International Business Final (Test 1-3)

Suppose annual inflation rates in the U.S. and Venezuela are expected to be 2% and 50%, respectively, over the next several years. If the current spot rate for the Venezuelan Bolivar is $.007, then the best estimate of the bolivar's spot value in dollars in 3 years is

$0.002201

If the spread on the Yuan is quoted as $0.00592-615, then what is the ask rate?

$0.00615

Suppose annual inflation rates in the U.S. and France are expected to be 5% and 9%, respectively, over the next several years. If the current spot rate for the Euro is $1.065, then the best estimate of the Dollar per 1 Euro's spot value in 3 years is

$0.952002

Suppose the 90 day forward rate for the Euro is $1.4395. Assume the forward Euro is selling at a 5.4% discount, what is the current spot rate?

$1.4593

Suppose that the interbank forward bid for March 20 on the Euro is $0.9895 at the same time that the price of IMM Swiss franc futures for delivery on March 20 is $0.9795. How much of an arbitrage profit could a dealer earn per March Euro futures contract of E150,000?

$1500

Suppose it is January 1990 and the current spot rate for the DM is $0.5945. The call premium on a call option with an exercise price of $0.5795 is $0.0025. What is the intrinsic value of one DM 120,500 call option?

$1807.50

Suppose the current spot rate for the Australian dollar is U.S.$0.8425. The intrinsic value of an A$50,000 call option with an exercise price of U.S.$0.7957 is

$2340

Suppose that Britain pegs the pound to gold at 6 pounds per ounce, whereas the exchange rate between pounds and US dollars is $5=1. What should an ounce of gold be worth in US dollars

$30.00

On January 1, 1994, the annual inflation rates in the U.S. and India were expected to be 2% and 10%, respectively. If the current spot rate on that day for the dollar was $1 = R500, then the expected spot rate for the rupee in dollars in three years was

0.001595

Suppose the Drachma is quoted at $0.00543-00549, and the Dutch Guilder is quoted at $1.2456-2462. What is the direct quote for the Drachma in the Netherlands?

0.004357-0.004408

Suppose the Yen is quoted at $0.00456-545, and the Peso is quoted at $0.0913-19. What is the direct quote for the Yen in Mexico City?

0.0496-0.0596

Suppose it is 1995 and the following direct quotes are received for spot and one month British Pound in New York: 1.2155-575-8. Then the outright 30 day forward quote for the British Pound was

1.2160-1.2165

Company X, a low-rated firm, desires a fixed-rate, long-term loan. X presently has access to floating interest rate funds at a margin of 0.75% over LIBOR. Its direct borrowing cost is 12% in the fixed-rate bond market. In contrast, company Y, which prefers a floating-rate loan, has access to fixed-rate funds in the Eurodollar bond market at 8% and floating-rate funds at LIBOR + 1/2%. Suppose there is a middleman helping facilitate the transaction that charges 0.15% and suppose the companies split the cost savings. How much would X pay for its fixed-rate funds?

10.2%

If the Euro devalues against the Australian dollar by 10%, the Australian dollar will appreciate by

11.11%

If the expected inflation rate is 7% and the real required return is 9%, then the Fisher effect says that the nominal interest rate should be

16.63%

Suppose the expected inflation in the U.S. on January 1, 1988 was projected at 6.5% annually for the next 5 years and at 11.4% annually in Italy for the same time period, and the lira/$ spot rate that day was currently at L2200 = $1, then the PPP estimate of the lira/$ spot rate five years from now was

2755

During 1995, the yen went from $0.0125 to $0.0095238. By how much did the dollar appreciate against the yen?

31.25%

Suppose the spot rate and forward rate for the Peso are $0.0918 and $0.0929 respectively. Assume the forward pound is selling at a 7.1% premium, what is the number of days of the forward contract?

60 days

Suppose the price indexes in Mexico and the U.S., which both began the year at 100, are at 130 and 104, respectively, by the end of the year. If the exchange rate began the year at Mex$4.5 = $1 and ended the year at Mex$5.17 = $1, then the change in the real value of the peso during the year is

8.80%

The exchange of debt-service obligations denominated in one currency for the service on an agreed-upon principal amount of debt denominated in another currency is known as

A currency swap

Calls for a new gold standard reflect

A fundamental distrust of government's willingness to maintain the integrity of fiat money

The basic difference(s) between forward and futures contracts is that

All of the above

Benefits from adopting a common European currency include

All of the above (a. reduced transaction costs, b. elim of exchange rate risk, c. increase price transparency)

Which one of the following is NOT a disadvantage of a strong dollar?

