Question 1

You are trying to determine the appropriate risk-adjusted rate,in Venus sun-dollars for a project on Venus.You know that the correct risk-adjusted discount rate in U.S.dollars is 15% and the risk-free rate in dollars is 8%.If the risk-free rate in sun-dollars is 5%,then what is the correct risk-adjusted discount rate in dollars? Round to the nearest .01%

Accepted Answer

(1.15/1.08)= (1+risk adjusted sun-dollars)/ 1.05 =====>
risk-adjusted sun-dollar rate = .1180556

Question 2

If the Canadian Dollar is worth $1.50,and the Swiss Franc is worth $1.30,then how many Swiss Francs does it take to purchase a Canadian Dollar?

Accepted Answer

($1.500/CAD)/ ($1.30/CHF)= 1.1538 CHF/CAD

Question 3

If the law of one price holds and the price of a Big Mac in the U.S.is $1.99 while the price of a Big Mac in Britain is £1.50,then what should the spot exchange rate for $/£ be?

Accepted Answer

£1.50/ $1.99 = .7537688£/$ ===> 1.326666 $/£

Question 4

If the spot rate for Marsian Spotlets (MRS)is 4 per U.S.Dollar (USD)and the one-year risk-free rate of return is 30%,for the Marsian economy,then what should the risk free rate for the U.S.economy if the 1-year forward rate be for MRS/USD is 5?

Accepted Answer

Forward Rate = Spot Rate ´ ({1+ Foreign risk-free}/{1+ Domestic risk-free})
5 = 4 ´ (1.3/{1+d})====> d = .04

Question 5

If the law of one price holds and the price of an apple in the U.S.is $1.50 while the price of an apple in Japan is ¥174.00,then what should the spot exchange rate for ¥/$ be?

Accepted Answer

¥174.00/ USD1.50 = 116.00¥/$

Question 6

The 1-year risk-free rate of return in Hobbiton is 10% and the 1-year risk-free rate of return in Gondor is 20%.If the real rate of return on a 1-year risk-free investment in Hobbiton is 0%,the what should be the expected rate of inflation in Gondor?

Accepted Answer

(1 + Inflation_Gondor)/ (1 + Inflation_Hobbiton)= (1 + Rate_Gondor)/ (1 + Rate_Hobbiton) Real return of 0 ====> inflation = rate of return for Hobbiton = 10% (1 + Inflation_Gondor)/ 1.1= 1.2/1.1 ====> Inflation_Gondor = .2

Question 7

If the spot rate for the yen/ dollar is ¥110.00 and the forward rate is ¥111.00 then the yen trades at

Accepted Answer

{(110 - 111)/110}= .0090909 discount because spot > forward

Question 8

If the spot rate for Jupiter Ringlets (JPR)is 3 USD per Ringlet and the risk-free rates of return are 1% and 2%,respectively for the Jupiter and U.S.economy,then what should the 1-year forward rate be for JPR/USD? Round to the nearest 4th decimal place.

Accepted Answer

USD/JPR spot = 3 ===> JPR/USD spot = .33333333
Forward Rate = Spot Rate ´ ({1+ Foreign risk-free}/{1+ Domestic risk-free})
= 33333 ´ (1.01/1.02)= .3300654

Question 9

If the spot rate for Marsian Spotlets (MRS)is 4 per U.S.Dollar (USD)and the risk-free rates of return are 10% and 2%,respectively for the Marsian and U.S.economy,then what should the 1-year forward rate be for MRS/USD?

