Question 1

XJ Company from the U.S.is evaluating a proposal to build a new plant in the United Kingdom.The expected cash flows in pounds are as follows: Year 0,-50; Year 1,25; Year 2,35; Year 3,40.The discount rate in BP is 14% and the discount rate in the $US is 12%.The spot rate is $US1.99/BP.Calculate the NPV in $US:

Accepted Answer

The answer of XJ Company from the U.S.is evaluating a...

Question 2

The dollar interest rate is 6%,and the Swiss franc interest rate is 4%.If the required rate of return for a project in Switzerland is 15%,calculate the required rate of return in the U.S.for a similar project.

Accepted Answer

The required rate of return in the U.S. can be calculated using the interest rate parity condition: (1 + required return in US) = (1 + required return in Switzerland) * (1 + US interest rate) / (1 + Swiss interest rate). Solving gives approximately 17.2%.

Question 3

The current spot rate is BP 0.5024/$US.The 3-month forward rate is BP 0.5040/$US.The TE Company expects a payment of BP 100 million in three months.If the firm hedges this transaction in the forward market,what is the $US amount it will receive in three months?

Accepted Answer

The answer of The current spot rate is BP 0.5024/$US.The...

Question 4

Interest rate parity gives the relationship between the forward rate and the spot rate of exchange in terms of interest rates.

Accepted Answer

Interest rate parity is a fundamental concept in international finance that links global interest rates, spot exchange rates, and forward exchange rates. It states that the difference between the forward exchange rate and the spot exchange rate is equal to the interest rate differential between two countries.

Question 5

An Australian firm is evaluating a proposal to build a new plant in the U.S.The expected cash flows in $US (in millions)are as follows: Year 0,-100; Year 1,40; Year 2,50; Year 3,65.The discount rate in $A is 10%,while the discount rate in $US is 12% and the spot rate is $US0.85/$A.
Calculate the NPV in $A:

Accepted Answer

1. Convert the cash flows from $US to $A:
Year 0: -100/0.85 = -117.65
Year 1: 40/0.85 = 47.06
Year 2: 50/0.85^2 = 53.69
Year 3: 65/0.85^3 = 63.46

2. Calculate the NPV in $A using the discount rate of 10%:
NPV = -117.65 + (47.06/(1+0.1)^1) + (53.69/(1+0.1)^2) + (63.46/(1+0.1)^3)
NPV = 25.69

Therefore, the best choice is A as it is the only positive NPV option.

Question 6

The beta of a firm's equity in Switzerland is 1.25.The risk-free rate is 4% and market risk premium is 8.4%.Calculate the required rate of return for the equity of this firm.

Accepted Answer

The required rate of return (RRR) for the equity of the firm can be calculated using the Capital Asset Pricing Model (CAPM):

RRR = Risk-free rate + Beta * Market risk premium
    = 4% + 1.25 * 8.4%
    = 14.5%

Therefore, the required rate of return for the equity of this firm is 14.5%. The correct answer is option C.

Question 7

The risk associated with unanticipated actions by the host country government or its courts towards a multinational firm is called:

Accepted Answer

Political risk refers to the risk that a multinational firm faces due to unanticipated actions by the host country government or its courts. This risk can arise due to changes in laws and regulations, expropriation of assets, currency controls, and political instability. Economic risk refers to the risk of financial loss due to changes in exchange rates, interest rates, or inflation. Transaction risk refers to the risk of financial loss due to errors or fraud in financial transactions. Translation risk refers to the risk of financial loss due to changes in exchange rates when translating financial statements into another currency.

Question 8

The country with the most favorable political risk score is:

Accepted Answer

Finland consistently ranks as having one of the lowest political risk scores in the world according to organizations such as the World Bank and the Economist Intelligence Unit. Its stable political climate and efficient governance make it an attractive place for foreign investment. While the U.S. and U.K. are also relatively stable politically, they have experienced some recent political turbulence and uncertainty, which may impact their scores. France has faced challenges with civil unrest and political protests, lowering its political risk score.

Question 9

An Australian firm is evaluating a proposal to build a new plant in the U.S.The expected cash flows in $US (in millions)are as follows: Year 0,-100; Year 1,40; Year 2,50; Year 3,65.The discount rate in $A is 10%,while the discount rate in $US is 12% and the spot rate is $US0.60/$A.Calculate the NPV of the project in $US.

Accepted Answer

The NPV in $US is calculated by discounting the cash flows at the $US discount rate of 12%. The NPV is: -100 + 40/(1.12) + 50/(1.12^2) + 65/(1.12^3) = +21.84 million.

