Question 1

An agreement to trade currencies based on the exchange rate set today for settlement within two business days is called a(n)________ trade.

Accepted Answer

A) swap 
B) option 
C) futures 
D) forward 
E) spot 
A) swap 
B) option 
C) futures 
D) forward 
E) spot E

Question 2

Assume the euro is selling in the spot market for $1.22.Simultaneously,in the 3-month forward market the euro is selling for $1.24.Which one of these statements correctly describes this situation?

Accepted Answer

A) The spot market is out of equilibrium. 
B) The forward market is out of equilibrium. 
C) The dollar is selling at a premium relative to the euro. 
D) The euro is selling at a premium relative to the dollar. 
E) The euro is less expensive in the forward market. 
A) The spot market is out of equilibrium. 
B) The forward market is out of equilibrium. 
C) The dollar is selling at a premium relative to the euro. 
D) The euro is selling at a premium relative to the dollar. 
E) The euro is less expensive in the forward market. D

Question 3

"The change in exchange rates is determined by the difference in the inflation rates of the two countries." This statement expresses the concept of:

Accepted Answer

A) absolute purchasing power parity. 
B) relative purchasing power parity. 
C) the international Fisher effect. 
D) unbiased forward rates. 
E) interest rate parity. 
A) absolute purchasing power parity. 
B) relative purchasing power parity. 
C) the international Fisher effect. 
D) unbiased forward rates. 
E) interest rate parity. B

Question 4

Which one of these statements is correct assuming exchange rates are quoted as units of foreign currency per dollar?

Accepted Answer

A) When the dollar strengthens,it takes more dollars to obtain one unit of a foreign currency. 
B) If the U.S.inflation rate is lower than the inflation rate in Canada,then the U.S.dollar will depreciate relative to the Canadian dollar. 
C) When a foreign currency appreciates in value it strengthens relative to the dollar. 
D) As the U.S.dollar strengthens,one British pound will purchase more U.S.dollars. 
E) The exchange rate is unaffected by differences in the inflation rates of the two countries. 
A) When the dollar strengthens,it takes more dollars to obtain one unit of a foreign currency. 
B) If the U.S.inflation rate is lower than the inflation rate in Canada,then the U.S.dollar will depreciate relative to the Canadian dollar. 
C) When a foreign currency appreciates in value it strengthens relative to the dollar. 
D) As the U.S.dollar strengthens,one British pound will purchase more U.S.dollars. 
E) The exchange rate is unaffected by differences in the inflation rates of the two countries.

Question 5

You are expecting a payment of Can$138,000 two years from now.Assume the risk-free rate of return is 2.7 percent in Canada and 3.1 percent in the U.S.Also assume the current exchange rate is Can$1.2903 = $1.Approximately how much will the payment two years from now be worth in U.S.dollars?

Accepted Answer

A) $108,319 
B) $106,101 
C) $107,813 
D) $107,381 
E) $108,169 
A) $108,319 
B) $106,101 
C) $107,813 
D) $107,381 
E) $108,169

Question 6

Which one of these statements is true?

Accepted Answer

A) The exchange markets are limited to the currencies of highly developed countries. 
B) Importers and exporters are key players in the foreign exchange market. 
C) The trading floor of the foreign exchange market is located in London,England. 
D) Foreign exchange rates are set by the governments of each country issuing a currency. 
E) The foreign exchange market is the world's smallest financial market. 
A) The exchange markets are limited to the currencies of highly developed countries. 
B) Importers and exporters are key players in the foreign exchange market. 
C) The trading floor of the foreign exchange market is located in London,England. 
D) Foreign exchange rates are set by the governments of each country issuing a currency. 
E) The foreign exchange market is the world's smallest financial market.

Question 7

The unbiased forward rate is a:

Accepted Answer

A) condition where a future spot rate is equal to the current spot rate. 
B) guarantee of a future spot rate at one point in time. 
C) condition where the spot rate is expected to remain constant over a period of time. 
D) relationship between the future spot rate of two currencies at an equivalent point in time. 
E) predictor of the future spot rate at the equivalent point in time. 
A) condition where a future spot rate is equal to the current spot rate. 
B) guarantee of a future spot rate at one point in time. 
C) condition where the spot rate is expected to remain constant over a period of time. 
D) relationship between the future spot rate of two currencies at an equivalent point in time. 
E) predictor of the future spot rate at the equivalent point in time.

