Exam 22: International Financial Management

You have bid for a possible export order that would provide a cash inflow of €1 million in 1 year. The spot exchange rate is $0.9644/€ and the 1-year forward rate is $0.9503/€. There are two sources of uncertainty: (1) the euro could appreciate to $1.00/€ or depreciate to $0.90/€, and (2) you may or may not receive the export order. Illustrate in each case the profits or losses that you would make if you sell €1 million forward.

Would you be willing to exchange dollars for pounds at a rate of $1.50/£ to invest in London and earn a 1-year rate of 10%, as opposed to investing in the United States for a 5% return? What things might you first consider before investing?

Which one of the following would you expect to be nearly equal across countries?

If prices in the United States rise less rapidly than in Canada, which one of the following would be expected according to purchasing power parity?

The main purpose in contracting to purchase foreign currency in the forward market is to:

How much wealthier would you be 1 year from now if you exchange $100,000 into Hong Kong dollars today at an indirect rate of HK$7.8/$, earn 7% on your Hong Kong investment, and exchange back at a rate of HK$8.0/$, as compared to investing in the United States at 4.0%?

You can value overseas investments using the NPV of the cash flows. Which of the following adjustment is necessary to calculate the NPV?

What are some simple strategies to protect the firm against exchange rate risk?

A sandwich costs $6.79 in the U.S. The exchange rate is $C0.98 per U.S. dollar. What does the identical sandwich have to cost in Canada for purchasing power parity to exist?

Even if a firm neither owes nor is owed foreign currency, it still may be affected by currency fluctuations.

The spot exchange rate for the Canadian dollar (C$) is U.S.$0.980/C$. The 6-month interest rate in the United States is 2.5% and 3.0% in Canada. What is the 6-month forward rate for the Canadian dollar?

What are the basic relationships between spot exchange rates, forward exchange rates, interest rates, and inflation rates?

According to interest rate parity, the interest rate differential must be equal to the differential between forward and spot exchange rates.

Suppose that the inflation rate in the United States is 4% and in Canada it is 5%. What would you expect is happening to the exchange rate between the U.S. and Canadian dollars?