Question 1

The risk attached to international cash flows are all of the following EXCEPT
A) inflation and foreign exchange risks.
B) business and financial risks.
C) political risks.
D) risk of local management.

Accepted Answer

The risk of local management is not a specific risk associated with international cash flows. It is a more general business risk that can occur in any domestic or international context. In contrast, inflation and foreign exchange risks, business and financial risks, and political risks are all more specific risks that can arise from conducting business across international borders.

Question 2

As a foreign exchange hedging tool, options have all of the following characteristics EXCEPT
A) specifies price.
B) the right to buy or sell an amount of foreign currency.
C) specifies time period.
D) represents an obligation to buy or sell.

Accepted Answer

Options do not represent an obligation to buy or sell, they provide the right but not the obligation to buy or sell a specified amount of foreign currency at a specified price within a specified time period. This is in contrast to forward contracts, which do represent an obligation to buy or sell at a specific time and price.

Question 3

If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of inflation is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per Euro exchange rate in one year?
A) 0.7955
B) 1.145
C) 0.8730
D) 1.257

Accepted Answer

B

Question 4

The functional currency is the currency of the economic environment in which a business entity primarily generates and expends cash, and in which its accounts are maintained.

Accepted Answer

The functional currency is the currency that reflects the primary economic environment in which an entity operates, generates and expends cash, and maintains its accounts. It is determined based on various factors such as the currency of the country where the entity is located, the currency in which the entity generates revenue, and the currency in which it incurs most of its expenses.

Question 5

The risk of an investment in a Eurodollar deposit is partially due to
A) the fact that these instruments only pay interest at maturity.
B) the fact that the center of the Eurodollar market is in London.
C) the presence of some foreign exchange risk.
D) the fact that the majority of these deposits are not in the form of U.S. dollars.

Accepted Answer

Eurodollar deposits are denominated in U.S. dollars but they are held outside the United States. Therefore, there is a possibility of foreign exchange risk as the exchange rate between the U.S. dollar and the local currency of the country where the deposit is held may fluctuate.

Question 6

If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the exchange rate between the U.S. dollar and the Japanese yet is 120 Yen per dollar, then what is the Euro per Yen exchange rate?
A) 144.00
B) 100.00
C) 0.0100
D) 0.0069

Accepted Answer

To find the Euro per Yen exchange rate, we need to convert both exchange rates to the same currency (either Euro or Yen) and then divide the values.

First, we need to convert the U.S. dollar to Euro: 
1 Euro = $1.20

Next, we need to convert the U.S. dollar to Yen: 
1 dollar = 120 Yen

Now we can divide the Euro exchange rate by the Yen exchange rate to get the Euro per Yen exchange rate:

1 Euro / $1.20 ÷ 120 Yen / $1 = 1 Euro / 120 Yen = 0.0083 Euro per Yen

Rounding this to four decimal places gives us 0.0069. Therefore, the answer is option D.

Question 7

All of the following are considered to be major or "hard" currencies EXCEPT
A) the Japanese yen.
B) the U.S. dollar.
C) the Mexican peso.
D) the British pound.

Accepted Answer

The Mexican peso is not considered a major or "hard" currency, as it is not widely accepted or used as a reserve currency by other countries. The Japanese yen, U.S. dollar, and British pound are all considered to be major currencies.

Question 8

Countries that experience high inflation rates will see their currencies decline in value relative to the currencies of countries with lower inflation rates.

Accepted Answer

This is due to the decrease in purchasing power of the currency and the increase in the cost of goods and services. As a result, investors may be less likely to hold onto that currency, leading to a decline in demand and thus a decline in value.

Question 9

For currencies, changes in the value of foreign exchange rates are called .
A) floating; revaluation or devaluation
B) floating; appreciation
C) fixed; appreciation or depreciation
D) fixed; revaluation or devaluation

Accepted Answer

Changes in the value of foreign exchange rates for fixed currencies are called revaluation or devaluation. This is because the exchange rates are fixed by the government, and any change in the value of the currency must be done intentionally by the government through revaluation (increasing the value) or devaluation (decreasing the value).

Question 10

When fewer units of a foreign currency are required to buy one euro, the currency is said to have with respect to the euro.
A) depreciated
B) consolidated
C) remained fixed
D) appreciated

Accepted Answer

When fewer units of a foreign currency are required to buy one euro, it means that the euro has become stronger and the foreign currency has weakened in comparison. This is known as appreciation.

Question 11

As a foreign exchange hedge, currency swaps have all of the following characteristics EXCEPT
A) principal amounts are reversed at the spot rate at maturity.
B) principal amounts are reversed at a pre- agreed rate at maturity.
C) an initial exchange by two parties of two principal amounts in two different currencies.
D) each party pays the other's interest payment.

Accepted Answer

Currency swaps typically involve the exchange of principal and interest in different currencies between two parties, but the principal amounts are usually reversed at maturity at a pre-agreed rate (not at the spot rate). This allows both parties to know their obligations and entitlements, reducing exposure to exchange rate fluctuations.

