Question 1

Which of the following hedging strategies involves a loan without a futures contract?

Accepted Answer

The money market hedging strategy involves using loans and deposits in different currencies to hedge against exchange rate risk, without the use of futures contracts.

Question 2

Which of the following statements about forward exchange rates is false?

Accepted Answer

Forward exchange rates are usually slightly higher than the spot rate, not lower. This is because they take into account the interest rate differential between the two currencies being exchanged. The higher interest rate currency will typically command a premium in the forward market.

Question 3

The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and the money market reach equilibrium is called the

Accepted Answer

The interplay between interest rate differentials and exchange rates refers to the Interest Rate Parity Theory. This theory states that the difference in interest rates between two countries determines the exchange rate between their currencies. As investors seek higher returns on their investments, they will move their funds to countries with higher interest rates. This results in an increase in demand for the currency of the higher interest rate country, and thus an increase in its value relative to the other currency. The exchange rate adjusts until the interest rate differential is equalized by the expected change in exchange rates, bringing the markets to equilibrium.

Question 4

A firm exposed to exchange rate risk can hedge its risk by

Accepted Answer

All of these options provide ways for a firm to hedge its exchange rate risk. 
- Using the forward exchange market allows the firm to lock in a specific exchange rate for a future transaction. 
- Borrowing in international money markets also provides a way to match the currency of the assets and liabilities, reducing exchange rate risk. 
- Utilizing foreign currency futures markets allows the firm to enter into contracts to buy or sell currencies at a specific price and date in the future, providing a hedge against fluctuating exchange rates.

Question 5

Which of the following factors will not increase the value of a currency in foreign markets?

Accepted Answer

High inflation will decrease the value of a currency as it reduces the purchasing power of that currency. The other options, such as high interest rates, positive balance of payments, and strong stock market rally, will increase the demand for the currency and therefore increase its value in foreign markets.

Question 6

Three years ago, the U.S. dollar's exchange rate with the Iceland krona was .0008 dollars per krona. Today, the exchange rate was .0006 dollars per krona. These figures indicate that over this three-year period, the dollar

Accepted Answer

The exchange rate decreased from .0008 to .0006 dollars per krona, meaning fewer dollars are needed to buy one krona, indicating that the dollar has strengthened against the krona.

Question 7

Which of the following hedging strategies is not used to minimize transaction exposure?

Accepted Answer

The Eurobond market is a way of raising capital through international bond offerings, and is not directly related to minimizing transaction exposure. The other answer choices are all hedging strategies commonly used to reduce transaction exposure.

Question 8

Which of the following is not commonly used to minimize transaction exposure in foreign exchange dealings?

Accepted Answer

Hedging in the stock market is not commonly used to minimize transaction exposure in foreign exchange dealings. The other options, such as hedging in the forward exchange market, money market, and currency futures market, are commonly used to minimize transaction exposure in foreign exchange dealings.

Question 9

The spot rate of the British pound to the dollar is 1.15 ($\le\le$). The 180 day forward rate is $1.17, the annualized forward premium is:

Accepted Answer

The answer of The spot rate of the British pound...

Question 10

You travel to Cancun Mexico for spring break. The current exchange rate is 13 pesos to the dollar. When you arrive, you convert $1,000 into how many pesos?

Accepted Answer

Since the exchange rate is 13 pesos to the dollar, to find how many pesos in $1,000, we need to multiply $1,000 by 13. Therefore, $1,000 is equal to 13,000 pesos.

Question 11

Assume that you had dollar quotes for the Japanese Yen and the British Pound. If you want to know the Yen/Pound exchange rate, you would rely on

Accepted Answer

To determine the Yen/Pound exchange rate, one would use cross rates, which involve using two currency quotes to calculate the exchange rate between two currencies that are not directly quoted. Therefore, the answer is B. Forward rates are used to lock in future exchange rates, hedge ratios are used to minimize risk, and the Wall Street Journal may report currency quotes but does not provide the calculation of cross rates.

Question 12

The Swiss franc is selling for $.9412 and the British pound is selling for $1.5119. The cross rate between the franc and the pound is:

Accepted Answer

The cross rate is calculated by dividing the exchange rate of the pound by the exchange rate of the franc: 1.5119 / 0.9412 = 1.61.

Question 13

When Country A's currency strengthens against Country B's, citizens of Country A will

Accepted Answer

When Country A's currency strengthens against Country B's, it means that Country A's currency can buy more of Country B's currency. This makes Country A's products cheaper when sold in Country B, and Country B's products more expensive when sold in Country A. Therefore, citizens of Country A will pay less to buy Country B's products.

Question 14

The value of a country's currency may increase by

Accepted Answer

A stock market rally can increase investor confidence and attract foreign investment, leading to an appreciation of the country's currency.

Question 15

The following are the prices in the foreign exchange market between the U.S. dollar and another local currency (LC).  What was the discount or premium on 3-month forward for LC?

Accepted Answer

To calculate the discount or premium on a 3-month forward, we need to compare the 3-month forward rate with the spot rate. In this case, the spot rate is 1 USD = 7.7869 LC. The 3-month forward rate is 1 USD = 7.8331 LC.

To calculate the premium or discount, we use the formula: (3-month forward rate - spot rate) / spot rate x (12/3)

Substituting the values, we get: 
(7.8331 - 7.7869) / 7.7869 x 4 
= 0.0462 / 7.7869 x 4 
= 0.00594 or 0.594%

Since the 3-month forward rate is higher than the spot rate, there is a premium on the 3-month forward for LC. Hence, the correct answer is A) 0.643% premium.

Question 16

The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called

Accepted Answer

The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is known as foreign exchange risk.

