Chapter 18 International aspects of financial planning

ADR

A security issued in the United States that represents a share of foreign stock

Eurocurrency

Money deposited in a financial center outside of the country whose currency is involved

Cross-rate

The implicit exchange rate between two currencies quoted in a third currency

Relative PPP implies that the change in an exchange rate is driven by the difference in the _____ of the two countries involved.

inflation rates

Interest rate parity ______

eliminates covered interest arbitrage opportunities.

Which of the following are correct when describing purchasing power parity?

1. Parity is expressed as both absolute and relative 2. Exchange rates adjust to keep purchasing power level between currencies 3. Purchasing power parity is a major factor in the rate of change in exchange rates

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

1. an international corporation 2. a multinational

Which of the following are true concerning triangle arbitrage?

1. it is a profitable situation involving three currency exchange transactions 2. it helps keep the currency market in equilibrium

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

1. long-term exposure 2. short-term exposure 3. translation exposure

Currently, the spot exchange rate for the Swiss franc is SF 1 = $1.10 or SF 1 = $1.12 90 days forward. What is true?

1. the dollar is selling at a discount to the Swiss franc 2. the Swiss franc is at a forward premium

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

1. the goods must be identical 2. there must be no trade barriers

Eurobond

A bond issued outside the country in whose currency it is denominated

The use of _____ exchange agreements can help reduce the short-term exposure to exchange rate risk.

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