Chapter 18 Finance

The U.S. Treasury bill rate is the rate most international banks charge one another for overnight Eurodollar loans.

False

The rate that most international banks charge one another for loans of Eurodollars overnight is called the:

London Interbank Offer Rate.

A Eurobond is an international bond issued in multiple countries but denominated in a single currency.

True

Assume that you can exchange $1.00 U.S. for $1.55 Canadian today. This is a:

spot rate.

The current spot rate between Switzerland and the U.S. is SF1.27 per $1.00. Expected inflation in Switzerland is 9 percent per year and expected inflation in the U.S. is 4 percent per year. If relative purchasing power parity holds, what is the expected exchange rate in 3 years?

SF1.470 per $1.00

A spot trade in the foreign currency market is an agreement to trade currencies based on the exchange rate today for settlement within two business days.

True

The _____ will tell you the price of agreeing today to take delivery of a Canadian dollar 60 days from now.

forward exchange rate

If the percentage difference between the forward exchange rate and the spot exchange rate is equal to the interest rate differential between two countries, then _____ holds.

interest rate parity

A Japanese firm builds a manufacturing plant in the U.S. to avoid transportation charges in bringing its goods to the U.S. market. The Japanese firm is apparently willing to bear the _____, which would result from changes in the relative economic conditions between the U.S. and Japan.

long-run exchange rate risk

The U.S. risk-free rate is 5 percent. The British risk-free rate is 2 percent. The spot rate is £.5528. What is the approximate 3-year forward rate if interest rate parity holds?

£.5045 per $1.00

Suppose that the current exchange rate is ¥104 per $1. The inflation rate in the U.S. is expected to be 3 percent per year for the next 4 years. During that same time period, the inflation rate in Japan is expected to be 4 percent per year. Based on relative purchasing power parity, the exchange rate in 4 years should be approximately:

¥108 per $1.

A(n) _____ is a security issued in the U.S. which represents a claim on shares of a foreign stock.

American Depositary Receipt

The following quotes are given as the U.S. $ equivalent: Canada (dollar) 0.7196, Hong Kong (dollar) 0.1291, Sweden (krona) 0.1400. What is the cross-rate of Canadian dollars per Swedish krona?

C$0.1946

The foreign exchange market is an example of an organized exchange with a specific physical location for trading.

False

There is no mechanism that allows a foreign firm's shares to be traded on an exchange in the U.S.

False