FRL3000 Ch 21 connect study set

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

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

Long-term exposure Translation exposure Short-term exposure

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

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.

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

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

long-term exposures to exchange rate risk

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

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 rate

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

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

6NKr for $1 settled in 2 days

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

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

Foreign bonds

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

T-bill

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

Use local financing

Interest Rate Parity

eliminates covered interest arbitrage opportunities

The price of one country's currency expressed in terms of another country's currency is called the ________.

exchange rate

T/F Political risk refers only to problems for U.S. companies caused by foreign governments.

false

One of the most significant complications faced daily by multinationals is _______.

foreign exchange

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

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

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

interest rate swap

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

its overall positions in foreign currency

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 a __________ relative to the U.S. dollar.

premium

The international fisher effect asserts that _______ interest rates are equal across countries.

real

The day to day fluctuations in exchange rates create ________.

short-term exchange rate risk exposure

The unbiased forward rate condition may not hold if _____________.

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

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

T/F: The tax cuts and job acts of 2017 eliminates the tax issue about repatriating overseas profits

true

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%

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

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

Match the following currencies to their country origin

India=rupee Japan=Yen Mexico=peso Canada=dollar United Kingdom=pound Switzerland=franc

The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates between the countries is called __________.

uncovered interest parity

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.

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

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

A bond issued in multiple countries, but denominated in a single currency is called:

Eurobonds

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.

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

LIBOR

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

Management fees Royalties Dividends

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

Matching foreign currency inflows and outflows

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 approachis computationally easier than the home currency approach

Which of the following are conditions necessary for absolute purchasing power parity?

No trade barriers No transaction costs Identical costs

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

The cross-rate

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.

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

The home currency approach

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

Dollar _____ occurs when the value of a dollar rises and it takes more foreign currency to buy a dollar.

appreciation

Absolute purchasing power parity tells 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

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

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