Exam 23: International Corporate Finance

Assume IBM enters into a forward contract to purchase 100,000 euros at a rate of $1.60/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?

The spot exchange rate for the British pound is 0.65 pounds/dollar. The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 7%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?

Use the information for the question(s) below. The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r_$, is 5.35% and the risk-free interest rate on pounds, r_£, is 4.80%. -Using the covered interest parity condition, the calculated three-year forward rate F₃ is closest to ________.

A ________ is written between a firm and a bank and it fixes the currency exchange rate for a transaction that will occur at a future date.

Which of the following statements is FALSE?

Suppose the domestic cost of capital for a U.S.-based company is 9%. Also, the U.S. interest rate is 5% and the European interest rate is 5%. What is the foreign denominated cost of capital for the company?

A ________ exchange rate means that the rate changes constantly depending on the quantity supplied and demanded for the currency.

What is a currency forward contract?

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

________ is a term used to describe the transfer of profits from a foreign subsidiary to the home country.

Assume IBM enters into a forward contract to purchase 200,000 euros at a rate of $1.50/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?

Hedging with currency options involves a commitment by a firm to buy currency at a fixed rate.

A Brazilian firm owes you $2,000,000, payable in three months, however, they insist on paying in Brazilian Reals. The current spot exchange rate is $0.59305/Real. The three-month forward exchange rate is $0.61255/Real. How many Real should you demand in a forward contract to receive $2,000,000 in three months to hedge the exchange rate risk?

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

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 $1.50/euro and the dollar cost of capital is 8%, what is the present value (PV) of the project cash flows?

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 Irish operations is closest to ________.

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

Which of the following statements is FALSE?

The Law of One Price asserts that we will obtain the same valuation of a project whether (a) we use the domestic cost of capital of the domestic currency equivalent cash flows at the forward exchange rates or (b) we use the corresponding foreign cost of capital and then convert the present value (PV) of the foreign currency value of the cash flows at the spot rate.

U.S. tax liabilities are ________ until the foreign subsidiary profits are repatriated to the United States.