Question 1

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.

Accepted Answer

A) True 
 B)False  True

Question 2

Covered interest arbitrage can be taken advantage of when premiums in forward rates are not exactly equal to the interest rate differential between two countries.

Accepted Answer

A) True 
 B)False  True

Question 3

A forward exchange contract

Accepted Answer

A)   gives the owner the right, but not the obligation, to buy a foreign currency at a fixed exchange rate for a fixed period of time.
B)   gives the owner the right to purchase a foreign currency at some point in the future and any gains or losses are credited/debited to the account at the close of business each day.
C)   requires delivery, at a specified future date, of one currency for a specified amount of another currency.
D)   requires delivery, within two working days, of one currency for a specified amount of another currency. C

Question 4

Suppose a U.S.importer purchases an Italian product today but will not pay for it for 90 days.The cost of the product today is 30,000 euros.The spot exchange rate today is .6233 euros per dollar.If the U.S.importer does not hedge the position,which of the following spot exchange rates in 90 days will yield the highest returns?

Accepted Answer

A)   0.6833 euros per dollar
B)   0.6499 euros per dollar
C)   $1.4844 per euro
D)   $1.5387 per euro

Question 5

What does the law of one price say?

Accepted Answer

The answer of What does the law of one price...

Question 6

Assume that the British pound is worth 1.6242 U.S.dollars.If a new Jaguar costs $138,000,what is the cost in British pounds?

Accepted Answer

A)   201,000
B)   84,965
C)   71,642
D)   119,998

Question 7

What is a forward exchange rate?

Accepted Answer

The answer of What is a forward exchange rate?...

Question 8

An American manufacturer with its corporate headquarters in New York City is purchasing goods from a French supplier.Which of the following statements is true regarding the exchange rate risk for this contract?

Accepted Answer

A)   The American company will bear all of the exchange rate risk if the contract is denominated in dollars.
B)   The French company will bear all of the exchange rate risk if the contract is denominated in dollars.
C)   Both companies could bear exchange rate risk if the contract is denominated in British pounds.
D)   Both B and C are correct.

Question 9

International expansion often occurs because it is generally easier for firms to expand the market for their products rather than to develop new products.

Accepted Answer

A) True 
 B)False

Question 10

The bid rate is the rate at which the bank buys the foreign currency from the customer by paying in home currency.

Accepted Answer

A) True 
 B)False

Question 11

Buying and selling in more than one market to make a riskless profit is called

Accepted Answer

A)   profit-maximization.
B)   arbitrage.
C)   international trading.
D)   cannot be determined from the above information

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Exchange rate risk is highest for companies with

Accepted Answer

A)   international trade contracts denominated in the foreign currency.
B)   investment portfolios that contain foreign securities.
C)   direct foreign investments in foreign subsidiaries.
D)   international trade contracts denominated in the domestic currency.

Question 15

Purchasing power parity suggests that interest rates in different countries will adjust so that each currency will have the same purchasing power.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is true?

Accepted Answer

A)   The forward rate is the same as the spot rate that will prevail in the future.
B)   The future spot rate is equal to the forward rate less the current spot rate.
C)   The actual spot rate that will prevail in the future is not known today.
D)   The future spot rate is the current spot rate increased by the inflation rate.

Question 17

An indirect quote indicates the number of units of foreign currency that can be bought for one unit of the home currency.

Accepted Answer

A) True 
 B)False

Question 18

You purchased 3,000,000 Indian rupees in London at an exchange rate of 54.86 to the dollar and simultaneously sold the rupees in Bahrain at an exchange rate of 55.12 to the dollar.What is the name for such a transaction?

Accepted Answer

A)   trend trading
B)   arbitrage
C)   currency swapping
D)   exchange rate hedging

Question 19

What is arbitrage? Assume that the dollar is quoted $1 = £0.625 in New York and the pound sterling is quoted as £1 = $1.63 in London.Is there an arbitrage opportunity? If so,what would an astute trader do? What will happen to the quotes as trades are made at current prices?

Accepted Answer

The answer of What is arbitrage? Assume that the dollar...

Question 20

An important (additional)consideration for a direct foreign investment is

Accepted Answer

A)   political risk.
B)   maximizing the firm's profits.
C)   attaining a high international P/E ratio.
D)   maintaining the domestic cost of capital.

Exam 16: International Business Finance

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.

Covered interest arbitrage can be taken advantage of when premiums in forward rates are not exactly equal to the interest rate differential between two countries.

A forward exchange contract

What does the law of one price say?

Assume that the British pound is worth 1.6242 U.S.dollars.If a new Jaguar costs $138,000,what is the cost in British pounds?

What is a forward exchange rate?

An American manufacturer with its corporate headquarters in New York City is purchasing goods from a French supplier.Which of the following statements is true regarding the exchange rate risk for this contract?

International expansion often occurs because it is generally easier for firms to expand the market for their products rather than to develop new products.

The bid rate is the rate at which the bank buys the foreign currency from the customer by paying in home currency.

Buying and selling in more than one market to make a riskless profit is called

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

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

Exchange rate risk is highest for companies with

Purchasing power parity suggests that interest rates in different countries will adjust so that each currency will have the same purchasing power.

Which of the following is true?

An indirect quote indicates the number of units of foreign currency that can be bought for one unit of the home currency.

You purchased 3,000,000 Indian rupees in London at an exchange rate of 54.86 to the dollar and simultaneously sold the rupees in Bahrain at an exchange rate of 55.12 to the dollar.What is the name for such a transaction?

What is arbitrage? Assume that the dollar is quoted $1 = £0.625 in New York and the pound sterling is quoted as £1 = $1.63 in London.Is there an arbitrage opportunity? If so,what would an astute trader do? What will happen to the quotes as trades are made at current prices?

An important (additional) consideration for a direct foreign investment is