Question 10

Your U.S.-based firm is deciding between using currency futures contracts or a forward contract with its commercial bank in order to hedge a scheduled dividend from its subsidiary corporation in Germany.The dividend will be repatriated in July,while the currency futures contracts are only available for June or September delivery.Which of the following choices properly hedges the transaction without basis risk?

Accepted Answer

A forward contract to sell Euros in July matches the timing of the dividend repatriation, eliminating basis risk associated with futures contracts that do not align with the exact timing.

Question 11

In the forward exchange market,currency is traded for future delivery.

Accepted Answer

In the forward exchange market, two parties agree to exchange currencies at a future date, with the price and amount of currency set at the time the contract is made. This allows for hedging against currency fluctuations and managing foreign exchange risk.

Question 12

Currency risk exposure can be categorized as:

Accepted Answer

Currency risk exposure can be categorized into transaction exposure (which arises from actual transactions involving foreign currency), economic exposure (which arises from the impact of currency fluctuations on the overall financial results and competitive position of a firm), and translation exposure (which arises from the conversion of foreign subsidiary financial statements into the reporting currency of the parent company). Therefore, all the given options (A, B, and C) are correct, making D the best choice.

Question 13

Political risk is can be thought of as:

Accepted Answer

Political risk refers to the potential impact of unanticipated actions or events by a host government that affect the cash flows of a project. This can include changes in regulations, nationalization of assets, currency restrictions, or political instability that may impact the profitability or viability of a project. While political risk can also impact exchange rates and be influenced by international organizations such as the World Bank, these factors are not as directly related to the impact of the host government on a project's cash flows.

Question 14

XJ Company from the U.S.is evaluating a proposal to build a new plant in the United Kingdom.The expected cash flows in pounds are as follows: Year 0,-50; Year 1,25; Year 2,35; Year 3,40.The discount rate in BP is 14% and the discount rate in $US is 12%.The spot rate is $US1.99/BP.Calculate the NPV of the project in BP.

Accepted Answer

The NPV in BP is calculated by discounting the cash flows at the BP discount rate of 14%. The NPV is: -50 + 25/(1.14) + 35/(1.14^2) + 40/(1.14^3) = +25.86.

Question 15

If the peso is traded at a forward discount relative to the U.S.dollar,then the U.S.dollar is also trading at a discount relative to the peso.

Accepted Answer

If the peso is trading at a forward discount relative to the U.S. dollar, it means that the peso is expected to weaken in the future. This does not necessarily mean that the U.S. dollar is trading at a discount relative to the peso. It may simply mean that the market expects the peso to weaken due to factors such as inflation or political instability, while the U.S. economy remains strong.

Question 16

The phrase "stronger currency" implies a forward premium.Given a Euro-U.S.dollar exchange rate of $1.45/Euro,which of the following values for the forward rate shows the strongest dollar?

Accepted Answer

A stronger dollar means the dollar can buy more euros, so a lower forward rate (like 1.25) indicates a stronger dollar compared to the current rate of 1.45.

Question 17

Suppose that the G Company knows that in one month it must pay ≤7 million for goods that its U.S.subsidiary will receive in Britain.The current exchange rate is $1.99/≤.The risk that the corporate treasurer faces is that:

Accepted Answer

If the $US/pound exchange rate rises in a month's time, i.e., the pound strengthens, then the G Company will have to pay more dollars to acquire the same amount of pounds, making the transaction more expensive. Therefore, the risk that the corporate treasurer faces is that the pound strengthens.

Question 18

If a government were to seize the assets of a multinational company and not provide adequate compensation to its owners,the government would be following which practice?

Accepted Answer

The practice described in the question is expropriation, which refers to when a government seizes private property (such as a multinational company's assets) without providing adequate compensation to the owners. This practice is often seen as a violation of property rights and can cause tensions between governments and businesses.

Question 19

If the U.S.dollar interest rate is 4% and the peso interest rate is 7%,what is the likely one-year forward rate if the spot dollar-peso rate is peso 11/$US?

Accepted Answer

The formula for calculating the one-year forward rate is:

Forward rate = Spot rate x (1 + foreign interest rate) / (1 + domestic interest rate)

Plugging in the given values, we get:

Forward rate = 11 x (1 + 0.07) / (1 + 0.04)
Forward rate = 11 x 1.07 / 1.04
Forward rate = 11.32

Therefore, the likely one-year forward rate is peso 11.32/$US. Option B is the correct answer.

Question 20

The current spot rate is $US0.8543/$A.The one-year forward rate is $US0.8475/$A.A U.S.exporter denominates its exports to Australia in $A and expects to receive $A600,000 in one year.What is the value of these exports in one year in $US given that the firm executes a forward hedge?

Accepted Answer

The answer of The current spot rate is $US0.8543/$A.The one-year...

Quiz 27: Managing International Risks