Ch. 18-21? International Corporate Finance (LS)

The expected inflation rate in the U.K. is 2 percent compared to 4 percent in the U.S. The risk-free rate in the U.S. is 5 percent. According to the international Fisher effect, the U.K. risk-free rate is ____________ percent.

3

If U.S. dollars are deposited in banks outside the U.S. banking system, they are referred to as ______________.

Eurocurrency

Which of the following issues are not faced by a purely domestic Canadian firm?

Foreign exchange rates Sarbanes-Oxley requirements Foreign tax rates

The London Interbank Offer Rate is the cornerstone in pricing money markets and short-term debt because ______________.

Interest rates are usually quoted as some spread over this rate

The different types of exchange rate risk include which of the following?

Long-term exposure Translation exposure Short-term exposure

What are some strategies for hedging long-term exchange rate risk?

Matching foreign currency inflows and outflows

_____________ PPP explains the exchange rate change over time.

Relative

Alpha Co. imports raw materials and uses forward contracts to reduce which of the following risks?

Short-run exposure to exchange rate risk

What is the implicit rate between two currencies when both are quoted in a third currency?

The cross-rate

Which method employs uncovered interest parity to project future exchange rates?

The home currency approach

Which of the following are ways for a US corporation to reduce political risk in a foreign country?

Use local financing

A ___________ trade is an agreement to exchange currency at some time in the future.

forward

The amount of foreign currency required to purchase one U.S. dollar is called the __________ exchange rate.

indirect

When two parties exchange a floating rate payment for a fixed rate payment, it is called a(n):

interest rate swap can be vice versa, fixed for a floating

Unanticipated changes in relative economic conditions that affect the value of a foreign operation are known as ___________.

long-term exposures to exchange rate risk

Corporations with significant foreign operations are often called _________.

multinationals

Changes in the value of international investments due to the actions of governments is referred to as ______________ risk.

political

The ______________ of one currency based on another country's currency is known as the exchange rate.

price

The day-to-day fluctuations in exchange rates create

short-term exchange rate risk exposure

If purchasing power parity did not hold, it would be possible to engage in _____________________ simply bu transporting products to other countries.

arbitrage

Exploiting a disequilibrium between spot rates, forward rates and differences in interest rates is called:

covered interest arbitrage

The foreign exchange market allows for the trading of

currency

Interest rate parity _____________.

eliminates covered interest arbitrage opportunities

Which of the following agreements is a spot exchange rate for the Norwegian krone?

6NKr for $1 settled in 2 days

cross-rate between two countries quoted

U.S. dollars

financial factors that affect firms doing business globally

differing interest rates different accounting methods foreign govt intervention exchange rate risk foreign tax rates

The management of exchange rate risk should probably be centralized so that the firm has an understanding of _____________.

its overall positions in foreign currency

When a U.S. company calculates its accounting net income, it must report all income, including income from foreign operations, in dollar. This leads to ___________ exposure to exchange rate risk.

translation

Why is it more challenging to manage long-term exchange rate risk exposure that to hedge short-term risks?

Organized forward markets do not exist for long-term needs of corporations.

What is the difference in results between the home currency approach and the foreign currency approach?

The two procedures produce the same answer

Conditions that must be present for absolute purchasing power to exist include which of the following?

There must be no trade barriers The goods must be identical

An agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called ____________.

a forward trade

The use of local financing from the government of the foreign country where the operation is located ___________.

can reduce political risk

Relative purchasing power parity tells us that the exchange rate will rise if the U.S. inflation rate is lower than that of a foreign country. That foreign currency will then ____________ in value relative to the US dollar.

depreciate

Relative purchasing power parity says that the expected percentage change in an exchange rate is equal to the difference in the _____________ rates between the two countries.

inflation

The unbiased forward rate condition may not hold if _____________.

traders in the forward market are willing to pay a premium to avoid uncertainty

When compared to the home currency approach, which of the following are true for the foreign currency approach to capital budgeting?

The foreign currency approach is computationally easier. The foreign currency approach computes NPV in both foreign and domestic currencies.

International ___________ rates, interest rates and inflation rates are closely related.

exchange

The natural consequences of international operations in a world where relative currency values more up and down is called

exchange rate risk

Currently $1 buys ¥89 on the spot market. The 6-month forward rate is 90. According to the unbiased forward rate condition, the expected spot rate for the yen in 6 months is __________________.

