Question 1

A U.S.-based importer,Zarb Inc. ,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?
A) −$396
B) −$243
C) $0
D) $243
E) $638

Accepted Answer

The answer of A U.S.-based importer,Zarb Inc. ,makes a purchase...

Question 2

In 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?
A) The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
B) The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.
C) The spot rate equals the 90-day forward rate.
D) The spot rate equals the 180-day forward rate.
E) The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.

Accepted Answer

The answer of In Japan,90-day securities have a 4% annualized...

Question 3

A foreign currency will,on average,depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

Accepted Answer

This statement is known as the "purchasing power parity" theory, which suggests that the exchange rate between two currencies should equal the ratio of their respective price levels. If a country's inflation rate is higher than that of the United States, then its goods are relatively more expensive and its currency should depreciate to maintain the parity.

Question 4

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

PPP suggests that the price of the product in Switzerland should be the same as it is in the US. Therefore, the price in Switzerland would be $750 multiplied by the exchange rate of 1.65 Swiss francs per dollar, which equals 1,237.50 Swiss francs.

Question 5

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) formula is used to calculate the forward exchange rate based on the spot exchange rate and interest rates in the two countries. The formula is F = S * (1 + i_d) / (1 + i_f), where F is the forward exchange rate, S is the spot exchange rate, i_d is the domestic interest rate, and i_f is the foreign interest rate. Plugging in the given values: F = 1.60 * (1 + 0.0325) / (1 + 0.03) = 1.60 * 1.0325 / 1.03 = 1.5961.

Question 6

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 in USD, we need to convert the Canadian dollars to USD using the exchange rate given:

105 CAD * 0.71 USD/CAD = 74.55 USD

Therefore, the price of hockey pucks in the United States is $74.55 USD.

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 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 9

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?
A) 1 pound = $1.8000
B) 1 pound = $1.6582
C) 1 pound = $1.0000
D) 1 pound = $0.8500
E) 1 pound = $0.6031

Accepted Answer

According to interest rate parity, the return on a British investment in pounds should equal the return on a US investment in dollars after accounting for the exchange rate. 
Given:
- 6% annualized return on British investment
- 1.5% quarterly return on British investment
- 4% annualized return on US investment
- 1% quarterly return on US investment
- 90-day forward rate of 1 pound = $1.65
To find the spot exchange rate, we need to set the returns equal to each other and solve for the spot exchange rate:
(1 + 0.06/4)^(4/1) = (1 + 0.04/4)^(4/1) * (1.65/x)
1.01506 = 1.01002 * 1.65/x
x = $1.6582 (rounded to four decimal places)

Quiz 17: Multinational Financial Management

A foreign currency will,on average,depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

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?

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 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?