Question 1

U.S.investments with a 1-year maturity can be made for 6% and Swiss 1-year investments can be made for 3%.If the spot exchange rate is SFr1.6/$,which of the following 1-year forward exchange rates would convince you to invest in Switzerland?

Accepted Answer

A)  SFr1.55/$ 
B)  SFr1.60/$ 
C)  SFr1.65/$ 
D)  SFr1.70/$

Question 2

Interest rate parity tells us that the cost of buying yen forward is exactly the same as the cost of borrowing dollars,buying yen in the spot market,and leaving them on yen deposit.

Accepted Answer

A) True 
 B)False

Question 3

You can value overseas investments using the NPV of the cash flows.Which of the following adjustment is necessary to calculate the NPV?

Accepted Answer

A)  Convert the opportunity cost of capital and cash flows into foreign currency. 
B)  Convert the foreign cash flows into domestic currency and use the domestic opportunity cost of capital for discounting. 
C)  Use domestic discount rate to discount foreign cash flows. 
D)  Convert the foreign cash flow into domestic currency and use the foreign cost of capital for discounting.

Question 4

If the spot exchange rate between lire and dollars is L1600/$ and the forward exchange rate is L1550/$,what would you predict to be the expected future spot rate? Is the lira appreciating or depreciating against the dollar?

Accepted Answer

The answer of If the spot exchange rate between lire...

Question 5

Buckingham,Inc.,a British corporation,owes Yank Inc.,a U.S.corporation,$1 million due in 2 months.How can Buckingham hedge the exchange risk?

Accepted Answer

A)  Sell pounds in the spot market 
B)  Buy pounds in the forward market 
C)  Sell dollars in the spot market 
D)  Buy dollars in the forward market

Question 6

If the mark is trading at a forward discount relative to the dollar,then you'll receive less marks per dollar in the future.

Accepted Answer

A) True 
 B)False

Question 7

What is the expected German inflation rate if 3% inflation is expected in the United States,the spot exchange rate is €1.5/$ and the expected spot rate is €1.6/$?

Accepted Answer

A)  2.81% 
B)  7.10% 
C)  9.87% 
D)  11.43%

Question 8

Interest rate parity suggests that you may assume that it is cheaper to borrow in a currency with a low nominal rate of interest.

Accepted Answer

A) True 
 B)False

Question 9

How do we perform on NPV analysis for projects with cash flows in foreign currencies?

Accepted Answer

The answer of How do we perform on NPV analysis...

Question 10

Which of the following is correct when contracting ahead in the forward exchange market?

Accepted Answer

A)  At contract close you pay either the forward rate that was contracted or the then-current rate. 
B)  Contracting ahead is always cheaper than waiting to pay spot rates. 
C)  Your cost is locked in from the beginning of the contract, regardless of market changes. 
D)  Paying spot price is safer than contracting forward.

Question 11

If the exchange rate of euros/U.S.dollars is 2.04/1,then:

Accepted Answer

A)  it takes $2.04 to buy each euro. 
B)  the euro is worth more than one U.S. dollar. 
C)  each euro is worth approximately 49 cents. 
D)  20 cents will purchase one euro.

Question 12

The 6-month forward quote for the euro is €1.6/US$,and the spot price of the euro is €1.7/US$.Which of the following statements is true?

Accepted Answer

A)  Forward discount on the euro is 6.25%. 
B)  Forward premium on the euro is 6.25%. 
C)  Forward discount on US$ is 6.25%. 
D)  Forward premium on US$ is 6.25%.

Question 13

Suppose that the inflation rate in the United States is 4% and in Canada it is 5%.What would you expect is happening to the exchange rate between the U.S.and Canadian dollars?

Accepted Answer

The answer of Suppose that the inflation rate in the...

Question 14

High inflation rates are usually associated with:

Accepted Answer

A)  low nominal interest rates. 
B)  high nominal interest rates. 
C)  high real interest rates. 
D)  low real interest rates.

Question 15

If prices in the United States rise less rapidly than in Canada,which of the following would be expected according to purchasing power parity?

Accepted Answer

A)  The value of the Canadian dollar will decline, relative to the U.S. dollar. 
B)  The value of the U.S. dollar will decline, relative to the Canadian dollar. 
C)  Inflation will increase in Canada. 
D)  The price of gold will decline.

Question 16

Current 1-year interest rates are 4% and 8% in the United States and Spain,respectively.The anticipated inflation in the United States is 2%.If International Fisher effect holds,what is the expected inflation in Spain?