Americans will be less prone to buy foreign wines

Swaps provide a real economic benefit to the counterparties only if a barrier exists to prevent ______ from functioning fully.

Arbitrage

_______________________ is defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit from a price discrepancy

Arbitrage

A 20% real return in Morocco is higher than a 10% dollar return in the U.S.

Assuming both rates are real returns

The accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries is called the

Balance of payments

The overwhelming majority of foreign exchange transactions involve

Banks buying & selling foreign exchange

The internationalization process most likely tends to

Begin by exporting

Dell Computer has a £2 million receivable that it expects to collect in one year. Suppose the interest rate on pounds is 12%. How could Dell protect this receivable using a money market hedge?

Borrow 1,785,714 million pounds today

Several countries use the US dollar as the official currency of the country. Which of the following statement(s) is correct about a country pursuing dollarization?

Both b and c are correct (b. The country is economically integrated with the US, c. Country loses seigniorage revenues)

If the Fed desires to strengthen the dollar using a sterilized intervention approach, it should

Buy dollars in the foreign exchange market and buy T-securities in the domestic market

When real interest rates are determined by the global supply and demand for funds, we claim that it is an example of

Capital market integration

What is the name of the market in the U.S. where trade takes place in currency futures? The

Chicago Mercantile Exchange

In a _____ swap, one party pays a fixed rate calculated at the time of trade as a spread to a particular Treasury bond, and the other side pays a floating rate.

Coupon

The account that records imports and exports of goods, services, income, and current unilateral transfers is known as the

Current account

Suppose McDonald's charges DK 100 for a burger in Denmark. Its costs are DK 75 per burger and these costs are not expected to change with the exchange rate. If the DK devalues from $0.085 to $0.056, what price will McDonald's have to charge for its burgers to maintain its dollar profit margin?

DK 112.95

The _______ for/of foreign currency in the U.S. is derived from the demand for ___________ by American consumers

Demand; foreign products

______________ is another name for the complete replacement of the local currency with the U.S. dollar

Dollarization

Governments intervene in the foreign exchange markets for all of the following except to

Earn foreign exchange

A weak dollar will

Enable American exporters to improve their profit margins

To some U.S. manufacturers and labor unions, a cheap yuan value gives China's __________ an unfair advantage in the global economy

Exporters

Which type of money is MOST likely to see its value fluctuate in the foreign exchange market?

Fiat money

Which type of money is most likely to see its value fluctuate in the foreign exchange market?

Fiat money

Translation exposure reflects the exposure of a company's

Financial statements to currency movements

The United States currently uses a __________ exchange rate regime

Floating

The attempt by many countries to stimulate their domestic economies and to gain access to global financial markets is causing more and more countries to choose a __________ or __________ exchange rate regime

Floating; monetary union

A ___________ between a bank and a customer calls for a fixed delivery date, at a fixed exchange rate for a specified amount of one currency against another currency payment.

Forward contract

Traders on the foreign exchange market use ___________ to eliminate or cover the risk of loss on export or import orders denominated in foreign currencies.

Forward contracts

A(n) __________ is a contract that fixes an interest rate today on a future loan or deposit

Forward forward

Major advantages of futures contracts include

Freedom to liquidate the contract at any time before its maturity

The _______ the price elasticity of demand, the _____ the incentive to hold down price and thereby expand sales

Greater; greater

___________ a certain currency exposure means establishing an offsetting currency position so that the gain or loss from the exposure on the original currency is exactly offset buy the gain or loss from the currency hedge.

Hedging

A weaker US dollar is often associated with

Higher inflation

In the article that I posted on Blackboard, what car company is leaving the UK, most likely due to Brexit and the unknowns associated with it?

Hodna

If a country's freely floating currency is undervalued in terms of purchasing power parity, its capital account is likely to be

In deficit or trending toward a deficit

Of the following, exchange rates depend the most upon relative

Inflation rate between nations

This shows how much money must be in the futures market account balance when the contract is first entered into. It is the

Initial performance bond

The spot rate on the euro is $1.24 and the 180 day forward rate is $1.26. The difference between the two rates means

Interest rates are higher in the US than in Germany

A rise in the inflation rate in one nation relative to others will be associated with a fall in the first nation's exchange rate and with a rise of its interest rate relative to foreign interest rates. The two conditions combined result in the _________ Effect.