Question 12

If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of inflation is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per Euro exchange rate in one year?
A) 1.257
B) 1.145
C) 0.8730
D) 0.7955

Accepted Answer

The exchange rate adjusts according to the relative inflation rates. The formula is: New Exchange Rate = Old Exchange Rate * (1 + Inflation Rate in US) / (1 + Inflation Rate in Europe). So, 1.20 * (1.05/1.10) = 1.145.

Question 13

Between two major currencies, the spot exchange rate is the rate and the forward exchange rate is the rate .
A) at some specified future date; today
B) on that date; at some specified future date
C) today; on that date
D) on that date; today

Accepted Answer

The answer of Between two major currencies, the spot exchange...

Question 14

The risk resulting from the effects of changes in foreign exchange rates on the firm's value is
A) macro political risk.
B) economic exposure.
C) accounting exposure.
D) micro political risk.

Accepted Answer

Economic exposure refers to the risk associated with the impact of changes in foreign exchange rates on a firm's financial performance and value. This can include changes in the value of assets, liabilities, and cash flows due to currency fluctuations. Macro and micro political risks refer to risks associated with changes in government policies and actions, while accounting exposure refers to the impact of foreign exchange rate changes on a firm's financial statements.

Question 15

In doing business in foreign countries, financing operations in the local market not only improves the company's business ties to the host community but also minimizes exchange rate risk.

Accepted Answer

Financing operations in the local market allows the company to have a better understanding of the host community's financial system and builds stronger business relationships. It also reduces the exposure to exchange rate risk as the company is using the local currency instead of converting from another currency.

Question 16

Foreign exchange risk refers to the risk created by .
A) the potential seizure of an MNC's operations in a host country.
B) the varying exchange rate between two currencies.
C) the potential nationalization of the MNC's operations by a host government.
D) the fixed exchange rate between two currencies.

Accepted Answer

Foreign exchange risk refers to the risk created by the varying exchange rate between two currencies, which can affect the value of an MNC's assets, liabilities, or cash flows denominated in different currencies. Options A and C refer to risks related to government intervention or control, while option D refers to a fixed exchange rate that would not create this type of risk.

Question 17

When more units of a foreign currency are required to buy one euro, the currency is said to have appreciated with respect to the euro.

Accepted Answer

When more units of a foreign currency are required to buy one euro, the currency is said to have depreciated with respect to the euro.

Question 18

The forward exchange rate is the rate of exchange between two currencies on any given day.

Accepted Answer

The forward exchange rate refers to the exchange rate agreed upon today for a currency transaction that will take place at a future date, not the current day's exchange rate.

Question 19

The risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's accounts denominated in a given foreign currency is
A) economic exposure.
B) accounting exposure.
C) micro political risk.
D) macro political risk.

Accepted Answer

The risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's accounts denominated in a given foreign currency is known as accounting exposure. It refers to the impact of currency fluctuations on a company's financial statements and therefore affects the reported financial results of the company.

Question 20

Three basic types of risk associated with international cash flows are 1) business and financial risks,2) inflation and foreign exchange risks, and 3) political risks.

Accepted Answer

This statement is true. Business and financial risks include factors such as economic instability, creditworthiness of customers, and the potential for default. Inflation and foreign exchange risks involve fluctuations in currency values and purchasing power, while political risks relate to changes in government policies, regulations, and instability in the host country. All of these risks can impact the success of international cash flows.

Quiz 25: Present Value of an Annuity of 1 at Compound Interest

The risk attached to international cash flows are all of the following EXCEPT

As a foreign exchange hedging tool, options have all of the following characteristics EXCEPT

If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of inflation is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per Euro exchange rate in one year?

The functional currency is the currency of the economic environment in which a business entity primarily generates and expends cash, and in which its accounts are maintained.

The risk of an investment in a Eurodollar deposit is partially due to

If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the exchange rate between the U.S. dollar and the Japanese yet is 120 Yen per dollar, then what is the Euro per Yen exchange rate?

All of the following are considered to be major or "hard" currencies EXCEPT

Countries that experience high inflation rates will see their currencies decline in value relative to the currencies of countries with lower inflation rates.

For currencies, changes in the value of foreign exchange rates are called .

When fewer units of a foreign currency are required to buy one euro, the currency is said to have with respect to the euro.

As a foreign exchange hedge, currency swaps have all of the following characteristics EXCEPT

If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of inflation is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per Euro exchange rate in one year?

Between two major currencies, the spot exchange rate is the rate and the forward exchange rate is the rate .

The risk resulting from the effects of changes in foreign exchange rates on the firm's value is

In doing business in foreign countries, financing operations in the local market not only improves the company's business ties to the host community but also minimizes exchange rate risk.

Foreign exchange risk refers to the risk created by .

When more units of a foreign currency are required to buy one euro, the currency is said to have appreciated with respect to the euro.

The forward exchange rate is the rate of exchange between two currencies on any given day.

The risk resulting from the effects of changes in foreign exchange rates on the translated value of a firm's accounts denominated in a given foreign currency is

Three basic types of risk associated with international cash flows are 1) business and financial risks,2) inflation and foreign exchange risks, and 3) political risks.