Question 17

Which of the following kinds of risk is NOT uniquely associated with MNC's?

Accepted Answer

Business risk is common to all companies, not just multinational corporations (MNCs).

Question 18

The belief that shifts in exchange rates result from increasing or decreasing demand for a country's exports (or the corresponding opposite movements in supply of a country's imports) form the basis for the

Accepted Answer

This describes the balance of payments theory of exchange rates, where shifts in exchange rates are believed to be influenced by changes in trade balances, which result from changes in the supply and demand of exports and imports. The other theories mentioned (purchasing power, interest rate parity, and government intervention) focus on different factors that may influence exchange rates.

Question 19

While shopping in the Mexican market, you find that limes cost 11 pesos each. You remember that back home, they cost 80 cents each. If the Purchasing Power Parity Theory holds, the rate of exchange is

Accepted Answer

The Purchasing Power Parity Theory states that the exchange rate between two currencies should be equal to the ratio of the prices of a basket of goods in the two countries. In this case, the basket of goods consists of limes. The price of a lime in Mexico is 11 pesos, and the price of a lime in the United States is 80 cents. Therefore, the exchange rate should be 11 pesos/dollar or 7.3 cents/peso.

Question 20

You are leaving Mexico and have 290 pesos to change into dollars. The exchange rate is now 12 pesos to the dollar. How many dollars will you receive?

Accepted Answer

To find out how many dollars you will receive, divide the number of pesos you have by the exchange rate. 
290 pesos / 12 pesos to the dollar = $24.16. Therefore, the correct answer is option B, $24.16.

Quiz 21: International Financial Management

Which of the following hedging strategies involves a loan without a futures contract?

Which of the following statements about forward exchange rates is false?

The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and the money market reach equilibrium is called the

A firm exposed to exchange rate risk can hedge its risk by

Which of the following factors will not increase the value of a currency in foreign markets?

Three years ago, the U.S. dollar's exchange rate with the Iceland krona was .0008 dollars per krona. Today, the exchange rate was .0006 dollars per krona. These figures indicate that over this three-year period, the dollar

Which of the following hedging strategies is not used to minimize transaction exposure?

Which of the following is not commonly used to minimize transaction exposure in foreign exchange dealings?

The spot rate of the British pound to the dollar is 1.15 ( $\le\le$ ) . The 180 day forward rate is $1.17, the annualized forward premium is:

You travel to Cancun Mexico for spring break. The current exchange rate is 13 pesos to the dollar. When you arrive, you convert $1,000 into how many pesos?

Assume that you had dollar quotes for the Japanese Yen and the British Pound. If you want to know the Yen/Pound exchange rate, you would rely on

The Swiss franc is selling for $.9412 and the British pound is selling for $1.5119. The cross rate between the franc and the pound is:

When Country A's currency strengthens against Country B's, citizens of Country A will

The value of a country's currency may increase by

The following are the prices in the foreign exchange market between the U.S. dollar and another local currency (LC) . What was the discount or premium on 3-month forward for LC?

The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called

Which of the following kinds of risk is NOT uniquely associated with MNC's?

The belief that shifts in exchange rates result from increasing or decreasing demand for a country's exports (or the corresponding opposite movements in supply of a country's imports) form the basis for the

While shopping in the Mexican market, you find that limes cost 11 pesos each. You remember that back home, they cost 80 cents each. If the Purchasing Power Parity Theory holds, the rate of exchange is

You are leaving Mexico and have 290 pesos to change into dollars. The exchange rate is now 12 pesos to the dollar. How many dollars will you receive?

Quiz 21: International Financial Management

Which of the following hedging strategies involves a loan without a futures contract?

Which of the following statements about forward exchange rates is false?

The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and the money market reach equilibrium is called the

A firm exposed to exchange rate risk can hedge its risk by

Which of the following factors will not increase the value of a currency in foreign markets?

Three years ago, the U.S. dollar's exchange rate with the Iceland krona was .0008 dollars per krona. Today, the exchange rate was .0006 dollars per krona. These figures indicate that over this three-year period, the dollar

Which of the following hedging strategies is not used to minimize transaction exposure?

Which of the following is not commonly used to minimize transaction exposure in foreign exchange dealings?

The spot rate of the British pound to the dollar is 1.15 ( ≤≤\le\le≤≤ ) . The 180 day forward rate is $1.17, the annualized forward premium is:

You travel to Cancun Mexico for spring break. The current exchange rate is 13 pesos to the dollar. When you arrive, you convert $1,000 into how many pesos?

Assume that you had dollar quotes for the Japanese Yen and the British Pound. If you want to know the Yen/Pound exchange rate, you would rely on

The Swiss franc is selling for $.9412 and the British pound is selling for $1.5119. The cross rate between the franc and the pound is:

When Country A's currency strengthens against Country B's, citizens of Country A will

The value of a country's currency may increase by

The following are the prices in the foreign exchange market between the U.S. dollar and another local currency (LC) . What was the discount or premium on 3-month forward for LC?

The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called

Which of the following kinds of risk is NOT uniquely associated with MNC's?

The belief that shifts in exchange rates result from increasing or decreasing demand for a country's exports (or the corresponding opposite movements in supply of a country's imports) form the basis for the

While shopping in the Mexican market, you find that limes cost 11 pesos each. You remember that back home, they cost 80 cents each. If the Purchasing Power Parity Theory holds, the rate of exchange is

You are leaving Mexico and have 290 pesos to change into dollars. The exchange rate is now 12 pesos to the dollar. How many dollars will you receive?

The spot rate of the British pound to the dollar is 1.15 ( $\le\le$ ) . The 180 day forward rate is $1.17, the annualized forward premium is: