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Exam 21: International Corporate Finance

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Question 31

Multiple Choice

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Suppose the exchange rates are as follows: Assume interest rate parity holds and the current six-month risk-free rate in the United States is 3.1 percent. What must the six-month risk-free rate be in Great Britain?

A) 2.73 percent
B) 2.87 percent
C) 2.94 percent
D) 3.10 percent
E) 3.52 percent

F) A) and E)
G) D) and E)

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Question 32

Multiple Choice

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Which one of the following is a suggested method of reducing a U.S. importer's short-run exposure to exchange rate risk?

A) entering a forward exchange agreement timed to match the invoice date
B) investing U.S.dollars when an order is placed and using the investment proceeds to pay the invoice
C) exchanging funds on the spot market at the time an order is placed with a foreign supplier
D) exchanging funds on the spot market at the time an order is received
E) exchanging funds on the spot market at the time an invoice is payable

F) None of the above
G) B) and D)

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Question 33

Multiple Choice

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You are planning a trip to Australia. Your hotel will cost you A$145 per night for seven nights. You expect to spend another A$2,800 for meals, tours, souvenirs, and so forth. How much will this trip cost you in U.S. dollars given the following exchange rates?

The international Fisher effect states that _____ rates are equal across countries.

International bonds issued in multiple countries but denominated solely in the issuer's currency are called:

The type of exchange rate risk known as translation exposure is best described as:

Assume the spot rate on the Canadian dollar is C$1.1847. The risk-free nominal rate in the U.S. is 5 percent while it is only 4 percent in Canada. What one-year forward rate will create interest rate parity?

Which one of the following statements is correct given the following exchange rates?

Assume that $1 is equal to ¥98 and also equal to C$1.21. Based on this, you could say that C$1 is equal to: C$1(¥98/C$1.21) = ¥80.99. The exchange rate of C$1 = ¥80.99 is referred to as the:

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. is based solely on differences in exchange ratios between spot and futures markets.

Interest rate parity:

You observe that the inflation rate in the United States is 3.5 percent per year and that T-bills currently yield 3.8 percent annually. What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 4.5 percent per year?

Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate?

You would like to purchase a security that is issued by the British government. Which one of the following should you purchase?

How many Euros can you get for $2,100 if one euro is worth $1.2762?

In the spot market, $1 is currently equal to £0.6211. Assume the expected inflation rate in the U.K. is 4.2 percent while it is 3.4 percent in the U.S. What is the expected exchange rate one year from now if relative purchasing power parity exists?

Uncovered interest parity is defined as:

The expected inflation rate in Finland is 2.8 percent while it is 3.7 percent in the U.S. A risk-free asset in the U.S. is yielding 4.9 percent. What approximate real rate of return should you expect on a risk-free Finnish security?

Which one of the following securities is used as a means of investing in a foreign stock that otherwise could not be traded in the United States?

You just returned from some extensive traveling throughout the Americas. You started your trip with $20,000 in your pocket. You spent 3.4 million pesos while in Chile and 16,500 bolivares in Venezuela. Then on the way home, you spent 47,500 pesos in Mexico. How many dollars did you have left by the time you returned to the U.S. given the following exchange rates? (Note: Multiple symbols are used to designate various currencies. For example, the U.S. dollar is notated as "$" or as "USD".)