States if inflation is expected to be 3% in Japan and 6% in the United States?

Accepted Answer

A)  Japan's real interest rate should be 3% higher than in the United States. 
B)  Japan's real interest rate should be 3% lower than in the United States. 
C)  Japan's real interest rate should be half as high as in the United States. 
D) Real interest rates should be equal in both countries. 
A)  Japan's real interest rate should be 3% higher than in the United States. 
B)  Japan's real interest rate should be 3% lower than in the United States. 
C)  Japan's real interest rate should be half as high as in the United States. 
D) Real interest rates should be equal in both countries.

Question 8

Assume the current spot price is $1.62/₤ and the 3-month forward rate is $1.64/₤. Which one of these statements is correct given these rates?

Accepted Answer

A)  The pound is selling at a premium relative to the dollar. 
B)  The real interest rate in the U.S. is higher than the real rate in the U.K. 
C)  The dollar is expected to appreciate. 
D) The dollar is selling at a premium relative to the pound. 
A)  The pound is selling at a premium relative to the dollar. 
B)  The real interest rate in the U.S. is higher than the real rate in the U.K. 
C)  The dollar is expected to appreciate. 
D) The dollar is selling at a premium relative to the pound.

Question 9

If the direct exchange rate between U.S. dollars and pounds sterling is 1.50/1, how much should you be willing to pay to receive 350 pounds?

Accepted Answer

A)  $175.00 
B)  $233.33 
C)  $367.50 
D) $525.00 
A)  $175.00 
B)  $233.33 
C)  $367.50 
D) $525.00

Question 10

Buckingham Inc., a British corporation, owes Yank Inc., a U.S. corporation, $1 million due in 2 months. How can Buckingham hedge the exchange risk?

Accepted Answer

A)  Sell pounds in the spot market 
B)  Buy pounds in the forward market 
C)  Sell dollars in the spot market 
D) Buy dollars in the forward market 
A)  Sell pounds in the spot market 
B)  Buy pounds in the forward market 
C)  Sell dollars in the spot market 
D) Buy dollars in the forward market

Question 11

If real interest rates are different across countries, investors will shift their money into countries with high real interest rates.

Accepted Answer

A) True 
 B)False

Question 12

Forward contracts are standardized contracts sold in organized exchanges.

Accepted Answer

A) True 
 B)False

Question 13

What is the expected spot rate of ¥/$ one year from now if the current spot rate is ¥106/$ and the yen is selling 1-year forward at ¥114/$?

Accepted Answer

A)  ¥78.9/$ 
B)  ¥98.0/$ 
C)  ¥106.0/$ 
D) ¥114.0/$ 
A)  ¥78.9/$ 
B)  ¥98.0/$ 
C)  ¥106.0/$ 
D) ¥114.0/$

Question 14

Suppose the interest rate in Canada is 4% while it is 3% in the U.S. The indirect spot rate is C$1.02. What is the indirect 1-year forward rate?

Accepted Answer

A)  C$1.0299 
B)  C$1.0608 
C)  C$1.0200 
D) C$1.0302 
A)  C$1.0299 
B)  C$1.0608 
C)  C$1.0200 
D) C$1.0302

Question 15

If the direct quote for the euro is $1.35/€, then the indirect quote for the euro will be:

Accepted Answer

A)  €0.51/US$. 
B)  €0.74/US$. 
C)  €0.68/US$. 
D) €0.65/US$. 
A)  €0.51/US$. 
B)  €0.74/US$. 
C)  €0.68/US$. 
D) €0.65/US$.

Question 16

Country A has a higher inflation rate than Country B. Given this, Country A will have the:

Accepted Answer

A)  weaker currency. 
B)  higher nominal interest rate. 
C)  stronger currency. 
D)  higher real interest rate. 
A)  weaker currency. 
B)  higher nominal interest rate. 
C)  stronger currency. 
D)  higher real interest rate.

Question 17

Suppose the spot rate for the Canadian dollar is 1.034, the 3-month forward rate is 1.036, and the 1-year forward rate is 1.039. If no other information is available, what will be your guess about the spot rate in 1 year?

Accepted Answer

A)  1.034 
B)  1.036 
C)  1.039 
D) 1.037 
A)  1.034 
B)  1.036 
C)  1.039 
D) 1.037

Question 18

The forward exchange rate is the rate for immediate exchanges of two currencies.

Accepted Answer

A) True 
 B)False

Question 19

The ratio of expected spot rate to current spot rate for $/£ is 1.02 and the inflation rate in the United States 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 20

Suppose that:   What arbitrage gains can be achieved by a U.S. investor if the bank quotes a rate of 75 yen per Swiss franc?

Accepted Answer

A)  8% 
B)  9% 
C)  10% 
D) 11% 
A)  8% 
B)  9% 
C)  10% 
D) 11%

Exam 22: International Financial Management

Buying currency in the forward market is a common method of hedging currency risk.

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

Assume you can exchange $1 for either C$1.03 or €0.74. How many Canadian dollars can be acquired with one euro?

Interest rate parity suggests that it is cheaper to borrow in a currency with a low nominal rate of interest.

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

What would you expect to be the relationship between real rates of interest in Japan and the United States if inflation is expected to be 3% in Japan and 6% in the United States?

Assume the current spot price is $1.62/₤ and the 3-month forward rate is $1.64/₤. Which one of these statements is correct given these rates?

If the direct exchange rate between U.S. dollars and pounds sterling is 1.50/1, how much should you be willing to pay to receive 350 pounds?

Buckingham Inc., a British corporation, owes Yank Inc., a U.S. corporation, $1 million due in 2 months. How can Buckingham hedge the exchange risk?

If real interest rates are different across countries, investors will shift their money into countries with high real interest rates.

Forward contracts are standardized contracts sold in organized exchanges.

What is the expected spot rate of ¥/$ one year from now if the current spot rate is ¥106/$ and the yen is selling 1-year forward at ¥114/$?

Suppose the interest rate in Canada is 4% while it is 3% in the U.S. The indirect spot rate is C$1.02. What is the indirect 1-year forward rate?

If the direct quote for the euro is $1.35/€, then the indirect quote for the euro will be:

Country A has a higher inflation rate than Country B. Given this, Country A will have the:

Suppose the spot rate for the Canadian dollar is 1.034, the 3-month forward rate is 1.036, and the 1-year forward rate is 1.039. If no other information is available, what will be your guess about the spot rate in 1 year?

The forward exchange rate is the rate for immediate exchanges of two currencies.

The ratio of expected spot rate to current spot rate for $/£ is 1.02 and the inflation rate in the United States is 5%. What is the approximate inflation rate in the United Kingdom?

Suppose that: What arbitrage gains can be achieved by a U.S. investor if the bank quotes a rate of 75 yen per Swiss franc?

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