Question 1

The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in:

Accepted Answer

A)  real rates of interest. 
B)  purchasing power parity. 
C)  the standard of living. 
D)  expected inflation. 
A)  real rates of interest. 
B)  purchasing power parity. 
C)  the standard of living. 
D)  expected inflation.

Question 2

You have the opportunity to invest in the United States at 6% or invest in an equally risky Australian investment that offers 20%.This is too good to be true! The current exchange rate is AUD1.65 = USD1.Which one of the following do you suspect about this 1-year investment?

Accepted Answer

A)  Expected inflation is higher in the United States. 
B)  The 1-year forward exchange rate is AUD1.8679 = USD1. 
C)  Real interest rates are higher in the United States. 
D)  The Australian dollar is selling forward at an 8.48% premium relative to the dollar. 
A)  Expected inflation is higher in the United States. 
B)  The 1-year forward exchange rate is AUD1.8679 = USD1. 
C)  Real interest rates are higher in the United States. 
D)  The Australian dollar is selling forward at an 8.48% premium relative to the dollar.

Question 3

Which one of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?

Accepted Answer

A)  The countries have equal nominal interest rates. 
B)  The spot rate is expected to change. 
C)  Expected inflation is less than the nominal rate. 
D)  Both currencies are selling at a premium relative to the other. 
A)  The countries have equal nominal interest rates. 
B)  The spot rate is expected to change. 
C)  Expected inflation is less than the nominal rate. 
D)  Both currencies are selling at a premium relative to the other.

Question 4

You exchange USD100,000 into Hong Kong dollars today at HKD7.8= USD1,earn 7% on your Hong Kong investment,and exchange back into US dollars at a rate of HKD8.0 = USD1.How much wealthier are you as a result?

Accepted Answer

A)  $2,600 
B)  $4,325 
C)  $6,000 
D)  $9,744 
A)  $2,600 
B)  $4,325 
C)  $6,000 
D)  $9,744

Question 5

A sandwich costs $6.79 in the U.S.The exchange rate is CAD0.98 = USD1 dollar.What does the identical sandwich have to cost in Canada for the law of one price to exist?

Accepted Answer

A)  C$6.93 
B)  C$6.79 
C)  C$6.65 
D)  C$6.86 
A)  C$6.93 
B)  C$6.79 
C)  C$6.65 
D)  C$6.86

Question 6

Today,you purchased 125,000 yen 6-months forward at JPY130 = USD1 per dollar.The spot rate today is JPY128 =USD1.If the yen appreciates by 10% over the next six months,how many dollars must you pay to acquire the 125,000 yen?

Accepted Answer

A)  $0 
B)  $961.54 
C)  $976.56 
D)  $1,085.07 
A)  $0 
B)  $961.54 
C)  $976.56 
D)  $1,085.07

Question 7

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 disappears. 
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 recognize the possibility of bad outcomes. 
A)  The project should be abandoned until this risk disappears. 
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 recognize the possibility of bad outcomes.

Question 8

Suppose the one-year interest rate in the United States is 7%.What would you expect the interest rate to be in the UK if expected inflation is 4% in the United States and 8% in the UK?

Accepted Answer

A)  5.19% 
B)  7.93% 
C)  9.08% 
D)  11.12% 
A)  5.19% 
B)  7.93% 
C)  9.08% 
D)  11.12%

Question 9

If nominal interest rates are 5% in the United States and 8% in Mexico,you should convert the expected cash flows on your Mexican project into US dollars:

Accepted Answer

A)  by assuming that the Mexican peso will appreciate by about 3% a year. 
B)  by assuming that the Mexican peso will depreciate by 8% a year. 
C)  by assuming that the dollar will appreciate by 5% a year. 
D)  by assuming that the Mexican peso will depreciate by about 3% a year. 
A)  by assuming that the Mexican peso will appreciate by about 3% a year. 
B)  by assuming that the Mexican peso will depreciate by 8% a year. 
C)  by assuming that the dollar will appreciate by 5% a year. 
D)  by assuming that the Mexican peso will depreciate by about 3% a year.

Question 10

You can purchase a futures contract on any currency.

Accepted Answer

A) True 
 B)False

Question 11

Transaction risk can usually be identified and hedged.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A)  A fixed amount is paid when initiating the contract. 
B)  A fixed amount is paid at the end of the contract. 
C)  The amount to be paid is determined and paid at the end of the contract. 
D)  The amount to be paid is determined periodically and paid in installments during the contract. 
A)  A fixed amount is paid when initiating the contract. 
B)  A fixed amount is paid at the end of the contract. 
C)  The amount to be paid is determined and paid at the end of the contract. 
D)  The amount to be paid is determined periodically and paid in installments during the contract.

Question 13

What is the cost of hedging a 2 million euro commitment if the spot rate is USD1.60 = EUR1,the forward rate is USD1.55 = EUR1,and the spot rate is not expected to change before payment becomes due?

Accepted Answer

A)  $0 
B)  $25,000 
C)  $40,323 
D)  $36,667 
A)  $0 
B)  $25,000 
C)  $40,323 
D)  $36,667

Question 14

If the international Fisher effect is valid,then expected real interest rates in all countries should be equal.

Accepted Answer

A) True 
 B)False

Question 15

If exchange rates adjust to reflect inflation differentials across countries,then:

Accepted Answer

A)  the law of one price is wrong. 
B)  spot and forward rates will be equal. 
C)  nominal interest rates will be equal across countries. 
D)  purchasing power parity holds. 
A)  the law of one price is wrong. 
B)  spot and forward rates will be equal. 
C)  nominal interest rates will be equal across countries. 
D)  purchasing power parity holds.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 19

The New York Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market.

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 22: International Financial Management

The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in:

You have the opportunity to invest in the United States at 6% or invest in an equally risky Australian investment that offers 20%.This is too good to be true! The current exchange rate is AUD1.65 = USD1.Which one of the following do you suspect about this 1-year investment?

Which one of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?

You exchange USD100,000 into Hong Kong dollars today at HKD7.8= USD1,earn 7% on your Hong Kong investment,and exchange back into US dollars at a rate of HKD8.0 = USD1.How much wealthier are you as a result?

A sandwich costs $6.79 in the U.S.The exchange rate is CAD0.98 = USD1 dollar.What does the identical sandwich have to cost in Canada for the law of one price to exist?

Today,you purchased 125,000 yen 6-months forward at JPY130 = USD1 per dollar.The spot rate today is JPY128 =USD1.If the yen appreciates by 10% over the next six months,how many dollars must you pay to acquire the 125,000 yen?

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

Suppose the one-year interest rate in the United States is 7%.What would you expect the interest rate to be in the UK if expected inflation is 4% in the United States and 8% in the UK?

If nominal interest rates are 5% in the United States and 8% in Mexico,you should convert the expected cash flows on your Mexican project into US dollars:

You can purchase a futures contract on any currency.

Transaction risk can usually be identified and hedged.

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

What is the cost of hedging a 2 million euro commitment if the spot rate is USD1.60 = EUR1,the forward rate is USD1.55 = EUR1,and the spot rate is not expected to change before payment becomes due?

If the international Fisher effect is valid,then expected real interest rates in all countries should be equal.

If exchange rates adjust to reflect inflation differentials across countries,then:

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

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

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

The New York Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market.

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

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

Options

Risk Management

Filters