Deck 22: International Financial Management

Question 1

The law of one price implies that the same commodity should be sold at the same price in all countries.

Answer 1

False

Question 2

The direct exchange rate quotes the number of U.S. dollars that can be exchanged for one unit of a foreign currency.

Answer 2

True

Question 3

A U.S. importer of a Japanese product should sell Japanese yen forward to avoid the risk of an appreciation of the yen.

Answer 3

False

Question 4

Even if a firm neither owes nor is owed foreign currency, it still may be affected by currency fluctuations.

Question 5

The number of euros that can be purchased with one U.S. dollar is referred to as an indirect quote.

Question 6

Forward rates are always equal to the actual future exchange rates.

Question 7

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.

Question 8

The international Fisher effect states that nominal interest rates should be equal in all countries.

Question 9

Forward contracts are standardized contracts sold in organized exchanges.

Question 10

If inflation is expected to be higher in the U.S. than in Mexico, then the peso is forecasted to depreciate against the dollar.

Question 11

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

Question 12

According to interest rate parity, the interest rate differential must be equal to the differential between forward and spot exchange rates.

Question 13

The forward exchange rate is the rate for immediate exchanges of two currencies.

Question 14

The New York Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market.

Question 15

You can purchase a futures contract on any currency.

Question 16

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

Question 17

Futures contracts are an easy method of buying foreign currency forward.

Question 18

The spot rate is $1 = C$1.02. The 3-month forward rate is $1 = C$1.03. The Canadian dollar is selling at a forward premium.

Question 19

Transaction risk is easily identified and hedged.

Question 20

According to the international Fisher effect, the differences in nominal interest rates across countries reflect the differences in their expected rates of inflation.

Question 21

How many dollars will it take for a U.S. citizen to purchase a Japanese product priced at 60,000 yen if the indirect exchange rate is 104/1?

A) $577
B) $700
C) $5,769
D)$62,400

Question 22

The main purpose in contracting to purchase foreign currency in the forward market is to:

A) earn a premium on the exchange.
B) lock into a future currency price now.
C) take advantage of future price reductions.
D)avoid the more expensive spot rates.

Question 23

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

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

Question 24

Suppose that: What rate do you think a Japanese bank would quote for buying or selling Swiss francs today?

A) 81.01 yen
B) 83.01 yen
C) 80.77 yen
D)79.67 yen

Question 25

Assuming the international Fisher effect is holding, what will be the effect of an increase of a country's nominal interest rates on the country's currency?

A) The currency will appreciate.
B) The currency will depreciate.
C) There will be no significant change in the currency's value.
D)The currency will sell at a forward premium.

Question 26

If the interest rate in one country increases, then the value of that country's currency increases in the forward market.

Question 27

Buying currency in the forward market is a common method of hedging currency risk.

Question 28

Suppose the interest rate in Canada is 4% while it is 3% in the U.S. The indirect spot rate is C$1.02. What is the indirect 1-year forward rate?

A) C$1.0299
B) C$1.0608
C) C$1.0200
D)C$1.0302

Question 29

If the exchange rate of euros/U.S. dollars is 0.74/1, then:

A) it takes $0.74 to buy each euro.
B) the euro is worth less than one U.S. dollar.
C) each euro is worth approximately $1.35.
D)one euro is worth approximately $1.

Question 30

If purchasing power parity is holding, what will happen to the currency of a country with high inflation?

A) The currency will appreciate.
B) The currency will depreciate.
C) There will be no significant change in the currency's value.
D)The currency will sell at a forward premium.

Question 31

Country A has a higher inflation rate than Country B. Given this, Country A will have the:

A) weaker currency.
B) higher nominal interest rate.
C) stronger currency.
D) higher real interest rate.

Question 32

If the international Fisher effect is valid, then real interest rates in all countries should be equal.

Question 33

If real interest rates are different across countries, investors will shift their money into countries with high real interest rates.

Question 34

Suppose that: What arbitrage gains can be achieved by a U.S. investor if the bank quotes a rate of 75 yen per Swiss franc?

A) 8%
B) 9%
C) 10%
D)11%

Question 35

A sandwich costs $6.79 in the U.S. The exchange rate is $C0.98 per U.S. dollar. What does the identical sandwich have to cost in Canada for purchasing power parity to exist?

A) C$6.93
B) C$6.79
C) C$6.65
D)C$6.86

Question 36

If the direct exchange rate between U.S. dollars and pounds sterling is 1.50/1, how much should you be willing to pay to receive 350 pounds?

A) $175.00
B) $233.33
C) $367.50
D)$525.00

Question 37

Suppose the spot rate for the Canadian dollar is 1.034, the 3-month forward rate is 1.036, and the 1-year forward rate is 1.039. If no other information is available, what will be your guess about the spot rate in 1 year?

A) 1.034
B) 1.036
C) 1.039
D)1.037

Question 38

The nominal interest rate is the difference between the real interest rate and inflation.

Question 39

An indirect quote is the rate of one unit of foreign currency expressed in U.S. dollars.