Accepted Answer

A)  4.00% 
B)  4.04% 
C)  5.92% 
D)  6.00%

Question 17

How much wealthier would you be 1 year from now if you exchange $100,000 into Hong Kong dollars today at an indirect rate of HK$7.8/$,earn 7% on your Hong Kong investment,and exchange back at a rate of HK$8.0/$,as compared to investing in the United States at 4.0%?

Accepted Answer

A)  -$2,600 
B)  $325 
C)  $2,000 
D)  $5,744

Question 18

Suppose the interest rate on 1-year loans in the United States is 5% while in the United Kingdom the interest rate is 6%.The spot exchange rate is $1.55/£ and the forward rate is $1.54/£.In what country would you choose to borrow? To lend? Can you profit from this situation?

Accepted Answer

The answer of Suppose the interest rate on 1-year loans...

Question 19

If the difference between forward and spot exchange rates is positive,interest rate parity would predict that:

Accepted Answer

A)  the difference in interest rates between countries will be negative. 
B)  the difference in interest rates between countries will be positive. 
C)  there will be no difference in interest rates between countries. 
D)  the difference will be quickly eliminated.

Question 20

General Gadget Corp.(GGC)is a U.S.-based multinational firm that makes electrical coconut scrapers.These gadgets are made only in the United States using local inputs.The scrapers are sold mainly to Asian and West Indian countries where coconuts are grown.
a.If GGC sells scrapers in Trinidad,what must the firm consider when calculating its revenues?
b.In what currency should GGC borrow funds to pay for its investment in order to mitigate its foreign exchange exposure?
c.Suppose that GGC begins manufacturing its products in Trinidad using local (Trinidadian)inputs and labor.How does this affect its exchange rate risk?

Accepted Answer

The answer of General Gadget Corp.(GGC)is a U.S.-based multinational firm...

Exam 22: International Financial Management

U.S.investments with a 1-year maturity can be made for 6% and Swiss 1-year investments can be made for 3%.If the spot exchange rate is SFr1.6/$,which of the following 1-year forward exchange rates would convince you to invest in Switzerland?

Interest rate parity tells us that the cost of buying yen forward is exactly the same as the cost of borrowing dollars,buying yen in the spot market,and leaving them on yen deposit.

You can value overseas investments using the NPV of the cash flows.Which of the following adjustment is necessary to calculate the NPV?

If the spot exchange rate between lire and dollars is L1600/$ and the forward exchange rate is L1550/$,what would you predict to be the expected future spot rate? Is the lira appreciating or depreciating against the dollar?

Buckingham,Inc.,a British corporation,owes Yank Inc.,a U.S.corporation,$1 million due in 2 months.How can Buckingham hedge the exchange risk?

If the mark is trading at a forward discount relative to the dollar,then you'll receive less marks per dollar in the future.

What is the expected German inflation rate if 3% inflation is expected in the United States,the spot exchange rate is €1.5/$ and the expected spot rate is €1.6/$?

Interest rate parity suggests that you may assume that it is cheaper to borrow in a currency with a low nominal rate of interest.

How do we perform on NPV analysis for projects with cash flows in foreign currencies?

Which of the following is correct when contracting ahead in the forward exchange market?

If the exchange rate of euros/U.S.dollars is 2.04/1,then:

The 6-month forward quote for the euro is €1.6/US$,and the spot price of the euro is €1.7/US$.Which of the following statements is true?

Suppose that the inflation rate in the United States is 4% and in Canada it is 5%.What would you expect is happening to the exchange rate between the U.S.and Canadian dollars?

High inflation rates are usually associated with:

If prices in the United States rise less rapidly than in Canada,which of the following would be expected according to purchasing power parity?

Current 1-year interest rates are 4% and 8% in the United States and Spain,respectively.The anticipated inflation in the United States is 2%.If International Fisher effect holds,what is the expected inflation in Spain?

How much wealthier would you be 1 year from now if you exchange $100,000 into Hong Kong dollars today at an indirect rate of HK$7.8/$,earn 7% on your Hong Kong investment,and exchange back at a rate of HK$8.0/$,as compared to investing in the United States at 4.0%?

Suppose the interest rate on 1-year loans in the United States is 5% while in the United Kingdom the interest rate is 6%.The spot exchange rate is $1.55/£ and the forward rate is $1.54/£.In what country would you choose to borrow? To lend? Can you profit from this situation?

If the difference between forward and spot exchange rates is positive,interest rate parity would predict that: