Homework 14

The spot exchange rate is the exchange rate that applies to a(n): A. LIBOR transaction. B. ADR transaction. C. spot trade. D. forward trade. E. future transaction.

C. spot trade.

The U.S. dollar equivalent is .3897 for the Brazilian real and 1.5649 for the UK pound. Which one of the following statements is correct given this information? A. One U.S. dollar will buy .3897 Brazilian reals. B. If you have .3897 Brazilian reals, they are worth 1.5649 UK pounds. C. One UK pound will buy 1.5649 U.S. dollars. D. One Brazilian real will buy 1.5649 UK pounds. E. One U.S. dollar will buy 1.5649 UK pounds.

C. One UK pound will buy 1.5649 U.S. dollars.

An American Depositary Receipt is defined as a security: A. that has been deposited in an interest-bearing account at a U.S. bank. B. issued outside the U.S. that represents shares of a U.S. stock. C. issued in the U.S. that represents shares of a foreign stock. D. that has a guarantee of payment from a U.S. bank. E. issued in multiple countries but denominated in U.S. currency

C. issued in the U.S. that represents shares of a foreign stock.

Assume the USD equivalent of the Norwegian krone is .1425. If you have NKr5,500, how much do you have in US dollars? A. $861.42 B. $42,608.14 C. $38,596.49 D. $783.75 E. $16,216.50

D. $783.75 NKr5,500 ($.1425/NKr1) = $783.75

Assume $1 = €.8036 = A$1.1757. What is the cross-rate for Australian dollars in terms of euros? A. A$1.1066/€1 B. A$1.2908/€1 C. A$1.3929/€1 D. A$1.4630/€1 E. A$1.5042/€1

D. A$1.4630/€1 A$1.1757 = €.8036 A$1.4630= €1

Assume your favorite running shoes cost $119 in the U.S. while the identical shoes cost C$139.50 in Canada. According to purchasing power parity, what is the C$/$ exchange rate? A. C$.8530/$1 B. C$.8426/$1 C. C$1.0918/$1 D. C$1.1723/$1 E. C$1.2305/$1

D. C$1.1723/$1 C$139.50/$119 = C$1.1723 /$1

Which one of the following is an example of the political risks associated with foreign operations? A. Technological changes B. Exchange rate fluctuations C. Translation exposure to exchange rate risk D. Changes in foreign tax laws E. Changes in relative wage rates between the home country and the foreign country

D. Changes in foreign tax laws

Which of the following parties are participants in the foreign exchange market? I. U.S. importers II. U.S. exporters III. U.S. travelers to Europe IV. Foreign portfolio managers who purchase American securities A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

Which one of the following terms is used to identify the concept that exchange rates vary to keep purchasing power constant among currencies? A. Exchange rate equilibrium B. Exchange rate parity C. Universal parity D. Market equilibrium E. Purchasing power parity

E. Purchasing power parity

Given the following exchange rates, which of the following currencies are selling at a premium against the dollar? <See table in homework> Suppose the Swiss franc exchange rate is SF.9703 = $1, and the euro exchange rate is €.8024 = $1. What is the cross-rate in terms of Swiss francs per euro? A. SF.7692/€1 B. SF.7786/€1 C. SF1.1054/€1 D. SF1.1832/€1 E. SF1.2092/€1

E. SF1.2092/€1 SF.9703 = €.8024 SF1.2092 = €1

Today, $1 will buy you 1,113 won or 102 rupees. Which one of the following occurred over the past year? A. The dollar appreciated against the won. B. The dollar depreciated against the rupee. C. The dollar appreciated against both the won and the rupee. D. The won depreciated against the dollar. E. The rupee depreciated against the dollar.

E. The rupee depreciated against the dollar.

The foreign subsidiary of a U.S. firm is profitable when profits are measured in the foreign currency but those profits become losses when measured in U.S. dollars. This is an example of which one of the following? A. Interest rate disparities B. Short-run exposure to exchange rate risk C. Long-run exposure to exchange rate risk D. Political risk associated with the foreign operations E. Translation exposure to exchange rate risk

E. Translation exposure to exchange rate risk

Which one of the following is the best universal definition of an exchange rate? A. Price of one country's currency expressed in terms of another country's currency B. Number of foreign dollars that can be purchased for every one U.S. dollar paid C. Price of a country's currency expressed in terms of that country's currency unit D. Number of units of a currency that were originally required to obtain one euro when a country adopted the euro as its official currency E. Price that must be paid to obtain a good or service from another country

A. Price of one country's currency expressed in terms of another country's currency

Assume the exchange rate is .96 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 1,500 Swiss francs? A. $1,521.21 B. $1,562.50 C. $1,528.80 D. $1,440.00 E. $1,418.46

B. $1,562.50 SF1,500×($1/SF.96) = $1,562.50

You just returned from a trip to Germany and have 356euros in your pocket. How many dollars will you receive when you exchange this money if the U.S. dollar equivalent of the euro is 1.2452? A. $402.08 B. $443.29 C. $411.40 D. $397.18 E. $462.05

