Question 1

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return.In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return.In the 90-day forward market, 1 British pound equals $1.65.If interest rate parity holds, what is the spot exchange rate?

Accepted Answer

According to interest rate parity,
(1 + 0.06/4) / (1 + 0.01/4) * (1.5/100) = (1.5/100) * 1.65 / spot exchange rate
Solving for spot exchange rate, we get:
Spot exchange rate = 1.6582
Therefore, the answer is choice B.

Question 2

one Swiss franc can purchase $0.71 U.S.dollars, how many Swiss francs can one U.S.dollar buy?

Accepted Answer

To find out how many Swiss francs one U.S. dollar can buy, we need to take the reciprocal of the exchange rate.

Reciprocal of 0.71 is 1.41

Therefore, one U.S. dollar can buy 1.41 Swiss francs. Answer is D.

Question 3

Suppose the exchange rate between U.S.dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S.dollar and the euro is $1.00 = 1.64 euros.What is the cross-rate of Swiss francs to euros?

Accepted Answer

To find the cross-rate between Swiss francs and euros, we need to use the exchange rates between each currency through the U.S. dollar. 
SF 1.41 = $1.00 
$1.00 = 1.64 euros 
To find the cross-rate, we divide the exchange rate of Swiss francs to U.S. dollars by the exchange rate of euros to U.S. dollars:
SF 1.41 / $1.00 divided by $1.00 / 1.64 euros = SF 0.86 / euro

Question 4

Suppose one British pound can purchase 1.82 U.S.dollars today in the foreign exchange market, and currency forecasters predict that the U.S.dollar will depreciate by 12.0% against the pound over the next 30 days.How many dollars will a pound buy in 30 days?

Accepted Answer

The answer of Suppose one British pound can purchase 1.82...

Question 5

Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners.If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?

Accepted Answer

First, we need to calculate the before-tax return the investor receives from the Eurobond after taxes:

9% × (1 - 0%) = 9%

Next, we need to calculate the before-tax return the investor needs to receive from the domestic bond to get the same after-tax return:

9% = before-tax return × (1 - 28%)

Solving for before-tax return, we get:

before-tax return = 12.50%

Therefore, the domestic bond would need to pay a before-tax rate of 12.50% to provide a 9% after-tax return for the investor. The correct answer is D.

Question 6

Stover Corporation, a U.S.based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar.The terms of the purchase are net 90 days, and the U.S.firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk.Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs.If the spot rate in 90 days is actually 1.638 francs, how much will the U.S.firm have saved or lost in U.S.dollars by hedging its exchange rate exposure?

Accepted Answer

The answer of Stover Corporation, a U.S.based importer, makes a...

Question 7

one U.S.dollar buys 1.64 Canadian dollars, how many U.S.dollars can you purchase for one Canadian dollar?

Accepted Answer

To find out how many U.S. dollars can be purchased for one Canadian dollar, we need to divide 1 by 1.64. This gives us 0.61. Therefore, the answer is B.

Question 8

considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.

Accepted Answer

Exchange rate risk and political risk are major factors that can increase the risk of a foreign investment, while international diversification can help lower risk by spreading out investments across different markets and reducing the impact of any one market's instability.

Question 9

Suppose that currently, 1 British pound equals 1.62 U.S.dollars and 1 U.S.dollar equals 1.62 Swiss francs.What is the cross exchange rate between the pound and the franc?

Accepted Answer

To find the cross exchange rate between the pound and the franc, we need to use the given exchange rates to find the ratio between pounds and dollars, and then use that ratio to find the ratio between pounds and francs.

1 pound = 1.62 dollars

1 dollar = 1.62 francs

So 1 pound = (1/1.62) dollars and 1 dollar = (1/1.62) francs

Multiplying these two expressions, we get: 1 pound = (1/1.62) x (1/1.62) francs

Simplifying: 1 pound = 0.6162 francs

Therefore, 1 British pound equals 0.6162 Swiss francs or 1 British pound equals 2.6244 Swiss francs (rounded to four decimal places).

The answer is B.

Question 10

the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ________________ to the spot rate.

Accepted Answer

The forward rate is higher than the spot rate, indicating a discount. The percentage discount is calculated as ((5.97 - 5.51) / 5.97) * 100 = 7.71%, which rounds to 8%.

Question 11

Which of the following is NOT a reason why companies move into international operations?

Accepted Answer

Increasing inventory levels is not a typical reason for companies to move into international operations. The other options (A-D) are commonly cited reasons such as taking advantage of lower production costs, accessing new markets, serving primary customers in new regions, and accessing important raw materials located abroad.

Question 12

cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

Accepted Answer

The cost of capital is determined by the level of risk associated with a project. Foreign projects may have different levels of risk due to factors such as political instability, currency fluctuations, and legal and regulatory differences, which can affect the cost of capital for a foreign project compared to an equivalent domestic project.

Question 13

1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200.If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S.dollars?

Accepted Answer

To find the current price in U.S. dollars, we need to divide the original price in yen by the current exchange rate (in yen per dollar):
1,476,000 yen / 144 yen per dollar = $10,250. Therefore, the correct answer is choice C.

Question 14

interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S.money market instruments.

Accepted Answer

The interest rate paid on Eurodollar deposits is determined by the bank's lending rate and the rates available on U.S. money market instruments such as LIBOR (London Interbank Offered Rate) and the federal funds rate.

Question 15

Suppose DeGraw Corporation, a U.S.exporter, sold a solar heating station to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar.In order to close the sale, DeGraw agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction.The terms were net 6 months.If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would DeGraw actually receive after it exchanged yen for U.S.dollars?

Accepted Answer

The answer of Suppose DeGraw Corporation, a U.S.exporter, sold a...

Question 16

Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return.In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%.All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen.Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?

Accepted Answer

According to interest rate parity, the difference in interest rates between two countries should be equal to the percentage difference in the forward exchange rate between the two currencies. In this case, both the US and Japan have a 4% annualized return on 90-day securities, so there should be no difference in the yen-dollar exchange rate in the 90-day forward market. Therefore, the yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market. This is the only choice that is consistent with interest rate parity.

Question 17

cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.

Accepted Answer

The answer of cash flows relevant for a foreign investment...

Question 18

Suppose 144 yen could be purchased in the foreign exchange market for one U.S.dollar today.If the yen depreciates by 8.0% tomorrow, how many yen could one U.S.dollar buy tomorrow?

Accepted Answer

The answer of Suppose 144 yen could be purchased in...

Question 19

Which of the following statements is NOT CORRECT?

Accepted Answer

The statement "The term Eurobond applies only to foreign bonds denominated in U.S. currency" is not correct. In fact, Eurobonds are bonds denominated in a currency different from the currency of the country where the bond is issued, but not necessarily in U.S. currency.

Question 20

the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will

Accepted Answer

If the inflation rate in the United States is greater than the inflation rate in Britain, this means that the value of the U.S. dollar is decreasing faster than the value of the British pound. Therefore, the British pound will appreciate against the U.S. dollar.

Quiz 17: Multinational