Question 1

Exchange rate changes tend to reflect international differences in inflation rates.What is the name of this theory?

Accepted Answer

A) the purchasing power parity theory 
B) the IMF effect 
C) interest rate parity theory 
D) the law of one price

Question 2

The bid-asked spread is much lower for currencies that are infrequently traded in order to compensate banks for providing the service.

Accepted Answer

A) True 
 B)False

Question 3

A U.S.-based multinational corporation (MNC)currently has an investment portfolio that includes Japanese securities valued at 10,000,000 yen.The company also owes its Japanese suppliers 12,000,000 yen.Which of the following statements is MOST correct?

Accepted Answer

A) The MNC is not exposed to exchange rate risk because it holds both assets and liabilities denominated in yen. 
B) The MNC will be exposed to exchange rate losses if the yen declines in value relative to the dollar. 
C) The MNC will be exposed to exchange rate losses if the yen increases in value relative to the dollar. 
D) The MNC can avoid exchange rate risk by paying its Japanese liabilities with dollars.

Question 4

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 5

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.

Question 6

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 7

The spot exchange rate in New York is 1.600 dollars per British pound.The 360-day forward exchange rate is 1.680 dollars per pound.The one-year interest rate in Great Britain is 2% while the one-year interest rate in the United States is 4%. 
a.If the interest rate in Great Britain remains at 2%,what should the interest rate be in the United States according to the interest rate parity theory? 
b.An American investor with $40,000 decides to take advantage of the differences in rates.Ignoring transaction costs,how can the American investor exploit the disequilibrium? Compare the amount of money the investor will have at the end of the year if he or she invests in one-year U.S.securities versus one-year British securities.

Accepted Answer

The answer of The spot exchange rate in New York...

Question 8

Commercial centers for foreign exchange exist only in New York and London in order to make it possible for arbitrage to work.

Accepted Answer

A) True 
 B)False

Question 9

Three types of arbitrage are simple arbitrage,rectangular arbitrage,and covered-expense arbitrage.

Accepted Answer

A) True 
 B)False

Question 10

With international investing,unlike domestic investing,exchange rate risk could cause a marginally-positive-NPV project to be rejected due to the additional risk.

Accepted Answer

A) True 
 B)False

Question 11

Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.

Accepted Answer

A) True 
 B)False

Question 12

A U.S.corporation investing in a foreign corporation by purchasing stock on a foreign stock exchange is an example of direct foreign investment.

Accepted Answer

A) True 
 B)False

Question 13

The existence of a forward-spot differential creates an arbitrage opportunity that will eliminate the differential almost immediately.

Accepted Answer

A) True 
 B)False

Question 14

Money-market hedges and forward market hedges rely on the

Accepted Answer

A) interest rate parity theory. 
B) purchasing power parity theory. 
C) law of large numbers. 
D) capital asset pricing model.

Question 15

In order to profit from an expected near-term increase in the relative value of the British pound versus the U.S.dollar,an investor would be wise to maintain a short position in pounds,then sell when the pound rises in relative value.

Accepted Answer

A) True 
 B)False

Question 16

Suppose the current spot rate in New York is .0119 dollars per yen.Inflation for the coming year in the United States is expected to be 3%,while inflation for the coming year is Japan is expected to be only 1%.Using the purchasing power parity theory,what is the expected spot rate at the end of the year should be

Accepted Answer

A) .0110147 dollars per yen. 
B) .0108159 dollars per yen. 
C) .0138373 dollars per yen. 
D) .0121356 dollars per yen.

Question 17

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 18

Forward rates are all of the following EXCEPT

Accepted Answer

A) quoted in both direct and indirect form. 
B) quoted at a premium or discount. 
C) beneficial to risk-reduction. 
D) equal to future spot rates.

Question 19

A U.S.-based multinational corporation has 100% owned subsidiary in Argentina.The subsidiary operates only domestically,that is,all transactions occur within Argentina.Therefore,the U.S.multinational corporation

Accepted Answer

A) is exposed to translation risk only. 
B) is not exposed to exchange rate risk because the subsidiary operates 100% domestically. 
C) is exposed to both translation exposure and economic exposure. 
D) is most concerned with transactions exposure.

Question 20

Problems of multinationals include

Accepted Answer

A) cash management and positioning of funds. 
B) managing receivables. 
C) global control. 
D) all of the above.

Exam 16: International Business Finance

Exchange rate changes tend to reflect international differences in inflation rates.What is the name of this theory?

The bid-asked spread is much lower for currencies that are infrequently traded in order to compensate banks for providing the service.

A U.S.-based multinational corporation (MNC) currently has an investment portfolio that includes Japanese securities valued at 10,000,000 yen.The company also owes its Japanese suppliers 12,000,000 yen.Which of the following statements is MOST correct?

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?

A forward exchange contract

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

Commercial centers for foreign exchange exist only in New York and London in order to make it possible for arbitrage to work.

Three types of arbitrage are simple arbitrage,rectangular arbitrage,and covered-expense arbitrage.

With international investing,unlike domestic investing,exchange rate risk could cause a marginally-positive-NPV project to be rejected due to the additional risk.

Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.

A U.S.corporation investing in a foreign corporation by purchasing stock on a foreign stock exchange is an example of direct foreign investment.

The existence of a forward-spot differential creates an arbitrage opportunity that will eliminate the differential almost immediately.

Money-market hedges and forward market hedges rely on the

In order to profit from an expected near-term increase in the relative value of the British pound versus the U.S.dollar,an investor would be wise to maintain a short position in pounds,then sell when the pound rises in relative value.

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?

Forward rates are all of the following EXCEPT

A U.S.-based multinational corporation has 100% owned subsidiary in Argentina.The subsidiary operates only domestically,that is,all transactions occur within Argentina.Therefore,the U.S.multinational corporation

Problems of multinationals include