Ch. 21

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

long run exchange rate exposure

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

long term exposure to change rate risk

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

exchange rate risk

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

forward

______ 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.

interest rate parity

The day-to-day fluctuations in exchange rates create _____ exposure.

short term exchange rate risk

What are the different types of exchange risk

translation exposure, short term and long term exposure

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

The foreign currency approach to capital budgeting analysis _____. 1. produces the same results as the home currency approach 2. is computationally easier than the home currency approach 3. utilizes the uncovered interest parity relationship 4. computes the NPV of a project in both the foreign and domestic currency

1, 2, 4

When compared to the home currency approach, which of the following are true for the foreign currency approach to capital budgeting? (Select all that apply) 1. The foreign currency approach makes use of uncovered interest rate parity. 2. The foreign currency approach computes NPV in both foreign and domestic currencies. 3. The foreign currency approach uses the international Fisher effect. 4. The foreign currency approach is computationally easier.

1, 3

How many Euros can you get for $1,500 is one Euro is worth $1.1846

1,266

What are some ways in which a foreign subsidiary can remit cash flows to a parent? (Select all that apply) 1. Capital gains on stock holdings 2. Royalties for the use of trade names and patents 3. Management fees for central service 4. Dividends

2, 3, 4

The home currency approach: A. utilizes the international Fisher effect to compute the required future exchange rates. B. discounts all of a project's foreign cash flows using the current spot rate. C. computes the net present value (NPV) of a project in the foreign currency and then converts that NPV into U.S. dollars. D. utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency. E. employs the uncovered interest parity relationship to project future exchange rates.

E

Suppose the spot exchange rate is C$1.3158 and the six-month forward rate is C$1.3163. The U.S. dollar is selling at a _____ relative to the Canadian dollar and the U.S. dollar is expected to _____ relative to the Canadian dollar.

Premium , appreciate

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

They produce the same answer

Interest rate parity ___. A. eliminates covered interest arbitrage opportunities B. exists when spot rates are equal for multiple countries C. exists when the spot rate is equal to the future rate D. eliminates exchange rate fluctuations

a

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

Funds from a foreign subsidiary that cannot currently be remitted are sometimes said to be ___.

blocked

Which of the following are correct when describing purchasing power parity? (multiple) 1. A unit of currency in any country will buy the same quantity of goods. 2. Parity is expressed as both absolute and relative. 3. Purchasing power parity is a major factor in the rate of change in exchange rates. 4.Exchange rates adjust to keep purchasing power level between currencies.

2, 3, 4

Absolute purchasing power parity is most apt to exist for which one of the following items? A. An ounce of silver B. A computer C. A cell phone D. A pound of beef E. An automobile

A

Long-run exposure to exchange rate risk relates to: A. unexpected changes in relative economic conditions. B. daily variations in exchange rates. C. accounting gains and losses created by fluctuating exchange rates. D. variances between spot and future rates. E. differences between future spot rates and related forward rates.

A

You would like to purchase a foreign bond that is issued by the government of the United Kingdom. Which one of the following should you purchase? A. Bulldog bond B. Samurai bond C. Swap D. Kronor bond E. Rembrandt bond

A

One goal of the Tax Cuts and Jobs Act of 2017 is to encourage corporations to: A. bring all of their foreign assets back to the U.S. by paying a one-time tax rate of 15.5 percent on those assets. B. repatriate their untaxed overseas profits. C. claim all overseas profits as U.S. profits to avoid paying taxes to foreign governments. D. distribute all of their overseas profits as dividends to avoid all U.S. taxes. E. bring their overseas cash back to the U.S. at a one-time tax rate of 8 percent.

B

Which method employs uncovered interest parity to project future exchange rates? A. The foreign currency approach B. The home currency approach C. The international Fisher effect D. Triangle arbitrage

B

Which one of the following conditions is not required for absolute purchasing power parity to exist? A. Transaction costs must be zero. B. Spot and forward rates must be equal. C. Goods must be identical. D. There can be no spoilage. E. No trade barriers can exist.

B

Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £.78. The traders agree to settle this trade within two business days. What is this exchange called? A. Swap B. Forward trade C. Spot trade D. Option trade E. Futures trade

C

Assume the euro is selling in the spot market for $1.18. Simultaneously, in the three-month forward market the euro is selling for $1.20. Which one of the following statements correctly describes this situation? A. The euro is expected to depreciate in value. B. The dollar is selling at a premium relative to the euro. C. The spot market is out of equilibrium. D. The euro is selling at a premium relative to the dollar. E. The forward market is out of equilibrium.

D

The forward rate market is dependent upon: A. current spot rates equaling the actual future spot rates on average over time. B. current spot rates equaling current forward rates, on average, over time. C. current forward rates exceeding current spot rates. D. forward rates equaling the actual future spot rates on average over time. E. current spot rates exceeding current forward rates over time.

D

The type of exchange rate risk known as translation exposure is best described as the: A. risk that a positive net present value (NPV) project could turn into a negative NPV project because of changes in the exchange rate between two countries. B. variance between the revenue of an exporter who uses forward rates and an equivalent exporter who does not use forward rates. C. fluctuation in prices faced by importers of foreign goods. D. problem encountered by an accountant of an international firm who is trying to record balance sheet account values. E. variance in relative pay rates based on the currency used to pay an employee.

D

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

its overall position in foreign currency

The international Fisher effect asserts that ______ interest rates are equal across countries.

real

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

the home currency approach

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

the international fisher effect

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