Question 8

The forward rate is most apt to equal the spot rate when:

Accepted Answer

A) the real rate of interest is declining. 
B) the inflation rates in the two countries are equal. 
C) purchasing power parity exists. 
D) the real rates of interest in the two countries are equal. 
E) inflation rates are historically high. 
A) the real rate of interest is declining. 
B) the inflation rates in the two countries are equal. 
C) purchasing power parity exists. 
D) the real rates of interest in the two countries are equal. 
E) inflation rates are historically high.

Question 9

The symbol "RFC" represents the foreign country's:

Accepted Answer

A) forward nominal market interest rate. 
B) real risk-free interest rate. 
C) real market interest rate. 
D) forward real market interest rate. 
E) nominal risk-free interest rate. 
A) forward nominal market interest rate. 
B) real risk-free interest rate. 
C) real market interest rate. 
D) forward real market interest rate. 
E) nominal risk-free interest rate.

Question 10

Explain the difference between a spot trade and a forward trade as they relate to currencies.

Accepted Answer

A spot trade is an agreement made today

Question 11

The international Fisher effect says that ________ rates are equal across countries.

Accepted Answer

A) spot 
B) one-year future 
C) nominal 
D) inflation 
E) real 
A) spot 
B) one-year future 
C) nominal 
D) inflation 
E) real

Question 12

Which one of these statements is correct?

Accepted Answer

A) Borrowing money in the country in which operations are located reduces long-run exchange rate risk. 
B) Accounting translation gains are recorded on the income statement as other income. 
C) In multidivisional firms,exchange rate risk should be managed at the division level. 
D) The usage of forward rates can help reduce the long-run exposure to exchange rate risk. 
E) Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk. 
A) Borrowing money in the country in which operations are located reduces long-run exchange rate risk. 
B) Accounting translation gains are recorded on the income statement as other income. 
C) In multidivisional firms,exchange rate risk should be managed at the division level. 
D) The usage of forward rates can help reduce the long-run exposure to exchange rate risk. 
E) Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

Question 13

For absolute purchasing power parity to hold:

Accepted Answer

A) transaction costs must be observable. 
B) interest rates must be uniform on a nominal basis. 
C) inflation rates must be uniform in all markets. 
D) tariffs must be imposed on all imported goods. 
E) products must be identical in all markets. 
A) transaction costs must be observable. 
B) interest rates must be uniform on a nominal basis. 
C) inflation rates must be uniform in all markets. 
D) tariffs must be imposed on all imported goods. 
E) products must be identical in all markets.

Question 14

The home currency approach:

Accepted Answer

A) generally produces more reliable results than those found using the foreign currency approach. 
B) requires an applicable exchange rate for every time period for which there is a cash flow. 
C) uses the current risk-free nominal rate to discount all the cash flows related to a project. 
D) stresses the use of the real rate of return to compute the net present value (NPV)of a project. 
E) converts the foreign-denominated NPV into the dollar-denominated NPV. 
A) generally produces more reliable results than those found using the foreign currency approach. 
B) requires an applicable exchange rate for every time period for which there is a cash flow. 
C) uses the current risk-free nominal rate to discount all the cash flows related to a project. 
D) stresses the use of the real rate of return to compute the net present value (NPV)of a project. 
E) converts the foreign-denominated NPV into the dollar-denominated NPV.

Question 15

Suppose the spot rate on the Canadian dollar is C$1.2797.Also assume the risk-free nominal rate in the U.S.is 3.8 percent while it is only 3.3 percent in Canada.Which one of the following three-year forward rates best establishes the approximate interest rate parity condition?

Accepted Answer

A) C$1.2733 
B) C$1.2606 
C) C$1.2861 
D) C$1.2990 
E) C$1.1918 
A) C$1.2733 
B) C$1.2606 
C) C$1.2861 
D) C$1.2990 
E) C$1.1918

Question 16

Interest rate parity:

Accepted Answer

A) eliminates covered interest arbitrage opportunities. 
B) exists when spot rates are equal for multiple countries. 
C) means that the nominal risk-free rate of return must be the same across countries. 
D) exists when the spot rate is equal to the futures rate. 
E) eliminates exchange rate fluctuations. 
A) eliminates covered interest arbitrage opportunities. 
B) exists when spot rates are equal for multiple countries. 
C) means that the nominal risk-free rate of return must be the same across countries. 
D) exists when the spot rate is equal to the futures rate. 
E) eliminates exchange rate fluctuations.