Question 40

High inflation rates are usually associated with:

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

Question 41

How much would you expect to receive for a nominal interest rate in Great Britain if funds can be invested in the United States at a rate of 7%, when inflation is expected to be 4% in the United States and 8% in Great Britain?

A) 5.19%
B) 7.93%
C) 9.08%
D)11.12%

Question 42

The ratio of expected spot rate to current spot rate for $/£ is 1.02 and the inflation rate in the United States is 5%. What is the approximate inflation rate in the United Kingdom?

A) 1.3%
B) 2.9%
C) 4.1%
D)7.0%

Question 43

If interest rates are higher in Italy than in the United States, you should expect the euro to:

A) appreciate against the dollar.
B) depreciate against the dollar.
C) offer a higher real rate of return than the dollar.
D)offer a lower real rate of return than the dollar.

Question 44

The theory that goods in a foreign country should be priced approximately equal after currency translation to goods in a host country is referred to as the law of:

A) exchange rates.
B) large numbers.
C) spot rates.
D)one price.

Question 45

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%?

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

Question 46

If you buy yen forward when the yen is selling at a forward premium, you will get:

A) more yen than if you buy yen on spot market.
B) fewer yen than if you buy yen on spot market.
C) the same number of yen as on the spot market, but with a lower commission.
D)the expectation of more yen, but the difference is not locked in.

Question 47

If the spot exchange rate between euros and dollars is €1.5/$ before the dollar depreciates by 10%, how many dollars will it take after the depreciation has occurred to pay an invoice of €500?

A) $366.67
B) $370.37
C) $750.00
D)$825.00

Question 48

Which one of the following would you expect to be nearly equal across countries?

A) Nominal interest rates
B) Real interest rates
C) Inflation rates
D)Forward premium

Question 49

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

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 in the U.S. will exceed inflation in Canada.
D)The exchange rate will be unaffected by the price changes.

Question 50

If exchange rates adjust to reflect inflation differentials across countries, then:

A) the law of one price is voided.
B) spot and forward rates will be equal.
C) nominal interest rates will be equal across countries.
D)purchasing power parity holds.

Question 51

If the spot indirect exchange rate of Mexican pesos for U.S. dollars is 9.8/1 and the peso is trading at a forward premium of 3%, then you will receive:

A) more than 9.8 pesos per dollar in the future.
B) less than 9.8 pesos per dollar in the future.
C) 9.83 pesos per dollar in the future.
D)10.09 pesos per dollar in the future.

Question 52

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

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)any difference in interest rates between countries will be quickly eliminated.

Question 53

The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in:

A) real rates of interest.
B) purchasing power parity.
C) the standard of living.
D)expected inflation.

Question 54

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 the international Fisher effect holds, what is the expected inflation rate in Spain?

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

Question 55

Which one of the following is advised when evaluating a capital project in a foreign country if you are concerned about political risk?

A) The project should be abandoned until this risk is eliminated.
B) The project's cost of capital rate should be decreased to offset the perceived risk.
C) The domestic discount rate should be increased to account for the added risk.
D)The project cash flows should be decreased to account for the political risk.

Question 56

Predict the expected spot exchange rate between the Japanese yen and U.S. dollar, given that inflation in Japan, at 8%, is 4% higher than in the United States and that the current spot rate is ¥107/$1.

A) ¥102.72/$1
B) ¥103.04/$1
C) ¥111.12/$1
D)¥111.28/$1

Question 57

You are importing TV sets worth ¥10 million from a Japanese manufacturer, and this amount is payable after 6 months. You can hedge your exchange risk by:

A) buying Japanese yen in the forward market.
B) selling Japanese yen in the forward market.
C) borrowing Japanese yen.
D)doing nothing.

Question 58

Which one of the following is correct if you have contracted to purchase 1,000 Swiss francs 3 months forward at a rate of SFr1.6/$?

A) You pay $625 today for the francs.
B) You pay $1,600 today for the francs.
C) You pay $625 three months from now for the francs.
D)You pay $1,600 three months from now for the francs.

Question 59

What do you expect to happen to prices in Japan, given nominal interest rates of 10% in the United States and 6% in Japan, and expected U.S. inflation of 6%?

A) Expected Japanese inflation is 1.79%.
B) Expected Japanese inflation is 2.15%.
C) Expected Japanese inflation is 6.22%.
D)Expected Japanese inflation is 10.00%.

Question 60

According to the expectations theory of exchange rates, what change is expected in the future spot exchange rate if the current spot rate is 8% lower than the forward exchange rate?

A) The future spot rate is expected to increase by 8%.
B) The future spot rate is expected to decrease by 8%.
C) The future spot rate is expected to decrease by 4%.
D)No change is expected in the future spot rate.

Question 61

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/$?

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

Question 62

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

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 the spot price is safer than contracting forward.

Question 63

Consider the following spot exchange rates: $1.60/£, ¥105/$, €1.6/$, and L2,020/$. Which one of the following prices for 1 troy ounce of gold seems to violate the law of one price if gold sells for $290 per troy ounce in the United States?

