Ch 21 LearnSmart

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

The different types of exchange rate risk include:

-Translation exposure -Long-term exposure -Short-term exposure

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

Eurocurrency

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

Management fees Royalties Dividends

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

The home currency approach

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

Which of the following issues are not faced by a purely domestic Canadian firm?

-Foreign exchange rates -Sarbanes-Oxley requirements -Foreign tax rates

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

6NKr for $1 settled in 2 days

______ 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

True or false: The Tax Cuts and Jobs Act of 2017 eliminates the tax issue about repatriating overseas profits.

True

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

Use local financing

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

its overall positions in foreign currency

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

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.

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:

Eurobond

True or false: Political risk refers only to problems for U.S. companies caused by foreign governments.

False

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

Foreign bonds

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

Identical goods No transaction costs No trade barriers

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

Matching foreign currency inflows and outflows

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.

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 at a ______________ relative to the U.S. dollar.

Premium

Which of the following are correct when describing purchasing power parity? (Select all that apply.)

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.

____________ PPP explains the exchange rate change over time.

Relative

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

If purchasing power parity did not hold, it would be possible to engage in _____________________ simply bu transporting products to other countries.

arbitrage

According to the international Fisher effect, if real returns are higher in Brazil than in the U.S., money would flow out of the U.S. financial markets in Brazilian markets and the result would be __________________.

asset prices in Brazil would rise and their returns would fall

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 approach is computationally easier than the home currency approach

What is the implicit exchange rate between two currencies when both are quoted in a third currency?

cross-rate

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

exchange rate

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

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

interest rate swap

When it is reported that the dollar is strong in the foreign exchange market it means that

the dollar is more valuable and can buy more of other currencies

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

Suppose the euro currently costs $1.37 and the nominal risk-free interest rate in France is 3 percent compared to the 2 percent in the U.S. Interest rate parity implies the euro 1-year forward rate will be approximately _____________.

$13,837

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

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

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 world's largest financial market is the:

foreign exchange market

Match the following currencies to their country of origin:

India = rupee Japan = Yen Mexico = Peso Canada = dollar UK = pound Switzerland = franc

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.

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

T-bill

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

The goods must be identical There must be no trade barriers

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

The amount of foreign currency required to purchase one U.S. dollar is called the __________ exchange rate.

indirect

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

the international Fisher effect

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

LIBOR

The day-to-day fluctuations in exchange rates create

short-term exchange rate risk exposure

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.

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

You are considering the purchase of an LCD TV that costs $699 in the United States. If the absolute purchasing power parity exists, the identical TV will cost _________________ in France when the exchange rate is $1.37 on the E1.

E510.22