Question 1

Suppose a U.S.firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received).The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.50 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?
A)$0
B)$1,834.86
C)$4,517.26
D)$5,712.31
E)$7,547.17

Accepted Answer

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

Question 2

A product sells for $750 in the United States.The exchange rate is $1 to 1.65 Swiss francs.If purchasing power parity (PPP)holds,what is the price of the product in Switzerland?
A)123.75 Swiss francs
B)454.55 Swiss francs
C)750.00 Swiss francs
D)1,237.50 Swiss francs
E)1,650.00 Swiss francs

Accepted Answer

Purchasing Power Parity (PPP) suggests that in the absence of transaction costs and barriers to trade, the same product should cost the same in different countries when prices are expressed in a common currency. Therefore, to find the price in Swiss francs, multiply the price in dollars by the exchange rate: $750 * 1.65 = 1,237.50 Swiss francs.

Question 3

Suppose 1 U.S.dollar equals 1.60 Canadian dollars in the spot market.6-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 U.S.dollar-Canadian dollar exchange rate in the 180-day forward market?
A)1 U.S. dollar = 0.6235 Canadian dollars
B)1 U.S. dollar = 0.6265 Canadian dollars
C)1 U.S. dollar = 1.0000 Canadian dollars
D)1 U.S. dollar = 1.5961 Canadian dollars
E)1 U.S. dollar = 1.6039 Canadian dollars

Accepted Answer

Interest rate parity (IRP) suggests that the difference in interest rates between two countries will equal the expected change in exchange rates between those countries' currencies. According to IRP, the formula to calculate the forward exchange rate is: Forward Rate = Spot Rate * (1 + Interest Rate of Domestic Currency) / (1 + Interest Rate of Foreign Currency). Here, the domestic currency is the U.S. dollar, and the foreign currency is the Canadian dollar. Plugging in the values: 1.60 * (1 + 0.0325) / (1 + 0.03) = 1.60 * 1.0325 / 1.03 = 1.5961.

Question 4

A U.S.-based company,Stewart,Inc.,arranged a 2-year,$1,000,000 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 5.75 pesos per dollar,but it dropped to 5.10 pesos per dollar before the first payment came due.The loan was not hedged in the foreign exchange market.Thus,Stewart must convert U.S.funds to Mexican pesos to make its payments.If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period,what effective interest rate will Stewart end up paying on the loan?
A)10.36%
B)11.50%
C)17.44%
D)20.00%
E)21.79%

Accepted Answer

The effective interest rate Stewart ends up paying is higher due to the depreciation of the peso against the dollar. When the exchange rate drops from 5.75 to 5.10 pesos per dollar, it means Stewart has to use more dollars to buy the same amount of pesos to make loan payments. This increases the cost of the loan in dollar terms, resulting in an effective interest rate higher than the nominal rate of 10.0%.

Question 5

Suppose 6 months ago a Swiss investor bought a 6-month U.S.Treasury bill at a price of $9,708.74,with a maturity value of $10,000.The exchange rate at that time was 1.420 Swiss francs per dollar.Today,at maturity,the exchange rate is 1.324 Swiss francs per dollar.What is the annualized rate of return to the Swiss investor?
A)−7.92%
B)−4.13%
C)6.00%
D)8.25%
E)12.00%

Accepted Answer

The answer of Suppose 6 months ago a Swiss investor...

Question 6

Tashakori Trucking,a U.S.-based company,is considering expanding its operations into a foreign country.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.In addition,due to political risk factors,Tashakori 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.However,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.Tashakori'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?
A)$1.01 million
B)$2.77 million
C)$3.09 million
D)$5.96 million
E)$7.39 million

Accepted Answer

First, calculate the expected terminal value considering the political risk: $0.5 \times \$2M + 0.5 \times \$8M = \$5M$. Then, calculate the cash flows after the government's block: Years 1-2: $0.8 \times \$4M = \$3.2M$, Years 3-4: $0.8 \times \$6M = \$4.8M$, and the terminal value: $0.8 \times \$5M = \$4M$. Using a discount rate of $16\%$ (15% + 1% for exchange rate risk), the NPV calculation is as follows: $\text{NPV} = -\$10M + \frac{\$3.2M}{1.16} + \frac{\$3.2M}{1.16^2} + \frac{\$4.8M}{1.16^3} + \frac{\$4.8M}{1.16^4} + \frac{\$4M}{1.16^4}$. This calculation results in an NPV of approximately \$2.77 million.

Question 7

A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States.Assuming that purchasing power parity (PPP)holds,what is the current exchange rate?
A)1 U.S. dollar equals 0.69 Swiss francs
B)1 U.S. dollar equals 0.85 Swiss francs
C)1 U.S. dollar equals 1.21 Swiss francs
D)1 U.S. dollar equals 1.29 Swiss francs
E)1 U.S. dollar equals 1.44 Swiss francs

Accepted Answer

The answer of A box of chocolate candy costs 28.80...

Question 8

Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars,and 1 Canadian dollar equals 0.71 U.S.dollars.If purchasing power parity (PPP)holds,what is the price of hockey pucks in the United States?
A)$14.79
B)$63.00
C)$74.55
D)$85.88
E)$147.88

Accepted Answer

To find the price of hockey pucks in the United States under the assumption of purchasing power parity (PPP), multiply the price in Canadian dollars by the exchange rate: 105 Canadian dollars * 0.71 = $74.55.

Question 9

Suppose Stackpool Inc.had inventory in Britain valued at 240,000 pounds one year ago.The exchange rate for dollars to pounds was 1£ = 2 U.S.dollars.This year the exchange rate is 1£ = 1.82 U.S.dollars.The inventory in Britain is still valued at 240,000 pounds.What is the gain or loss in inventory value in U.S.dollars as a result of the change in exchange rates?
A)−$240,000
B)−$43,200
C)$0
D)$43,200
E)$47,473

Accepted Answer

The inventory value in U.S. dollars one year ago was 240,000 pounds * 2 U.S. dollars/pound = $480,000. This year, the value is 240,000 pounds * 1.82 U.S. dollars/pound = $436,800. The loss in inventory value is $480,000 - $436,800 = $43,200.

Quiz 27: Multinational Financial Management

A product sells for $750 in the United States.The exchange rate is $1 to 1.65 Swiss francs.If purchasing power parity (PPP) holds,what is the price of the product in Switzerland?

A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States.Assuming that purchasing power parity (PPP) holds,what is the current exchange rate?

Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars,and 1 Canadian dollar equals 0.71 U.S.dollars.If purchasing power parity (PPP) holds,what is the price of hockey pucks in the United States?