Accepted Answer

Forward Rate = Spot Rate ´ ({1+ Foreign risk-free}/{1+ Domestic risk-free})
= 4 ´ (1.1/1.02)= 4.3137255

Question 10

The 1-year risk-free rate of return in Hobbiton is 10% and the 1-year risk-free rate of return in Gondor is 20%.If the expected rate of inflation in Hobbiton is 5%,the what should be the expected rate of inflation in Gondor? Round to the nearest .01%

Accepted Answer

(1 + Inflation_Gondor)/ (1 + Inflation_Hobbiton)= (1 + Rate_Gondor)/ (1 + Rate_Hobbiton) (1 + Inflation_Gondor)/ 1.05= 1.2/1.1 ====> Inflation_Gondor = .1454545

Question 11

The type of risk primarily concerned with converting revenues and costs denominated in foreign currencies into a firm's domestic currency is

Accepted Answer

Translation exposure refers to the risk associated with converting financial statements of foreign subsidiaries into the parent company's domestic currency for consolidation purposes.

Question 12

If the spot rate for Marsian Spotlets (MRS)is 4 per U.S.Dollar (USD)and the one-year risk-free rate of return in the U.S.is 4%,then what should the risk free rate on Mars be if the 1-year forward rate be for MRS/USD is 5?

Accepted Answer

Forward Rate = Spot Rate ´ ({1+ Foreign risk-free}/{1+ Domestic risk-free})
5 = 4 ´ ({1+f}/{1.04})====> f = .3

Question 13

Forward-spot parity suggests that

Accepted Answer

Forward-spot parity states that the forward rate should be an unbiased predictor of the future spot rate. Therefore, option B is the correct answer. Option A and Option C suggest that there will be an overestimation or underestimation of the future spot rate, which contradicts the concept of forward-spot parity. Option D is not a correct answer because the other options are all mutually exclusive and collectively exhaustive.

Question 14

If the Canadian Dollar is worth $1.50,and the Swiss Franc is worth $1.30,then how many Canadian Dollars does it take to purchase a Swiss Franc?

Accepted Answer

($1.30/CHF)/ ($1.500/CAD)= .8667 CAD/CHF

Question 15

You are a French wine producer who has a contract to sell $10,000,000 worth of wine in the U.S.for dollars 6 months in the future.If you would like to hedge this position,what could you do to hedge the currency risk involved in transaction?

Accepted Answer

The answer of You are a French wine producer who...

Question 16

If the spot rate for the yen/ dollar is ¥110.00 and the one-month forward rate is ¥111.00 then the yen trades at an annual

Accepted Answer

{(110 - 111)/110}´ {12/1)= .1090909 discount because spot > forward

Question 17

You are trying to determine the appropriate risk-adjusted rate,in U.S.dollars for a project in Britain.You know that the correct risk-adjusted discount rate in pounds is 15% and the risk-free rate in pounds is 9%.If the risk-free rate in dollars is 5%,then what is the correct risk-adjusted discount rate in dollars? Round to the nearest .01%

Accepted Answer

(1.15/1.09)´ 1.05 = 1+ risk-adjusted USD rate = 1.107982 =====>
risk-adjusted USD rate = .107982

Question 18

When one currency buys less of another currency in the forward market than it does in the spot market,we say that it is trading at

Accepted Answer

When one currency buys less of another currency in the forward market than it does in the spot market, it is said to be trading at a forward discount. This means that investors are willing to pay less for the currency in the future, compared to what it is worth now.

Question 19

You are a U.S.dollar based corporation with a project in Great Britain that will cost you £1,000,000.The project will provide free cash flow of £500,000 for the next 3 years.If the pound denominated discount rate for this project is 12% and the spot rate is .5600£/$,then what is the dollar denominated NPV for the project? Round to the nearest $10.

Accepted Answer

Pound NPV: -1,000,000 + 500,000PVIFA(12%,3)= 200,915.63
USD: 200,915.63/.5600 = 358,777.92

Question 20

Which of the following accounts for the largest portion of trading volume in the foreign exchange markets?

Accepted Answer

Investors, including hedge funds, pension funds, and other large institutions, account for the largest portion of trading volume in the foreign exchange markets. Their trades are driven by a variety of factors, including economic data releases, interest rate differentials, geopolitical events, and technical analysis. While exporters, importers, and governments also participate in the forex market, their trading volume tends to be smaller and less frequent than that of investors.

Quiz 18: International Financial Management