Question 1

Suppose 1 year ago Hein Company had inventory in Britain valued at 240,000 pounds.The exchange rate for dollars to pounds was £1 = 2 Canadian dollars.This year,the exchange rate is £1 = 1.82 Canadian dollars.The inventory in Britain is still valued at 240,000 pounds.What is the gain or loss in inventory value in Canadian dollars as a result of the change in exchange rates?

Accepted Answer

Last year, the inventory value in Canadian dollars was 240,000 pounds * 2 CAD/pound = 480,000 CAD. This year, it's 240,000 pounds * 1.82 CAD/pound = 436,800 CAD. The loss in value is 480,000 CAD - 436,800 CAD = 43,200 CAD.

Question 2

Suppose hockey skates sell in Canada for 105 Canadian dollars,and 1 Canadian dollar equals 0.9423 US dollars.If absolute purchasing power parity (PPP) holds,what is the price of hockey skates in the United States?

Accepted Answer

The answer of Suppose hockey skates sell in Canada for...

Question 3

An American citizen is travelling to Canada for 6 months.If the exchange rate is $1USD:$1.33CAD,what is the value (in CAD) of his or her travel spending money (assume he or she has saved $25,000 for the trip to Canada)?

Accepted Answer

To find the value in CAD, multiply the amount in USD by the exchange rate: $25,000 * 1.33 = $33,250 CAD.

Question 4

Which of the following best describes the work of a financial analyst in a multinational context?

Accepted Answer

Financial analysts in a multinational context must consider the effects of changing currency values as their work involves analyzing financial data across different countries with varying currencies. This includes monitoring exchange rates, hedging against currency fluctuations, and assessing the risks and opportunities associated with foreign currency transactions. Options B, C, and D do not accurately reflect the role of financial analysts in a multinational context.

Question 5

Which of the following best describes how one would determine a currency cross rate?

Accepted Answer

Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base. For example, if one wants to calculate the cross rate between Euros and Japanese yen, one would use the US dollar as a base currency because the US dollar is widely traded against both currencies. This means that one would first calculate the exchange rate between Euros and US dollars and then the exchange rate between Japanese yen and US dollars. The cross rate would be calculated by multiplying the two exchange rates.

Question 6

A product sells for $750 in Canada.The exchange rate is $1 to 9.55 pesos.If the law of one price holds,what is the price of the product in Mexico?

Accepted Answer

The law of one price states that in the absence of transportation costs and barriers to trade, the price of a product should be the same in all markets when expressed in a common currency. To find the price in Mexico, multiply the price in Canada by the exchange rate: $750 * 9.55 = 7,162.50 pesos.

Question 7

A product sells for $7,500 in Canada.The exchange rate is $1USD:$1.33CAD.If the law of one price holds,what is the price of the product in United States?

Accepted Answer

To find the price in USD, divide the CAD price by the exchange rate: $7,500 CAD / 1.33 = $5,639 USD.

Question 8

A box of candy costs 12.80 euros in Germany and $20 in Canada.Assuming that the law of one price holds,what is the current exchange rate?

Accepted Answer

The law of one price suggests that the cost in euros (12.80) divided by the cost in dollars (20) gives the exchange rate, which is 0.64 euros per Canadian dollar.

Question 9

Blenman Corporation,based in Canada,arranged a 2-year,$1,000 loan to fund a project in Mexico.The loan is denominated in Mexican pesos,carries a 10.0% nominal rate,and requires equal semiannual payments.The exchange rate at the time of the loan was 10.1366 pesos per dollar,but it dropped to 9.5511 pesos per dollar before the first payment came due.The loan was not hedged in the foreign exchange market.Thus,Blenman must convert Canadian dollars into Mexican pesos to make its payments.If the exchange rate remains at 9.5511 pesos per dollar through the end of the loan period,what effective interest rate will Blenman end up paying on the loan?

Accepted Answer

The answer of Blenman Corporation,based in Canada,arranged a 2-year,$1,000 loan...

Question 10

Suppose one British pound can purchase 2.12 US dollars today in the foreign exchange market,and currency forecasters predict that the US dollar will depreciate by 22.0% 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 22.0% against the pound, it means the pound will increase in value by the same percentage relative to the dollar. The new value can be calculated as 2.12 * (1 + 22.0%) = 2.12 * 1.22 = 2.5864, which rounds to 2.59, making option A correct.

Question 11

Suppose a Canadian firm buys $200,000 worth of television tubes from a Norwegian manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received).The rising Canadian deficit has caused the dollar to depreciate against the krone recently.The current exchange rate is 5.50 krones per Canadian dollar.The 90-day forward rate is 5.45 krones/dollar.The firm goes into the forward market today and buys enough Norwegian krones at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 krones per Canadian dollar.How much in Canadian dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

Accepted Answer

The answer of Suppose a Canadian firm buys $200,000 worth...

Question 12

Chen Transport,a Canadian company,is considering expanding its operations into a foreign country for 5 years.The required investment at Time = 0 is $10 million.The firm forecasts total cash inflows of $4 million per year for 2 years,$6 million for the next 2 years,and then a possible terminal value of $8 million.Due to political risk factors,Chen believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million.In addition,the government of the host country will block 20% of all cash flows.Thus,cash flows that can be repatriated are 80% of those projected.Chen's cost of capital is 15%,but it adds one percentage point to all foreign projects to account for exchange rate risk.Under these conditions,what is the project's NPV?

Accepted Answer

To calculate the NPV, we need to discount all the cash flows back to time = 0 using the cost of capital adjusted for exchange rate risk.

PV of cash inflows for the first 2 years: 
= $4 million / (1.16)^1 + $4 million / (1.16)^2 
= $6.96 million

PV of cash inflows for the next 2 years: 
= $6 million / (1.16)^3 + $6 million / (1.16)^4 
= $9.98 million

PV of terminal value: 
= 0.5 ($2 million / (1.16)^5) + 0.5 ($8 million / (1.16)^5) 
= $3.16 million

Total PV of cash inflows: 
= $6.96 million + $9.98 million + $3.16 million 
= $20.1 million

Adjusted cash flows that can be repatriated: 
= 0.8 x $20.1 million 
= $16.08 million

Initial investment: 
= -$10 million

NPV = $16.08 million - $10 million 
= $6.08 million

Since the NPV is positive, it is profitable to invest in the foreign country. Therefore, option B is the best choice.

Question 13

Suppose 6 months ago a British investor bought a 6-month Canadian Treasury bill at a price of $9,708.74,with a maturity value of $10,000.The exchange rate at that time was 1.9516 dollars per pound.Today,at maturity,the exchange rate is 2.0751 dollars per pound.What is the annualized rate of return to the British investor?

Accepted Answer

The investor initially spent £4,975.43 (9,708.74 / 1.9516) and received £4,819.43 (10,000 / 2.0751) at maturity. The loss is £156, resulting in a 3.13% loss over 6 months, or -6.26% annualized.

Quiz 21: International Financial Management