Question 17

All the following are political risks associated with international investing except:

Accepted Answer

A) nationalization. 
B) decreasing consumer demand. 
C) blocking of funds. 
D) tax law changes. 
E) contract abrogation. 
A) nationalization. 
B) decreasing consumer demand. 
C) blocking of funds. 
D) tax law changes. 
E) contract abrogation.

Question 18

The home currency approach:

Accepted Answer

A) discounts all a project's foreign cash flows using the current spot rate. 
B) employs uncovered interest parity to project future exchange rates. 
C) computes the net present value (NPV)of a project in the foreign currency and then converts that NPV into U.S.dollars. 
D) utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency. 
E) utilizes the international Fisher effect to compute the relevant exchange rates needed to compute the NPV of foreign cash flows in U.S.dollars. 
A) discounts all a project's foreign cash flows using the current spot rate. 
B) employs uncovered interest parity to project future exchange rates. 
C) computes the net present value (NPV)of a project in the foreign currency and then converts that NPV into U.S.dollars. 
D) utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency. 
E) utilizes the international Fisher effect to compute the relevant exchange rates needed to compute the NPV of foreign cash flows in U.S.dollars.

Question 19

What is required for absolute purchasing power parity to hold? Do you think absolute PPP would hold in the case where a shoe retailer in the U.S.sits directly across the border from a shoe retailer in Canada? How about Houston,Texas,and London,England?

Accepted Answer

The requirements for absolute PPP to hol

Question 20

Monies earned by foreign subsidiaries that have not yet been taxed under U.S.law can be used to:

Accepted Answer

A) purchase U.S.government bonds. 
B) purchase U.S.stocks. 
C) pay dividends. 
D) invest in new capital overseas. 
E) invest in new U.S.plants and equipment. 
A) purchase U.S.government bonds. 
B) purchase U.S.stocks. 
C) pay dividends. 
D) invest in new capital overseas. 
E) invest in new U.S.plants and equipment.

Exam 31: International Corporate Finance

An agreement to trade currencies based on the exchange rate set today for settlement within two business days is called a(n)________ trade.

Assume the euro is selling in the spot market for $1.22.Simultaneously,in the 3-month forward market the euro is selling for $1.24.Which one of these statements correctly describes this situation?

"The change in exchange rates is determined by the difference in the inflation rates of the two countries." This statement expresses the concept of:

Which one of these statements is correct assuming exchange rates are quoted as units of foreign currency per dollar?

You are expecting a payment of Can$138,000 two years from now.Assume the risk-free rate of return is 2.7 percent in Canada and 3.1 percent in the U.S.Also assume the current exchange rate is Can$1.2903 = $1.Approximately how much will the payment two years from now be worth in U.S.dollars?

Which one of these statements is true?

The unbiased forward rate is a:

The forward rate is most apt to equal the spot rate when:

The symbol "RFC" represents the foreign country's:

Explain the difference between a spot trade and a forward trade as they relate to currencies.

The international Fisher effect says that ________ rates are equal across countries.

Which one of these statements is correct?

For absolute purchasing power parity to hold:

The home currency approach:

Suppose the spot rate on the Canadian dollar is C$1.2797.Also assume the risk-free nominal rate in the U.S.is 3.8 percent while it is only 3.3 percent in Canada.Which one of the following three-year forward rates best establishes the approximate interest rate parity condition?

Interest rate parity:

All the following are political risks associated with international investing except:

The home currency approach:

What is required for absolute purchasing power parity to hold? Do you think absolute PPP would hold in the case where a shoe retailer in the U.S.sits directly across the border from a shoe retailer in Canada? How about Houston,Texas,and London,England?

Monies earned by foreign subsidiaries that have not yet been taxed under U.S.law can be used to:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

Filters

The symbol "R_FC" represents the foreign country's: