Question 1

Firms use forward foreign exchange contracts rather than a cash-and-carry strategy because ________.

Accepted Answer

A) of lower transaction costs 
B) of inability to borrow in different currencies 
C) of higher interest costs if credit quality is poor 
D) all of the above 
A) of lower transaction costs 
B) of inability to borrow in different currencies 
C) of higher interest costs if credit quality is poor 
D) all of the above D

Question 2

What is floating rate?

Accepted Answer

Most foreign exchange rates are floating rates, which means it changes constantly depending on the quantity demanded and quantity supplied for each currency in the market.

Question 3

What are internationally integrated capital markets?

Accepted Answer

When an investor can exchange currencies in any amount at the spot or forward rates and is free to purchase or sell any security in any amount in any country at its current market price, it is termed an internationally integrated capital market.

Question 4

One British pound can be purchased for $1.80. What is the exchange rate in terms of pounds per dollar?

Accepted Answer

A) £0.451 
B) £0.491 
C) £0.526 
D) £0.556 
A) £0.451 
B) £0.491 
C) £0.526 
D) £0.556

Question 5

A U.S. firm acquires a British firm that will generate cash flows of 10,000 pounds next year and these cash flows will grow at 6% a year. If the British WACC is 9% and the spot exchange rate is $1.9/pound, what is the present value (PV)of the cash flows from this acquisition to domestic shareholders?

Accepted Answer

A) $633,333 
B) $654,876 
C) $691,543 
D) $716,289 
A) $633,333 
B) $654,876 
C) $691,543 
D) $716,289

Question 6

If a firm hedges a future purchase of euros by purchasing a call option, the firm ________ the potential cost but will benefit if the euro ________.

Accepted Answer

A) fixes, depreciates 
B) fixes, appreciates 
C) caps, depreciates 
D) caps, appreciates 
A) fixes, depreciates 
B) fixes, appreciates 
C) caps, depreciates 
D) caps, appreciates

Question 7

The one-year forward exchange rate for the British Pound is $1.70/Pound. If the one-year U.S. interest rate is 5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

Accepted Answer

A) $1.69/pound 
B) $1.72/pound 
C) $1.75/pound 
D) $1.78/pound 
A) $1.69/pound 
B) $1.72/pound 
C) $1.75/pound 
D) $1.78/pound

Question 8

What is a currency timeline?

Accepted Answer

A currency forward contract allows inves

Question 9

Use the information for the question(s)below.
You are a U.S. investor who is trying to calculate the present value (PV)of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and the forward rate is FS1U1B11S1U1B0 = $1.8862/£. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
-You are a U.S. investor who is trying to calculate the present value (PV)of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F1 = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the dollar cash inflow computed by first converting the £ into dollars and then discounting the dollars?

Accepted Answer

A) $23,275,505 
B) $23,186,792 
C) $23,278,575 
D) $23,367,640 
A) $23,275,505 
B) $23,186,792 
C) $23,278,575 
D) $23,367,640

Question 10

With internationally integrated capital markets the value of an investment depends on the currency used in the analysis.

Accepted Answer

A) True 
 B)False

Question 11

Consider the following equation:   =   (1 +   )- 1 The term   in this equation refers to ________.

Accepted Answer

A) the cost of capital in terms of dollars 
B) the risk-free rate of interest on the yen 
C) the risk-free rate of interest on the dollar 
D) the cost of capital for the firm in terms of yen 
A) the cost of capital in terms of dollars 
B) the risk-free rate of interest on the yen 
C) the risk-free rate of interest on the dollar 
D) the cost of capital for the firm in terms of yen

Question 12

A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100,000 euros after one year. If the one-year forward exchange rate is $1.35/euro and the dollar cost of capital is 10%, what is the present value (PV)of the project cash flows?

Accepted Answer

A) $122,675 
B) $122,727 
C) $127,150 
D) $128,209 
A) $122,675 
B) $122,727 
C) $127,150 
D) $128,209

Question 13

If a firm purchases its inputs and sells its goods in the same foreign market, evaluation of the project ________.

Accepted Answer

A) requires us to consider the exchange rate risk of output only 
B) requires us to consider exchange rate risk of inputs only 
C) does not require consideration of exchange rate risk 
D) none of the above 
A) requires us to consider the exchange rate risk of output only 
B) requires us to consider exchange rate risk of inputs only 
C) does not require consideration of exchange rate risk 
D) none of the above

Question 14

The spot exchange rate for Indian Rupees is Rs 41/$. The one-year forward exchange rate is Rs 42/$ and the one-year U.S. interest rate is 4%. What is the implied one year interest rate in India?

Accepted Answer

A) 6.54% 
B) 6.24% 
C) 6.77% 
D) 6.75% 
A) 6.54% 
B) 6.24% 
C) 6.77% 
D) 6.75%

Question 15

Assume IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.90/euro one year from today. If the spot exchange rate is $2/euro one year later, what is the dollar amount that IBM must pay to receive the euros?

Accepted Answer

A) $300,000 
B) $325,000 
C) $380,000 
D) $400,000 
A) $300,000 
B) $325,000 
C) $380,000 
D) $400,000

Question 16

Use the information for the question(s)below.
KT Enterprises, a U.S. import-export trading, is considering its international tax situation. Currently KT's U.S. tax rate is 35%. KT has significant operations in both Japan and Ireland. In Japan, the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%. In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%. KT's profits, which are fully and immediately repatriated, and foreign taxes paid for the current year are shown here (in millions):  
-The amount of the taxes paid in dollars for the Japanese operations is closest to ________.

Accepted Answer

A) $29.5 million 
B) $5.1 million 
C) $50.0 million 
D) $20.5 million 
A) $29.5 million 
B) $5.1 million 
C) $50.0 million 
D) $20.5 million

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) Many countries regulate or limit capital inflows or outflows, and many do not allow their currencies to be freely converted into dollars, thereby creating capital market segmentation. 
B) The existence of internationally integrated capital markets makes many decisions in international corporate finance more complicated but potentially more lucrative for a firm that is well positioned to exploit the market segmentation. 
C) Political, legal, social, and cultural characteristics that differ across countries may require compensation in the form of a country risk premium. 
D) Swaps allow firms to mitigate their exchange rate risk exposure between assets and liabilities, while still making investments and raising funds in the most attractive locales. 
A) Many countries regulate or limit capital inflows or outflows, and many do not allow their currencies to be freely converted into dollars, thereby creating capital market segmentation. 
B) The existence of internationally integrated capital markets makes many decisions in international corporate finance more complicated but potentially more lucrative for a firm that is well positioned to exploit the market segmentation. 
C) Political, legal, social, and cultural characteristics that differ across countries may require compensation in the form of a country risk premium. 
D) Swaps allow firms to mitigate their exchange rate risk exposure between assets and liabilities, while still making investments and raising funds in the most attractive locales.

Question 18

Multinational firms often use currency forward contracts and currency options to hedge foreign exchange rate risk.

Accepted Answer

A) True 
 B)False

Question 19

Assuming Covered Interest Parity holds, a(n)________ in the domestic interest rate will ________ the forward rate, all other things held constant.

Accepted Answer

A) increase, increase 
B) increase, decrease 
C) decrease, decrease 
D) decrease, have no effect on 
A) increase, increase 
B) increase, decrease 
C) decrease, decrease 
D) decrease, have no effect on

Question 20

The ________ rate is a price for a currency denominated in another currency.

Accepted Answer

A) marginal 
B) foreign exchange 
C) interest 
D) reversion 
A) marginal 
B) foreign exchange 
C) interest 
D) reversion

Exam 23: International Corporate Finance

Firms use forward foreign exchange contracts rather than a cash-and-carry strategy because ________.

What is floating rate?

What are internationally integrated capital markets?

One British pound can be purchased for $1.80. What is the exchange rate in terms of pounds per dollar?

If a firm hedges a future purchase of euros by purchasing a call option, the firm ________ the potential cost but will benefit if the euro ________.

The one-year forward exchange rate for the British Pound is $1.70/Pound. If the one-year U.S. interest rate is 5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

What is a currency timeline?

With internationally integrated capital markets the value of an investment depends on the currency used in the analysis.

Consider the following equation: = (1 + )- 1 The term in this equation refers to ________.

If a firm purchases its inputs and sells its goods in the same foreign market, evaluation of the project ________.

The spot exchange rate for Indian Rupees is Rs 41/$. The one-year forward exchange rate is Rs 42/$ and the one-year U.S. interest rate is 4%. What is the implied one year interest rate in India?

Assume IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.90/euro one year from today. If the spot exchange rate is $2/euro one year later, what is the dollar amount that IBM must pay to receive the euros?

Which of the following statements is FALSE?

Multinational firms often use currency forward contracts and currency options to hedge foreign exchange rate risk.

Assuming Covered Interest Parity holds, a(n)________ in the domestic interest rate will ________ the forward rate, all other things held constant.

The ________ rate is a price for a currency denominated in another currency.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

Leasing

Insurance and Risk Management

Corporate Governance

Filters

If a firm hedges a future purchase of euros by purchasing a call option, the firm the potential cost but will benefit if the euro .

Assuming Covered Interest Parity holds, a(n) in the domestic interest rate will the forward rate, all other things held constant.