A) £181.25
B) ¥30,450
C) €405
D)L585,800

Question 64

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?

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 65

Yesterday the spot exchange rate of yen-to-dollar was 105. What is today's spot exchange rate if the yen has appreciated 10% against the dollar today?

A) ¥94.5/$1
B) ¥94.5/$1.10
C) ¥115.5/$1
D)¥115.5/$1.10

Question 66

According to the theory of purchasing power parity, exchange rates will adjust so that differences in:

A) interest rates across countries are offset.
B) forward rates across countries are offset.
C) expected inflation rates across countries are offset.
D)international Fisher rates are offset.

Question 67

A firm owes a large future payment that must be made in a foreign currency and wants to hedge the associated exchange rate risk. Which one of the following identifies the cost of such a hedge?

A) Difference between expected and current spot rates
B) Difference between expected and current forward rates
C) Difference between the forward premium and the forward discount
D)Difference between the forward rate and the expected future spot rate

Question 68

Which one of these is probably the best means of reducing or offsetting political risk?

A) Refusing any foreign government assistance in building the infrastructure required for your foreign operations
B) Borrowing money in the country in which you have foreign operations to fund those activities
C) Manufacturing a complete product in a foreign country using only resources from that country
D)Paying for all foreign operations with cash originating in the home country

Question 69

You have the opportunity to invest in the United States at 6% or invest in an equally risky Australian investment that offers 20%. This is too good to be true! The current exchange rate is A$1.65/$. Which one of the following do you suspect about this 1-year investment?

A) Expected inflation is higher in the United States.
B) The 1-year forward exchange rate is A$1.8679/$.
C) Real interest rates are higher in the United States.
D)The Australian dollar is selling forward at an 8.48% premium relative to the dollar.

Question 70

What would you expect to be the relationship between real rates of interest in Japan and the United States if inflation is expected to be 3% in Japan and 6% in the United States?

A) Japan's real interest rate should be 3% higher than in the United States.
B) Japan's real interest rate should be 3% lower than in the United States.
C) Japan's real interest rate should be half as high as in the United States.
D)Real interest rates should be equal in both countries.

Question 71

What is the expected spot rate of ¥/$ one year from now if the current spot rate is ¥106/$ and the yen is selling 1-year forward at ¥114/$?

A) ¥78.9/$
B) ¥98.0/$
C) ¥106.0/$
D)¥114.0/$

Question 72

Which one of the following is correct when foreign currency is contracted in the forward market?

A) A fixed amount is paid when initiating the contract.
B) A fixed amount is paid at the end of the contract.
C) The amount to be paid is determined and paid at the end of the contract.
D)The amount to be paid is determined periodically and paid in installments during the contract.

Question 73

What would you expect to occur if the rate of expected inflation in the United States is considerably lower than the expected inflation in Germany?

A) The expected spot rate of €/$ will decrease.
B) The current spot rate of €/$ will increase.
C) The dollar should appreciate against the euro.
D)The dollar should depreciate against the euro.

Question 74

Assume you can exchange $1 for either C$1.03 or €0.74. How many Canadian dollars can be acquired with one euro?

A) C$0.7622
B) C$1.2900
C) C$1.3919
D)C$0.7184

Question 75

Which one of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rates between two currencies?

A) The countries have equal nominal interest rates.
B) The spot rate is expected to change.
C) Expected inflation is less than the nominal rate.
D)Both currencies are selling at a premium relative to the other.

Question 76

An indirect exchange rate can be converted to a direct exchange rate by:

A) dividing the indirect rate by the number of U.S. dollars required to purchase one unit of the other currency.
B) dividing the indirect rate by 100.
C) multiplying the indirect rate by the spot rate.
D)taking the inverse of the indirect rate.

Question 77

This morning, you purchased 125,000 yen ahead 6 months at a price of 130 yen per dollar. The spot rate today is 128 yen per dollar. In six months, how many dollars must you pay to acquire the 125,000 yen?

A) $0
B) $961.54
C) $976.56
D)$968.99

Question 78

The international Fisher effect is valid in the long run because:

A) inflation rates are equal in different countries.
B) investors will move their money into countries with high real interest rates.
C) investors will move their money into countries with high nominal interest rates.
D)investors will move their money into countries with low inflation.

Question 79

Which one of these is an example of operational hedging?

A) Producing goods in a foreign country for sale in the U.S.
B) Manufacturing goods in the country where they will be sold
C) Producing products in one location and distributing them internationally
D)Offsetting every spot trade with an opposing forward trade

Question 80

Assume nominal rates are 10% in the United States and 25% in Holland, while the expected rates of inflation are 5% and 19%, respectively. Assuming investments of equal risk, you should invest in:

A) the United States because of the lower inflation rate.
B) the United States because the real return is 1.1% higher.
C) the United States because the real return is 0.37% higher.
D)Holland because the real return is 0.28% higher.