Question 1

Suppose that currently 1 British pound equals 1.98 Canadian dollars and 1 Canadian dollar equals 1.04 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 convert pounds to Canadian dollars and then Canadian dollars to Swiss francs. 1 pound equals 1.98 Canadian dollars and 1 Canadian dollar equals 1.04 Swiss francs, so 1 pound equals 1.98 x 1.04 Swiss francs or approximately 2.0592 Swiss francs. Therefore, the answer is B.

Question 2

If one US dollar buys 1.0613 Canadian dollars,how many US dollars can you purchase for one Canadian dollar?

Accepted Answer

To find out how many US dollars you can purchase for one Canadian dollar, you divide 1 by the exchange rate of 1.0613. This gives you approximately 0.94 US dollars for one Canadian dollar.

Question 3

Suppose in the spot market 1 US dollar equals 1.0613 Canadian dollars.Six-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%).6-month U.S.securities have an annualized return of 6.5% and a periodic return of 3.25%.If interest rate parity holds,what is the US dollar-Canadian dollar exchange rate in the 180-day forward market?

Accepted Answer

According to interest rate parity, the forward exchange rate between two currencies should be equal to the ratio of the interest rates of the two countries.

Therefore, (1 + 0.065/2) / (1 + 0.03/2) = (forward exchange rate) / 1.0613

Solving for the forward exchange rate, we get:

Forward exchange rate = 1.0613 x (1 + 0.065/2) / (1 + 0.03/2) = 1.0587

Therefore, 1 US dollar is equal to 1.0587 Canadian dollars in the 180-day forward market.

Question 4

Which of the following is NOT likely to be a reason that companies move into international operations?

Accepted Answer

Companies may move into international operations to take advantage of lower production costs, develop new markets, or access important raw materials. However, diversifying the risk of global terrorist attacks is not a common reason for companies to expand internationally. While international operations may provide some level of diversification, the primary reasons for expanding abroad are typically related to market opportunities and cost savings.

Question 5

If 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 what is the forward rate for the Israeli shekel selling at?

Accepted Answer

The forward rate is higher than the spot rate, indicating a discount. The percentage discount is calculated as ((5.97 - 5.51) / 5.51) * 100 = 8.34%, which rounds to 8%.

Question 6

If one Swiss franc can purchase 0.966 Canadian dollars,how many Swiss francs can one Canadian dollar buy?

Accepted Answer

Since one Swiss franc can purchase 0.966 Canadian dollars, one Canadian dollar can purchase 1/0.966 Swiss francs which is approximately equal to 1.04 Swiss francs. Therefore, the answer is D.

Question 7

Stover Corporation,a Canadian importer,makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs,or $38,610,at the spot rate of 1.035 francs per dollar.The terms of the purchase are net 90 days,and the Canadian 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 1.099 francs.If the spot rate in 90 days is actually 1.062 francs,how much will the Canadian firm have saved or lost in Canadian dollars by hedging its exchange rate exposure?

Accepted Answer

The answer of Stover Corporation,a Canadian importer,makes a purchase of...

Question 8

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

To provide a 9% after-tax return when there is a 28% withholding tax, the before-tax interest rate needs to be calculated as the required after-tax return divided by (1 - tax rate). This is 9% / (1 - 0.28) = 9% / 0.72 = 12.5%.

Question 9

Suppose the exchange rate between Canadian dollars and Swiss francs is SF 1.10 = $1.00,and the exchange rate between the Canadian dollar and the euro is $1.00 = 0.68 euros.What is the cross-rate of Swiss francs to euros?

Accepted Answer

The answer of Suppose the exchange rate between Canadian dollars...

Question 10

In Japan,90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return.In Canada,90-day securities have a 4% annualized return and 180-day securities have a 4.5% annualized return.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 statement about the exchange rate is true?

Accepted Answer

Interest rate parity implies that the forward exchange rate equals the spot exchange rate multiplied by the ratio of the domestic and foreign interest rates. In this case, the 90-day forward exchange rate is equal to the spot exchange rate multiplied by 1 + 0.04 / 1 + 0.04 = 1.0000. The 180-day forward exchange rate is equal to the spot exchange rate multiplied by 1 + 0.05 / 1 + 0.045 = 1.0000. Therefore, the yen-dollar spot exchange rate equals the yen-dollar exchange rate in both the 90-day and 180-day forward markets.

Question 11

Suppose one British pound can purchase 1.82 US dollars today in the foreign exchange market,and currency forecasters predict that the US 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

If the US dollar depreciates by 12% against the pound, then the new exchange rate will be:

1 pound = (1 + 0.12) * 1.82 dollars
1 pound = 2.04 dollars

Therefore, a pound will buy 2.04 dollars in 30 days. The answer is D.

Question 12

Which of the following statements is NOT correct?

Accepted Answer

The statement "The term 'Eurobond' applies only to foreign bonds denominated in US currency" is incorrect. Eurobonds are bonds issued in a currency different from the currency of the country or market where the bond is being sold. It does not have to be denominated in US currency.

Question 13

Suppose 104 yen could be purchased in the foreign exchange market for one Canadian dollar today.If the yen depreciates by 8.0% tomorrow,how many yen could one Canadian dollar buy tomorrow?

Accepted Answer

If the yen depreciates by 8%, it means the value of the yen decreases by 8%. Therefore, the new exchange rate would be 104 yen * (1 + 0.08) = 112.32 yen per Canadian dollar.

Question 14

Suppose DeGraw Corporation,a Canadian exporter,sold a solar heating station to a Japanese customer at a price of 106.0875 million yen,when the exchange rate was 103.5 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 110.2 yen when the invoice was paid,what dollar amount would DeGraw actually receive after it exchanged yen for Canadian dollars?

Accepted Answer

To find the dollar amount DeGraw actually receives, divide the total yen received by the exchange rate at the time of payment: 106.0875 million yen / 110.2 yen per dollar = $962,681.

Question 15

When 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 common risks associated with foreign investment, while international diversification can help reduce the overall risk by spreading investments across multiple countries and industries.

Question 16

What is NOT one of the requirements of international financial management?

Accepted Answer

The requirement that markets be considered to be efficient is not a requirement of international financial management. While it is a common assumption in financial theory, the reality is that markets are not always efficient, especially in the context of global financial markets where there are often informational asymmetries and other factors that can create market inefficiencies. The other requirements listed (consideration of currency effects, legal/economic differences, and respect for cultural heritages) are all important considerations in international financial management.

Question 17

The 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 the project. Foreign projects may be subject to a variety of risks such as currency risk, political risk, and regulatory risk that may differ from domestic projects. Therefore, the cost of capital may be different for a foreign project than for an equivalent domestic project.

Question 18

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return.In Canada,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 $1.96.If interest rate parity holds,what is the spot exchange rate?

Accepted Answer

Interest rate parity implies that the difference in interest rates between two countries is equal to the difference between the forward exchange rate and the spot exchange rate. Using the formula for interest rate parity: Forward Rate / Spot Rate = (1 + interest rate domestic) / (1 + interest rate foreign). Plugging in the given values: 1.96 / Spot Rate = (1 + 0.015) / (1 + 0.01). Solving for the Spot Rate gives approximately 1.9700.

Question 19

In 1997,a certain 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 110 yen per dollar,what would the car be selling for today in Canadian dollars?

Accepted Answer

The answer of In 1997,a certain Japanese imported automobile sold...

Question 20

If the inflation rate in Canada is greater than the inflation rate in Britain,other things held constant,what will happen to the British pound?

Accepted Answer

When the inflation rate in Canada is higher than in Britain, the value of the Canadian dollar is expected to decrease relative to the British pound, leading to an appreciation of the British pound against the Canadian dollar. This is because higher inflation typically reduces a currency's purchasing power, making goods and services from the country with higher inflation more expensive compared to those from the country with lower inflation.

Quiz 21: International Financial Management