Question 1

The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate is called:

Accepted Answer

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

Question 2

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 of 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 a foreign denominated NPV into a dollar denominated NPV. B

Question 3

Which of the following statements are correct?
I. The usage of forward rates can help reduce the short-run exposure to exchange rate risk.
II. Accounting translation gains are recorded on the income statement as other income.
III. The long-run exchange rate risk faced by an international firm can be reduced if the firm borrows money in the foreign country where it has operations.
IV. Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

Accepted Answer

A)   I and III only
B)   II and IV only
C)   II and III only
D)   I and IV only
E)   I and II only A

Question 4

Absolute purchasing power parity is also known as:

Accepted Answer

A)   The law of one price.
B)   relative purchasing power parity.
C)   complete purchasing power parity.
D)   interest rate parity.
E)   the international Fisher Effect.

Question 5

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

Accepted Answer

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

Question 6

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

Accepted Answer

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

Question 7

The rate most international banks charge one another for overnight Eurodollar loans is called the:

Accepted Answer

A)   Eurodollar yield to maturity.
B)   London Interbank Offer Rate.
C)   Paris Opening Interest Rate.
D)   United States Treasury bill rate.
E)   international prime ratE.

Question 8

"A commodity costs the same regardless of what currency is used to purchase it." This is a statement of:

Accepted Answer

A)   Absolute Purchasing Power Parity.
B)   Relative Purchasing Power Parity.
C)   The First Principle of International Finance.
D)   The Conservation of Currency Value.
E)   None of these.

Question 9

Triangle arbitrage: I. is a profitable situation involving three separate currency exchange transactions.
II) helps keep the currency market in equilibrium.
III) opportunities can exist in either the spot or the forward market.
IV) only involves currencies other than the U.S. dollar.

Accepted Answer

A)   I and IV only
B)   II and III only
C)   I, II, and III only
D)   II, III, and IV only
E)   I, II, III, and IV

Question 10

The expected inflation rate in Switzerland is 2 percent while it is 3 percent in the U.S. A risk-free asset in the U.S. is yielding 3.5 percent. What real rate of return should you expect on a risk-free Swiss security?

Accepted Answer

A)   2.0%
B)   2.5%
C)   3.0%
D)   3.5%
E)   4.0%

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

Question 12

A firm engaging in international investments:

Accepted Answer

A)   could provide indirect diversification.
B)   could lower the risk premium on international projects.
C)   could lead to lower risk adjusted discount rates.
D)   could provide indirect diversification and could lower the risk premium on international projects.
E)   could provide indirect diversification; could lower the risk premium on international projects; and could lead to lower risk adjusted discount rates.

Question 13

A foreign bond issued in Japan and denominated in yen is called a(n):

Accepted Answer

A)   American Depository Receipt.
B)   European Currency Unit.
C)   swap bond.
D)   Samurai bond.
E)   Eurobond.

Question 14

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

Accepted Answer

The answer of What is required for absolute purchasing power...

Question 15

Suppose that the spot rate on the Canadian dollar is C$1.40. The risk-free nominal rate in the U.S. is 8 percent while it is only 4 percent in Canada. Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?

Accepted Answer

A)   C$1.278
B)   C$1.344
C)   C$1.355
D)   C$1.456
E)   C$1.512

Question 16

You are analyzing a very low-risk project with an initial cost of £120,000. The project is expected to return £40,000 the first year,£50,000 the second year and £60,000 the third and final year. The current spot rate is £.54. The nominal return relevant to the project is 4 percent in the U.K. and 3 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

Accepted Answer

A)   $33,232
B)   $34,040
C)   $34,067
D)   $34,422
E)   $35,009

Question 17

How well do you think relative purchasing power parity and uncovered interest parity behave?
 That is,do you think it's possible to forecast the expected future spot exchange rate accurately?
 What complications might you run into?

Accepted Answer

The answer of How well do you think relative purchasing...

Question 18

The acronym LIBOR stands for:

Accepted Answer

A)   London Interbank Offer Rate.
B)   Lending Institution Bank Receipt.
C)   Leading Indicator Borrowing Rate.
D)   Loan Interest Bank Order Receipt.
E)   London International Opportunity RatE.

Question 19

The idea that the exchange rate adjusts to keep buying power constant among currencies is called:

Accepted Answer

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

Question 20

A risk-free asset in the U.S. is currently yielding 3 percent while a Canadian risk-free asset is yielding 2 percent. The current spot rate is C$.72 is equal to $1. What is the approximate two-year forward rate if interest rate parity holds?

Accepted Answer

A)   C$.7057
B)   C$.7128
C)   C$.7136
D)   C$.7189
E)   C$.7272

Exam 31: International Corporate Finance