FIN3403 LearnSmart Ch18

Select all that apply The different types of exchange rate risk include which of the following?

- short-term exposure - translation exposure - long-term exposure

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

6NKr for $1 settled in 2 days

Gilts are securities issued by the ______.

British and Irish governments

______ states that any difference in interest rates between two countries for some period is equal to the difference between the forward and spot exchange rates, thus eliminating any arbitrage possibilities.

IRP

A US corporation can reduce political risk in a foreign country by which of the following ways?

Use local financing

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. The foreign currency will ______ in value relative to the U.S. dollar.

depreciate

If the Japanese yen is less expensive in the forward market than it is today, it is said to be selling at a(n) ______.

discount

Interest rate parity ______.

eliminates covered interest arbitrage opportunities

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

exchange rate

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

exchange rate risk

The world's largest financial market is the ______.

foreign exchange market

Short-term exposure to exchange rate risk can be reduced by importing raw materials and using _____ contracts.

forward

The exchange rate in an agreement to exchange currency at some time in the future is called the ______ rate.

forward

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

forward

In covered interest arbitrage, investors protect themselves against changes in exchange rates by locking in the ______.

forward exchange rate

Relative PPP implies that the change in an exchange rate is driven by the difference in the ______ of the two countries involved.

inflation rates

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

its overall positions in foreign currency

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

long-run exchange rate exposure

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

matching foreign currency inflows and outflows

The foreign exchange market is where ______.

one country's currency is traded for another country's currency

Changes in value due to the actions of governments is referred to as ______ risk.

political

The concept that exchange rates adjust to keep purchasing power constant among currencies is referred to as ______.

purchasing power parity

Alpha Co. imports raw materials and uses forward contracts to reduce which of the following risks?

short-run exposure to exchange rate risk

The day-to-day fluctuations in exchange rates create ______.

short-term exchange rate risk exposure

An agreement to trade currencies within two business days at today's exchange rate is called a ______.

spot trade

A foreign bond refers to a bond ______.

that is issued in a single country, denominated in the currency of that country

A Eurobond refers to a bond ______.

that is issued in multiple countries, usually denominated in the currency of the issuer's country

When it is reported that the dollar is stronger in the foreign exchange market it means that ______.

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

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

Match the following currencies to their country of origin. Instructions

India = rupee Japan = yen Mexico = peso Canada = dollar United Kingdom = pound Switzerland = franc

True or false: For absolute PPP to hold, there must be no trade barriers such as tariffs, taxes, or political barriers.

True

True or false: If purchasing power parity did not hold, it would be possible to engage in arbitrage simply by transporting products to other countries.

True

True or false: The cross-rate is the exchange rate for a non-U.S. currency expressed in terms of another non-U.S. currency.

True

True or false: The management of exchange rate risk should probably be centralized so that the firm has an understanding of its overall positions in foreign currency.

True

The _____-rate is the exchange rate for a non-U.S. currency expressed in terms of another non-U.S. currency.

cross

The implicit exchange rate between two currencies when both are quoted in a third currency is called the ______.

cross-rate

The foreign exchange market allows for the trading of ______.

currencies

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 cross-rate between two foreign currencies is usually quoted in what currency?

the U.S. dollar

Match the international corporate finance terminology below with its correct definition.

ADR = A security issued in the United States that represents shares of a 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

A security issued in the United States representing shares of a foreign stock is called a(n) ______.

American Depository Receipt

Protecting oneself from a change in the exchange rate by locking in the forward exchange rate today is called ______.

covered interest arbitrage

A bond issued in multiple countries but denominated in a single currency is a _____.

Eurobond

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

Eurocurrency

If U.S. dollars are deposited in banks outside the U.S. banking system, they are referred to as ______.

Eurodollars

British and _____ governments issue gilts.

Irish

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

LIBOR

The interest rate most international banks charge one another for overnight Eurodollar loans is the _____ Interbank Offered Rate.

London

Why is it more challenging to manage long-term exchange rate risk exposure than to hedge short-term risks?

Organized forward markets do not exist for long-term needs of corporations.

An agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called ______.

a forward trade

The condition that a commodity costs the same regardless of the currency used or where it is purchased is called ______.

absolute purchasing power parity

Currency ______ occurs when the value of the dollar rises and it takes more foreign currency to buy a dollar.

appreciation

The use of local financing from the government of the foreign country where the operation is located ______.

can reduce political risk

Select all that apply Which of the following are true concerning triangle arbitrage?

- It helps keep the currency market in equilibrium. - It is a profitable situation involving three separate currency exchange transactions.

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

- Parity is expressed as both absolute and relative. - Purchasing power parity is a major factor in the rate of change in exchange rates. - Exchange rates adjust to keep purchasing power level between currencies.

Select all that apply Currently, the spot exchange rate for the Swiss franc is SF 1 = $1.10 or SF 1 = $1.12 90 days forward. Which of the following is true?

- The dollar is selling at a discount to the Swiss franc - The Swiss franc is at a forward premium.

Select all that apply 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.

Select all that apply An interest rate swap involves swapping a ______ payment for a ______ payment.

- fixed rate; floating rate - floating rate; fixed rate

Select all that apply Users of the foreign exchange market include ______.

- foreign exchange brokers who match buy and sell orders - importers who pay for goods using foreign currencies - speculators who try to profit from changes in exchange rates

True or false: A security issued in the United States representing shares of a foreign stock is called a Stars and Stripes Issue.

False A security issued in the United States representing shares of a foreign stock is called an American Depository Receipt.

True or false: An interest rate swap occurs when two parties exchange a sub-par loan for a market-rate loan.

False An interest rate swap occurs when two parties exchange a floating-rate payment for a fixed-rate payment or vice versa.

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

False Political risk refers to changes in value encountered by any firm as a consequence of any country's political actions.

True or false: 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 transaction exposure to exchange rate risk.

False This leads to translation exposure to exchange rate risk.

_____ arbitrage helps keep the currency market in equilibrium.

Triangle