International Fisher

The time value of a European option

Is always positive for an out-of-the-money option

In a freely floating exchange rate system, if the capital account surplus for the U.S. rises, what will most likely happen to the real value of the dollar?

It will rise

Which of the following is an example of foreign exchange market intervention?

Japanese central bank buys yen in the foreign exchange market to prop up the value of the yen

When government intervention attempts to reduce for exporters and importers the uncertainty caused by disruptive exchange rate changes for the short and medium term, it is referred to as _________

Leaning against the wind

Which one of the following would NOT be considered as part of a nation's capital account?

License fees earned by Hewlitt Packard

Most international currency transactions are conducted by

Major banks

In the face of exchange rate volatility, developing a pricing strategy must address two key issues:

Market share and profit margin

Firms that attempt to reduce risk and beat the market simultaneously may end up with

More risk, not less

Hedgers, mostly _____________, engage in forward contracts on the foreign exchange markets to protect the home currency value of various foreign currency-denominated assets and liabilities on their balance sheets.

Multinational corporations

It is possible for transaction exposure to be positive and translation exposure in the same currency to be

Negative

The Fisher effect states that the _________ rate is made up of a real required rate of return and an inflation premium.

Nominal interest

Given the added risks associated with doing business abroad, companies should

Not limit their foreign sales at all

American terms refers to the

Number of US dollars per unit of foreign currrency

To which balance of payment category would purchases of gold by the Bank of England belong?

Official Reserve Account

What is the name of the theory that states exchange-adjusted prices on identical tradeable goods and financial assets must be within transaction costs of equality globally? The Law of

One Price

In the currency futures market, what is the term that describes the number of contracts in a currency outstanding at any one time?

Open Interest

The type of exposure that measures the extent to which currency fluctuations can alter a company's future operating cash flows, that is, its future revenues and costs is known as

Operating exposure

The spot and 90 day forward rates for the Euro are $1.42 and $1.47, respectively. The Euro is said to be selling at a forward

Premium of 14.08%

With respect to home currency (HC) appreciation, the key issue for a domestic firm is its degree of ____.

Pricing flexibility

Which one of the following parity theories states that, in its absolute version, price levels globally should be equal when expressed in a common currency?

Purchasing power parity

________________ were the earliest multinationals

Raw-material seekers

An increase in the supply of U.S. dollars by the Federal Reserve will

Reduce the value of the dollar because of inflation fears in the US

Which one of the following is most likely to depreciate?

Soft currency

The Japanese current account surplus can best be attributed to

The high rate of Japanese savings

All else equal, US exports should increase when

US dollar weakens in value against foreign countries

During a home currency appreciation, exporters may pull out of markets that foreign competition makes ________.

Unprofitable

The US dollar suddenly changes in value against the euro from an exchange rate of $0.8909/E to $0.8709/E. Thus, the dollar has ________ by ________

appreciated; 2.30%

In a __________ swaps, two parties exchange floating interest payments based on different reference rates.

basis

A balance of trade deficit results in a current account

deficit

The current exchange rate system can best be described as a _________ system

hybrid

Suppose the current spot rate for the euro is $1.3427. A call option with an exercise price of $1.2550 is said to be

in-the-money

When monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions, it is known as ________ intervention

insterilized

One way an MNC may improve productivity in the face of exchange rate volatility is by revising ________.

product offerings

The European Monetary System is best described as a

target-zone arrangment

In order to boost the value of the euro relative to the dollar

the Fed should sell dollars for euros and the European central bank should buy euros with dollars

Economic exposure is based on the extent to which the ______ of the firm will change when exchange rates change.

value

Other things equal, and assuming efficient markets, if a Honda Accord costs $18,365 in the U.S. then at an exchange rate of $1.43/£, the Honda Accord should cost __________ in Great Britain.

£12,843

The price of a Big Mac in the U.S. is $3.75 and ¥500. The current observed exchange rate is ¥121.45/$. What is the implied ¥/$ exchange rate based on the price of Big Mac in both countries?

¥133.33/$

The current exchange rate between the Swiss franc and Japanese is ¥98.78/Sfr. If the yen is expected to appreciate by 7% by the end of this year, what is the yearend exchange rate?

¥92.32/Sfr