Question 1

Triangle arbitrage:

Accepted Answer

A) no longer exists due to the advanced electronic communications used in today's markets. 
B) only applies to forward exchange rates. 
C) helps keep the currency market in equilibrium. 
D) opportunities can only be found in the spot market. 
E) only involves currencies other than the U.S.dollar.

Question 2

Remitting funds to a parent firm from a foreign subsidiary is referred to as:

Accepted Answer

A) recommitting. 
B) reshipping. 
C) repatriating. 
D) returning. 
E) reshaping.

Question 3

Covered interest arbitrage involves:

Accepted Answer

A) two spot rates. 
B) two forward rates. 
C) both a spot rate and a forward rate. 
D) a single exchange at the current exchange rate. 
E) a single exchange at a spot rate that exists in the future.

Question 4

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 Offered Rate. 
C) Paris Opening Interest Rate. 
D) United States Treasury bill rate. 
E) international prime rate.

Question 5

When the Canadian dollar is quoted as $.87,this quote is a(n):

Accepted Answer

A) triangle rate. 
B) indirect rate. 
C) direct rate. 
D) cross rate. 
E) inverse rate.

Question 6

Assume the expected inflation rate in Switzerland is 2.2 percent while it is 1.6 percent in the U.S.Also assume a risk-free asset in the U.S.is yielding 3.7 percent.What real rate of return should you expect on a risk-free Swiss security?

Accepted Answer

A) 2.0 percent 
B) 2.1 percent 
C) 3.0 percent 
D) 3.5 percent 
E) 3.1 percent

Question 7

Currencies that are exchanged today without any prior arrangement are exchanged at the:

Accepted Answer

A) spot rate. 
B) forward rate. 
C) triangle rate. 
D) LIBOR. 
E) discounted rate.

Question 8

The foreign currency approach to capital budgeting analysis:

Accepted Answer

A) is computationally harder to use than the home currency approach. 
B) utilizes the uncovered interest parity relationship. 
C) computes the NPV in both the foreign and the domestic currency. 
D) is solely dependent upon purchasing power parity. 
E) produces superior results as compared to the home currency approach.

Question 9

Assume the current spot rate is Can$1.2803 and the one-year forward rate is Can$1.2745.Also assume the nominal risk-free rate in Canada is 4.8 percent while it is 4.2 percent in the U.S.Using covered interest arbitrage,you can earn a profit of ________ for every $1 invested over the next year.

Accepted Answer

A) $.0163 
B) $.0108 
C) −$.0040 
D) −$.0088 
E) −$.0840

Question 10

A foreign subsidiary can remit funds to the parent firm in the all the following ways except by means of:

Accepted Answer

A) dividends. 
B) management fees for central services. 
C) royalties on the use of trade names. 
D) royalties on the use of patents. 
E) nationalization.

Question 11

The cross rate is:

Accepted Answer

A) the inverse of the direct rate. 
B) an implicit rate based on two currencies and their individual relationships with a third currency. 
C) the rate converting the direct rate into the indirect rate. 
D) the average of the spot and forward rates. 
E) the link between the spot and forward rates.

Question 12

Assume the current spot rate for the Norwegian krone is $1 = NKr7.9323,the expected inflation rate in Norway is 2.1 percent and 1.2 percent in the U.S.Also assume a risk-free asset in the U.S.is yielding 3.7 percent.What nominal risk-free rate of return should you expect on a Norwegian security?

Accepted Answer

A) 2.9 percent 
B) 4.6 percent 
C) 4.2 percent 
D) 3.1 percent 
E) 3.8 percent

Question 13

Spot trades must be settled:

Accepted Answer

A) on the trade date. 
B) within one business day. 
C) within two business days. 
D) within three business days. 
E) within one week of the trade date.

Question 14

The changes in the relative economic conditions between countries are referred to as the:

Accepted Answer

A) international Fisher effect. 
B) international exchange rate effect. 
C) translation exposure to exchange rate risk. 
D) long-run exposure to exchange rate risk. 
E) the interest rate parity risk.

Question 15

Global Markets wants to invest in a riskless project in Sweden.The project has an initial cost of SKr2.3 million and is expected to produce cash inflows of SKr850,000 a year for 3 years.The project will be worthless after the first 3 years.Assume the expected inflation rate in Sweden is 2.6 percent while it is 3.2 percent in the U.S.Also assume a risk-free security is paying 5.9 percent in the U.S.and the current spot rate is $1 = SKr8.31.What is the net present value of this project in Swedish krona using the foreign currency approach? Assume the international Fisher effect applies.

Accepted Answer

A) SKr1,856.07 
B) SKr1,809.85 
C) SKr1,969.10 
D) SKr1,978.67 
E) SKr2,028.18

Question 16

The camera you want to buy costs $399 in the U.S.If absolute purchasing power parity exists,the identical camera will cost ________ in Australia if the exchange rate is A$1 = $.7752.

Accepted Answer

A) A$309.30 
B) A$393.23 
C) A$435.09 
D) A$514.71 
E) A$506.67

Question 17

Assume the current spot rate is Can$1.2811 and the one-year forward rate is Can$1.2767.Also assume the nominal risk-free rate in Canada is 3.2 percent while the U.S.rate is 3.5 percent.Using covered interest arbitrage you can earn an extra profit of ________ for every $1 invested over the next year.

Accepted Answer

A) $.0018 
B) $.0015 
C) $.0011 
D) $.0006 
E) $.0002

Question 18

A Canadian project has an initial cost of Can$1.8 million and is expected to produce cash inflows of Can$710,000 a year for 3 years after which time it will be worthless.Assume the expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S.The applicable interest rate in Canada is 8 percent.Assume the current spot rate is C$1 = $.78.What is the net present value of this project in Canadian dollars using the foreign currency approach?

Accepted Answer

A) Can$33,974.02 
B) Can$32,790.05 
C) Can$29,738.86 
D) Can$28,721.40 
E) Can$30,751.18

Question 19

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 20

The foreign exchange market is where:

Accepted Answer

A) one country's stocks are exchanged for another's. 
B) one country's bonds are exchanged for another's. 
C) one country's currency is traded for another's. 
D) international banks make loans to one another. 
E) international businesses finalize import/export relationships with one another.

Exam 31: International Corporate Finance