Question 1

Countries with high inflation will have the:

Accepted Answer

A)  weakest currency. 
B)  highest nominal interest rate. 
C)  strongest currency. 
D)  highest real interest rate. 
A)  weakest currency. 
B)  highest nominal interest rate. 
C)  strongest currency. 
D)  highest real interest rate.

Question 2

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 3

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:

Accepted Answer

A)  exchange rates. 
B)  large numbers. 
C)  spot rates. 
D)  one price. 
A)  exchange rates. 
B)  large numbers. 
C)  spot rates. 
D)  one price.

Question 4

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 5

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

Accepted Answer

Even if a firm neither owes nor is owed

Question 6

The current exchange rate is $2/£.Cookham Industries is a large British firm that exports computer games to the United States.If the dollar depreciates relative to the pound,Cookham will increase the dollar price it charges its U.S.customers.But it cannot raise its U.S.price enough to fully offset any dollar depreciation because if it does so,it will lose customers to its U.S.competitors.Its rule of thumb is that for every $.10/£ increase in the exchange rate (e.g.,from $2.00/£ to $2.10/£)it will increase prices by $5 (e.g.,from $200 to $205 per game).The company will not lower the product price in U.S.dollars if sterling pound depreciates against the U.S.dollar to below $2/£.Given this rule,it will lose only some of its U.S.sales.Suppose its forecast of annual sales in the United States as a function of the dollar price is:
Quantity sold = 50,000 - 100 *price in dollars
Answer the questions below.
a.Plot the British pound value of Cookham's revenue from its U.S.sales as a function of the exchange rate for exchange rates ranging from $1.50/£ to $3.00/£.What is its exchange rate exposure?
b.Suppose each exchange rate scenario in part (a)is equally likely.What would Cookham's expected dollar revenue be? What would be its pound revenue in each scenario if it sold forward that number of U.S.dollars at a forward exchange rate of $2/£? Does this seem like an effective hedge?
c.As an alternative,Cookham calculates the hedge ratio (i.e.,the number of dollars it will sell forward)as
[$\Delta$ revenue in £]/[$\Delta$ exchange rate in £/$],
that is,revenue change induced by exchange rate change
Why do you think this hedge ratio performs so much better in offsetting exchange rate risk than the one you calculated in part (b)?

Accepted Answer

Let S be the final exchange rate with di

Question 7

One of the drawbacks of using forward contracts to hedge foreign exchange risk from payables is that the:

Accepted Answer

A)  transaction costs in the forward market are high. 
B)  forward rates are always lower than spot rates. 
C)  hedged currency could appreciate during the period. 
D)  hedged currency could depreciate during the period. 
A)  transaction costs in the forward market are high. 
B)  forward rates are always lower than spot rates. 
C)  hedged currency could appreciate during the period. 
D)  hedged currency could depreciate during the period.

Question 8

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

Accepted Answer

Our simple theories about forward rates

Question 9

What is the expected spot rate of ¥/$ 1 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 10

When the value of the U.S.dollar fell dramatically in 2006 and 2007,Volkswagen faced significant economic exposure.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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?

Accepted Answer

A)  Future spot rate is expected to increase by 8%. 
B)  Future spot rate is expected to decrease by 8%. 
C)  Future spot rate is expected to decrease by 4%. 
D)  No change is expected in the future spot rate. 
A)  Future spot rate is expected to increase by 8%. 
B)  Future spot rate is expected to decrease by 8%. 
C)  Future spot rate is expected to decrease by 4%. 
D)  No change is expected in the future spot rate.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

How many dollars will it take for a U.S.citizen to purchase a Japanese product priced at 60,000 yen if the indirect exchange rate is 104/1?

Accepted Answer

A)  $577 
B)  $700 
C)  $5,769 
D)  $62,400 
A)  $577 
B)  $700 
C)  $5,769 
D)  $62,400

Question 15

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

Accepted Answer

A)  interest rates across countries are offset. 
B)  forward rates across countries are offset. 
C)  expected inflation across countries are offset. 
D)  international Fisher rates are offset. 
A)  interest rates across countries are offset. 
B)  forward rates across countries are offset. 
C)  expected inflation across countries are offset. 
D)  international Fisher rates are offset.

Question 16

Indirect quotes are rates of foreign currency expressed in U.S.dollars.

Accepted Answer

A) True 
 B)False

Question 17

The spot exchange rate for the Canadian dollar (C$)is U.S.$0.68/C$.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?

Accepted Answer

A)  US$0.6734/C$ 
B)  US$0.6767/C$ 
C)  US$0.6833/C$ 
D)  US$0.6866/C$ 
A)  US$0.6734/C$ 
B)  US$0.6767/C$ 
C)  US$0.6833/C$ 
D)  US$0.6866/C$

Question 18

That Italian antique was priced at 3 million lire which,fortunately,does not have to be paid for 3 months.The lira has a spot exchange rate of L2,000/$ but is trading 3 months forward at a 5% discount.If you contract ahead now,how many dollars will the antique cost?

Accepted Answer

A)  $1,425 
B)  $1,429 
C)  $1,575 
D)  $1,579 
A)  $1,425 
B)  $1,429 
C)  $1,575 
D)  $1,579

Question 19

On average,empirical evidence suggests that those who cover foreign exchange commitments in the forward market pay a premium of approximately _____ to avoid exchange rate risk.

Accepted Answer

A)  0.0% 
B)  3.1% 
C)  5.0% 
D)  7.3% 
A)  0.0% 
B)  3.1% 
C)  5.0% 
D)  7.3%

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 22: International Financial Management

Countries with high inflation will have the:

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?

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:

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

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

One of the drawbacks of using forward contracts to hedge foreign exchange risk from payables is that the:

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

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

When the value of the U.S.dollar fell dramatically in 2006 and 2007,Volkswagen faced significant economic exposure.

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

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

How many dollars will it take for a U.S.citizen to purchase a Japanese product priced at 60,000 yen if the indirect exchange rate is 104/1?

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

Indirect quotes are rates of foreign currency expressed in U.S.dollars.

The spot exchange rate for the Canadian dollar (C$)is U.S.$0.68/C$.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?

That Italian antique was priced at 3 million lire which,fortunately,does not have to be paid for 3 months.The lira has a spot exchange rate of L2,000/$ but is trading 3 months forward at a 5% discount.If you contract ahead now,how many dollars will the antique cost?

On average,empirical evidence suggests that those who cover foreign exchange commitments in the forward market pay a premium of approximately _____ to avoid exchange rate risk.

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

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

Options

Risk Management

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