Chapter 21
Eurobond
A bond issued in multiple countries but denominated in a single currency
ADR
A security issued in the US that represents shares of a foreign stock
A security issued in the United States that represents shares of a foreign stock is called a ( n )
American Depository Receipt
Gilts are securities issued by the
British and Irish governments
A _____ is a bond issued in multiple countries , but denominated in a single currency , typically the issuer's home currency
Eurobond
A bond issued in multiple countries , but denominated in a single currency is called
Eurobond
If U.S. dollars are deposited in banks outside the U.S. banking system , they are referred to as
Eurocurrency
Bonds that are issued in a single country and are usually denominated in that country's currency are called .
Foreign bonds
What are some strategies for hedging long - term exchange rate risk ?
Matching foreign currency inflows and outflows
Eurocurrency
Money deposited in a financial center outside of the country with the involved currency
Why is it more challenging to manage long - term exchange rate risk exposure than to hedge short - term risks ?
Organized forward markets do not exist for long - term needs of corporations .
_____ PPP explains the exchange rate change over time .
Relative
What is the implicit exchange 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
Cross - rate
The implicit exchange rate between two currencies quoted in a third currency
What is the difference in results between the home currency approach and the foreign currency approach ?
The two procedures produce the same answer
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
Interest rate parity
eliminates covered interest arbitrage opportunities
Unlike Eurobonds , _____ bonds are issued in a single country and are usually denominated in that country's currency .
foreign
A _____ trade is an agreement to exchange currency at some time in the future .
forward
The use of _____ exchange agreements can help reduce the short - term exposure to exchange rate risk .
forward
British and Irish government securities are called
gilts
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 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 management of exchange rate risk should probably be centralized so that the firm has an understanding of
its overall positions in foreign currency
If an international firm borrows money in the foreign country where it has operations it can reduce
long - run exchange rate exposure
The foreign exchange market is where
one country's currency is traded for another country's currency
Changes in the value of international investments due to the actions of governments is referred to as _____ risk .
political
The concept that exchange rates adjust to keep purchasing power constant among currencies is referred to as
purchasing power parity
The international Fisher effect asserts that _____ interest rates are equal across countries .
real
The day - to - day fluctuations in exchange rates create _______ exposure .
short - term exchange rate risk
The unbiased forward rate condition may not hold if
traders in the forward market are willing to pay a premium to avoid uncertainty
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
What are some ways in which a foreign subsidiary can remit cash flows to a parent ?
•Management fees for central services •Dividends •Royalties for the use of trade names and patents
_____ refers to any difference in interest rates between two countries for some period offset by just the change in the relative value of the currencies , thus eliminating any arbitrage possibilities .
IRP
The natural consequences of international operations in a world where relative currency values move up and down is called
exchange rate risk
The amount of foreign currency required to purchase one U.S. dollar is called the _____ exchange rate .
indirect
Corporations with significant foreign operations are often called .
multinationals
The _____ of one currency based on another country's currency is known as the exchange rate .
price
An agreement to trade currencies within two business days at today's exchange rate is called a _____ trade .
spot
When a U.S. company calculates its accounting net income , it must report all income , including income from foreign operations , in dollars . This leads to _____ exposure to exchange rate risk .
translation
The number of U.S. dollars required to buy one unit of foreign currency is referred to as
a direct quote
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
True or false : The Tax Cuts and Jobs Act of 2017 eliminates the tax issue about repatriating overseas profits .
True
The implicit exchange rate between two currencies when both are quoted in a third currency is called the
cross - rate
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
Money deposited in a financial center outside the country whose currency is involved is called
Eurocurrency
True or false : For multinational firms , it is important to have decentralized departments for managing exchange rate risks so that there is a different team for each type of currency exposure .
False
True or false : Political risk refers only to problems for U.S. companies caused by foreign governments .
False
The use of local financing from the government of the foreign country where the operation is located
can reduce political risk .
Which of the following are ways for a U.S. corporation to reduce political risk in a foreign country ?
Use local financing
Which of the following are correct when describing purchasing power parity ? ( Select all that apply . )
•Exchange rates adjust to keep purchasing power level between currencies . •Parity is expressed as both absolute and relative . •Purchasing power parity is a major factor in the rate of change in exchange rates .
A foreign subsidiary can remit funds to the parent company in which of the following ways ?
•Royalties •Dividends •Management fees
Exploiting a disequlibrium between spot rates , forward rates , and differences in interest rates is called
covered interest arbitrage
Unanticipated changes in relative economic conditions that affect the value of a foreign operation are known as
long - term exposures to exchange rate riski
In formulas involving the relationship between spot exchange rates , forward exchange rates , and interest rates , the T - bill rate can be used for the U.S. _____ risk - free rate .
nominal
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
According to the international Fisher effect , if real returns are higher in Brazil than in the United States , money would flow out of the U.S. financial markets into Brazilian markets and the result would be that asset prices in
Brazil would rise and their returns would fall
The _____ Interbank Offered Rate is the rate that most international banks charge one another for loans of Eurodollars overnight in the _____ market .
London ; London
The Tax Cuts and Jobs Act of 2017 introduced a new flat tax rate of ___ percent which reduced the incentive for companies to leave cash overseas
21
Which of the following agreements is a spot exchange rate for the Norwegian krone ?
6NKr for $ 1 settled in 2 days
Alpha Co. imports raw materials and uses forward contracts to reduce which of the following risks ?
Short - run exposure to exchange rate risk
The _____ rate is generally used for the U.S. nominal risk - free rate ( Rus ) .
T - bill
In covered interest _____ you are covered in the event of a change in the exchange rate because you lock in the forward exchange rate today .
arbitrage
The price of one country's currency expressed in terms of another country's currency is called the
exchange rate
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
Match the country with the currency
•India —-> rupee •Japan —-> Yen •Mexico —-> peso •Canada —-> dollar •United Kingdom —-> pound •Switzerland —-> franc
Which of the following are conditions necessary for absolute purchasing power parity ?
•No trade barriers •No transaction costs •Identical goods
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 computes NPV in both foreign and domestic currencies •The foreign currency approach is computationally easier
The different types of exchange rate risk include which of the following ?
•Translation exposure •Short - term exposure •Long - term exposure
The foreign currency approach to capital budgeting analysis
•computes the NPV of a project in both the foreign and domestic currency •is computationally easier than the home currency approach •produces the same results as the home currency approach