Exam 16: International Business Finance

The direct quote in New York is .015 dollar per Pakistani Rupee.The direct quote in Pakistan is 60 rupees per dollar.This imbalance in rates can be corrected by arbitrage.A trader will ________ rupees in New York and ________ rupees in Pakistan,causing the direct quote in New York to ________.

Compared with other developed countries,the U.S.is particularly reliant on foreign trade for self-subsistence.

In addition to those risks faced by domestic corporations,multinational corporations face

Which of the following is a reason for international investment?

The law of one price suggests that all of the following will have the same price in different countries EXCEPT

Exchange rate risk is the risk that exchange rates will be lower in the future than they are today.

Exchange rate fluctuations do not increase the riskiness of foreign portfolio investments because changes in exchange rates are compensated for by changes in interest rates and investment returns.

Exceptions to purchase power parity exist if arbitrage opportunities are limited by characteristics such as perishability or high transportation costs.

Interest Rate Parity theory states that interest rates must be the same in all countries using floating exchange rates or else international markets will not be in equilibrium.

A bottle of German wine costs $21 euros in Berlin.According to the purchasing power parity theory,what would the bottle sell for in New York if it costs the New York company $1.25 per bottle to transport the wine to the United States? Assume the exchange rate is $1.32 per euro.

Interest rate parity theory states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity.

A direct quote of $1.6 per British Pound in the United States is equivalent to a direct quote of .625 British Pounds per U.S.dollar in Great Britain.

Short-term daily fluctuations in exchange rates are caused by supply and demand conditions in the foreign exchange market.

A British-made component costs 36 U.K.pounds.A company in the United States needs to buy these components and the current indirect quote indicates that one dollar will buy .6250 pounds.Ignoring transactions costs,how much will one component cost in U.S.dollars?

If the exchange rate quotes in two different countries were out of line with each other,an enterprising trader could make a profit by buying in the market where the currency was cheaper and simultaneously selling it in the market where the currency was more expensive.Such a person would be known as a

Exchange rate risk exists for a party to a contract if the contract is denominated in a foreign currency.

Exchange-rate risk arises from the fact that the spot exchange rate on a future date is unknown today.

Triangular arbitrage eliminates exchange rate differentials across three markets for three currencies.

The difference between the asked price and the bid price is known as the spread.

Investments in capital markets in foreign countries are motivated by the desire to earn higher returns and reduce risk through international diversification.