Question 1

Consider the following equation:
S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$)
The term S in this equation is ________.

Accepted Answer

S represents the current spot exchange rate between two currencies.

Question 2

Consider the following equation:
S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$)
The term rFC in this equation is ________.

Accepted Answer

The term rFC represents the foreign currency discount rate, which is used to discount the foreign cash flows in the equation.

Question 3

What are internationally integrated capital markets?

Accepted Answer

The answer of What are internationally integrated capital markets?...

Question 4

Consider the following equation:
S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$)
The term r$ in this equation is ________.

Accepted Answer

The answer of Consider the following equation:
S × [(Foreign Cash...

Question 5

What is cash-and-carry strategy?

Accepted Answer

The answer of What is cash-and-carry strategy?...

Question 6

Use the information for the question(s) below.
You are a U.S. investor who is trying to calculate the present value (PV) of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and the forward rate is F1 = $1.8862/£. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
-The present value (PV) of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to ________.

Accepted Answer

B) FV$ = £5 million × $1.8862/£ = $9,431,000
PV = 11eaabab_c053_3fc8_b90e_f51d5404a106_TB5536_11 = $8,954,615

Question 7

What is covered interest parity?

Accepted Answer

The answer of What is covered interest parity?...

Question 8

You are a U.S. investor who is trying to calculate the present value (PV) of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F1 = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the £ cash inflow computed by first discounting the £ and converting them into dollars?

Accepted Answer

A) PV£ = 11eaabab_c053_66da_b90e_2bbced7c983d_TB5536_11 = £14,785,609
PV$ = PV£ × S = £14,785,609 × $1.5742/£ = $23,275,505

Question 9

A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100,000 euros after one year. If the one-year forward exchange rate is $1.35/euro and the dollar cost of capital is 10%, what is the present value (PV) of the project cash flows?

Accepted Answer

B) Present Value = (Cash Flows × Forward Rate) / (1 + cost of capital)
Present Value = (100,000 euros × $1.35/euros) / (1 + 0.10) = $122,727

Question 10

What is floating rate?

Accepted Answer

The answer of What is floating rate?...

Question 11

What is a currency forward contract?

Accepted Answer

The answer of What is a currency forward contract?...

Question 12

What is a currency timeline?

Accepted Answer

The answer of What is a currency timeline?...

Question 13

Consider the following equation:
Spot Rate × [(Foreign Cash Flow) / (1 + rFC] = (F × Foreign Cash Flow) / (1 + r$)
The term F in this equation is ________.

Accepted Answer

The term "F" in the equation represents the forward exchange rate, which is the rate at which a currency can be exchanged for another currency at a specific date in the future. The other options (A, B, and C) do not accurately describe the term F in the equation.

Question 14

A(n) ________ market is one where an investor can exchange any currency in any amount at the spot rate or forward rate and is free to purchase or sell any security in any amount in any country at their current market prices.

Accepted Answer

The description matches with an internationally integrated capital market, where investors can freely exchange currencies and purchase or sell securities without any restrictions.

Question 15

With internationally integrated capital markets the value of an investment depends on the currency used in the analysis.

Accepted Answer

The value of an investment in internationally integrated capital markets should be independent of the currency used in the analysis because the underlying economic value of the investment does not change with the currency of measurement. Exchange rates adjust to reflect differences in inflation and interest rates between countries, ensuring that the value of an investment is consistent across currencies when markets are efficient.

Question 16

A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 200,000 euros after one year. If the one-year forward exchange rate is $1.40/euro and the dollar cost of capital is 9%, what is the present value (PV) of the project cash flows?

Accepted Answer

C) Present Value = (Cash Flows × Forward Rate) / (1 + cost of capital)
Present Value = (200,000 euros × $1.4/euro) / (1 + 0.09) = $256,881

Question 17

A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100,000 euros after one year. If the one-year forward exchange rate is $1.50/euro and the dollar cost of capital is 8%, what is the present value (PV) of the project cash flows?

Accepted Answer

D) Present Value = (Cash Flows × Forward Rate) / (1 + cost of capital)
Present Value = (100,000 euros × $1.5/euro) / (1 + 0.08) = $138,889

Question 18

You are a U.S. investor who is trying to calculate the present value (PV) of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F1 = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the dollar cash inflow computed by first converting the £ into dollars and then discounting the dollars?

Accepted Answer

C) FV$ = £15,000,000 × $1.5682/£ = $23,523,000
PV = 11eaabab_c053_66d9_b90e_e3fe561cd22f_TB5536_11 = $23,278,575

Question 19

Which of the following statements regarding international projects is FALSE?

Accepted Answer

B) The project will most likely generate foreign currency cash flows, although the managers and shareholders care about the home currency value of the project.

Question 20

Use the information for the question(s) below.
You are a U.S. investor who is trying to calculate the present value (PV) of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and the forward rate is F1 = $1.8862/£. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
-The present value (PV) of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to ________.

Accepted Answer

B) PV£ = 11eaabab_c053_18b7_b90e_17483c3efdd4_TB5536_11 = £4,751,045.23
PV$ = PV£ × S = £4,751,045.23 × $1.8839/£ = $8,950,494.10

Quiz 23: International Corporate Finance

Consider the following equation: S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$) The term S in this equation is ________.

Consider the following equation: S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$) The term rFC in this equation is ________.