¥90

Which of the following transactions is equivalent to entering a forward contract for an importing firm?

Borrowing domestically and investing in the foreign currency of interest for the length of the forward contract

Gilts are securities issued by the ______________.

British and Irish governments

Currently, $1 will buy Can$.99 while $1 will buy A$.95. How many Canadian dollars are needed to buy one Australian dollar?

Can $1.04

Assume $1 buys Can$1.07. The expected inflation rate is 3 percent in Canada and 2 percent in the U.S. How many Canadian dollars will $1 buy one year from now if relative purchasing power parity exists?

Can$1.0807

A project in Mexico is expected to return a payment of Ps40,000 three years from now. The risk-free rate is 2 percent in the U.S. and 4 percent in Mexico. Assume the current spot rate is $1 = Ps10. What will the payment be worth in U.S. dollars when it is received?

$3,769.29

A foreign subsidiary can remit funds to the parent company in which of the following ways?

Management fees Royalties Dividends

What is the acronym for the interest rate most international banks charge one another for overnight Eurodollar loans?

LIBOR

Assume the spot exchange rate is Fr 1 = $1.0810 and the 90-day forward rate is Fr 1 = $1.0815. Given this, the Swiss franc is selling at a ______________ relative to the U.S. dollar.

dollar is selling at a disc to Swiss franc Swiss franc at a forward premium

The _________ rate is generally used for the U.S. nominal risk-free rate (Rus).

T-bill

FASB 52 requires that assets and liabilities be translated at the current exchange rate and that the gains and losses be recorded ________________.

against shareholders' equity

What are some ways in which a foreign subsidiary can remit cash flows to a parent?

Dividends Royalties for the use of trade names and patents Management fees for central services

Bonds that are issued in a single country and are usually denominated in that country's currency are called:

Foreign bonds

The foreign currency approach to capital budgeting analysis

computes the NPV of a project in both the foreign and domestic currency produces the same results as the home currency approach is computationally easier than the home currency approach

Users of the foreign exchange market include

importers who pay for goods using foreign currencies foreign exchange brokers who match buy and sell orders speculators who try to profit from change in exchange rates

If an international firm borrows money in the foreign country where it has operations it can reduce ___________.

long-run exchange rate exposure

When it is reported that the dollar is strong in the foreign exchange market it means that

the dollar is more valuable and can buy more of other currencies

Which of the following are true concerning triangle arbitrage?

It is a profitable situation involving three separate currency exchange transactions. Arbitrage opportunities can exist in either the spot of the forward markets. It helps keep the currency market in equilibrium.

The theory that real interest rates are equal across countries is called __________.

the international Fisher effect

Money deposited in a financial center outside the country whose currency is involved is called _____________.

Eurocurrency

Which of the following are correct when describing purchasing power parity? (Select all that apply.)

Purchasing power parity is a major factor in the rate of change in exchange rates. Parity is expressed as both absolute and relative. Exchange rates adjust to keep purchasing power level between currencies.

Absolute purchasing power parity us that _________.

$1 will buy you the same number of tangerines

What will be the value one year from now from investing $1 in a covered interest arbitrage position if: Rpc = 4 percent; S0 = A$2; F1 = A$1.95?

$1.0667

Suppose the euro currently costs $1.37 and the nominal risk-free interest rate in France is 3 percent compared to the 2 percent in the U.S. Interest rate parity implies the euro 1-year forward rate will be approximately _____________.

$1.3837

Match the international corporate finance terminology below with its correct definition.

ADR - A security issued in the US that represents shares of foreign stock. Cross-rate - The implicit exchange rate between two currencies quoted in a third currency. Eurobond - A bond issued in multiple countries but denominated in a single currency. Eurocurrency - Money deposited in a financial center outside of the country with the involved currency. Eurodolar - U.S. dollars deposited in banks outside US banking sys

Which of the following refer to a firm with a large portion of its business outside of its parent country?

An international corporation A multinational

The spot rate for the Japanese yen is currently ¥90 per $1. The 1-year forward rate is ¥89 per $1. If risk-free assets in Japan earn 1 percent and interest rate parity holds, what is the approximate rate on a 1-year risk-free asset in the U.S.?

2.11%

According to the international Fisher effect, if real returns are higher in Brazil than in the U.S., money would flow out of the U.S. financial markets in Brazilian markets and the result would be __________________.

asset prices in Brazil would rise and their returns would fall