B. $443.29 €356×($1.2452/€1) = $443.29

You are planning an extended trip to India and have located some housing that you can lease for 37,250 rupees per month. What is the cost per month in U.S. dollars if the exchange rate is Rs1 = $.01606? A. $1,208.15 B. $598.24 C. $1,311.27 D. $695.35 E. $709.30

B. $598.24 Rs37,250($.01606 / Rs1) = $598.24

Short-run exposure to exchange rate risk is best illustrated by which one of the following? A. Change in book value when the market value of an asset remains constant B. Daily fluctuations in the spot rate C. Increases in the forward rate as the time to settlement increases D. Changes in relative economic conditions between two countries E. Unrealized foreign exchange gains

B. Daily fluctuations in the spot rate

Relative purchasing power parity is based on the principle that the expected percentage change in the exchange rate between two countries is equal to which one of the following? A. Difference in the risk-free interest rates in the two countries B. Average interest rate in the two countries C. Average inflation rate of the two countries D. Difference in the inflation rates of the two countries E. Difference between the two countries' average inflation and interest rates

D. Difference in the inflation rates of the two countries

Eurobonds are best defined as international bonds issued in and denominated in ____. A. a single country; multiple currencies B. a single country; a single currency C. multiple countries; multiple currencies D. multiple countries; a single currency E. Euroland; euros

D. multiple countries; a single currency

You are given the exchange rate between the U.S. dollar and the Canadian dollar. You are also given the exchange rate between the U.S. dollar and the Mexican peso. What is the name given to the Canadian dollar per Mexican peso exchange rate derived from the information that was provided? A. Swap rate B. Depositary rate C. Forward rate D. London Interbank rate E. Cross-rate

E. Cross-rate

Which term is defined as having international operations in a world where relative currency values change? A. Political risk B. Relative purchasing power parity C. Interest rate parity D. Absolute purchasing power parity E. Exchange rate risk

E. Exchange rate risk

The market where euros, pesos, dollars, and pounds are traded is referred to as the: A. ADR market. B. LIBOR market. C. gilt market. D. euromarket. E. foreign exchange market.

E. foreign exchange market.

An agreement to exchange currencies sometime in the future is referred to as which one of the following? A. Forward trade B. Hedge C. Gilt D. Forward exchange rate E. Spot trade

A. Forward trade

Which one of the following is the rate that most international banks charge when they loan Eurodollars to other banks? A. ADR B. LIBOR C. Cross-rate D. Gilt rate E. Swap rate

B. LIBOR

Which one of the following is the best definition of Eurocurrency? A. Any paper money used by a country that has adopted the euro as its common currency B. Money deposited in a financial institution outside the country whose currency is involved C. Both paper and coins officially adopted under the euro system of coinage D. U.S. dollars owned by any country that has adopted the euro as its currency E. Any exchange of funds between two countries that have adopted the euro as their official currency

B. Money deposited in a financial institution outside the country whose currency is involved

Which one of the following is the risk arising from changes in value caused by political actions? A. Exchange rate risk B. Political risk C. Translation risk D. LIBOR risk E. Cross-rate risk

B. Political risk

You are going to London and plan on spending £4,500. How many dollars will this trip cost you if the currency per $1 is £.6391? A. $2,875.95 B. $2,892.16 C. $7,041.15 D. $6,890.01 E. $3,044.04

C. $7,041.15 £4,500 ×($1/£.6391) = $7,041.15

Which one of the following terms is used to describe international bonds issued in a single country and generally denominated in that country's currency? A. Eurobonds B. American Depositary Receipts C. Foreign bonds D. Swaps E. Gilts

C. Foreign bonds

Suppose a U.S. firm builds a factory in China, staffs it with Chinese workers, uses materials supplied by Chinese companies, and finances the entire operation with a loan from a Chinese bank located in the same town as the factory. This firm is most likely trying to greatly reduce, or eliminate, which one of the following? A. Interest rate disparities B. Short-run exposure to exchange rate risk C. Long-run exposure to exchange rate risk D. Political risk associated with the foreign operations E. Translation exposure to exchange rate risk

C. Long-run exposure to exchange rate risk

Assume the exchange rates for the Canadian dollar versus the U.S. dollar are Last week: 0.8759 usd / 1.1417 currency per usd This week: 0.8761 usd / 1.1414 currency per usd Which statement is correct given this information? A. Last week, it took C$.8759 to purchase $1. B. This week you can exchange C$1 for $1.1414. C. It is cheaper for an American to travel in Canada this week than it was last week. D. The Canadian dollar depreciated from last week to this week. E. You would have made a profit if you had invested $100 in Canadian dollars last week and then converted your money back to U.S. dollars this week. Ignore any interest earnings.

E. You would have made a profit if you had invested $100 in Canadian dollars last week and then converted your money back to U.S. dollars this week. Ignore any interest earnings.