FINAL 21 CONCEPTS

Interest rate parity:

A. eliminates covered interest arbitrage opportunities.

method of reducing a U.S. importer's short-run exposure to exchange rate risk?

A. entering a forward exchange agreement timed to match the invoice date

unbiased predictor of the future spot exchange rate?

A. unbiased forward rates

. The interest rate parity approximation formula is

Ft = S0 × [1 + (RFC - RUS )] t .

45. The foreign currency approach to capital budgeting analysis:

I. is computationally easier to use than the home currency approach. II. produces the same results as the home currency approach. IV. computes the NPV of a project in both the foreign and the domestic currency. C. I, II, and IV only

that real interest rates are equal across countries?

C. international Fisher effect

required for absolute purchasing power parity to exist?

E. I, II, III, and IV

Which one of the following names matches the country where the bond is issued?

E. Rembrandt: Netherlands

International bonds issued in a single country and denominated in that country's currency are called:

E. foreign bonds.

You would like to purchase a security by the British government

E. gilt

market value of the Blackwell Corporation just declined by 5 percent recent legislation passed by Congress

E. political risk

49. Which of the following statements are correct?

II. Accounting translation gains and losses are recorded in the equity section of the balance sheet. III. The long-run exchange rate risk faced by an international firm can be reduced if a firm borrows B. II and III only

Assume the euro is selling in the spot market for $1.33. Simultaneously

The euro is selling at a premium relative to the dollar.

Assume that $1 is equal to ¥98 and also equal to C$1.21

B. cross-rate.

securities is used as a means of investing in a foreign stock not be traded in the United States?

A. American Depository Receipt

Where does most of the trading in Eurobonds occur?

C. London

formulas correctly describes the relative purchasing power parity relationship?

A. E(St ) = S0 × [1 + (hFC - hUS )] t

George and Pat just made an agreement to exchange currencies based on today's exchange rate

A. spot exchange rate

A trader has just agreed to exchange $2 million U.S. dollars for $1.55 million Euros

B. forward trade.

41. Uncovered interest parity is defined as:

B E(St ) = S0 × [1 + (RFC - RUS )] t .

42. The international Fisher effect states that _____ rates are equal across countries.

E. real

On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following Monday

B. London Interbank Offer Rate

43. The home currency approach:

B. employs uncovered interest parity to project future exchange rates.

Relative purchasing power parity:

B. relates differences in inflation rates to differences in exchange rates.

44. The home currency approach:

B. requires an applicable exchange rate for every time period for which there is a cash flow.

expected percentage change in the exchange rate between two countries

B. uncovered interest parity

48. The type of exchange rate risk known as translation exposure is best described as:

B.the problem encountered by an accountant of an international firm who is trying to record balance

3. International bonds issued in multiple countries but denominated solely in the issuer's currency are

C. Eurobonds.

The LIBOR is primarily used as the basis for the rate charged on:

C. Eurodollar loans in the London market.

The U.S. created a communications network called SWIFT to facilitate currency trading.

C. I, II, and III only I. is a profitable situation involving three separate currency exchange transactions. II. helps keep the currency market in equilibrium. III. opportunities can exist in either the spot or the forward market.

following variables used in the covered interest arbitrage formula are correctly defined?

C. I, III, and IV only

relative to the dollar. 30. Which one of the following formulas expresses the absolute purchasing power parity relationship between the U.S. dollar and the British pound?

C. PUK = S0 × PUS

Mr. Black has agreed to a currency exchange with Mr. White. C$12,500 for $10,000 with the exchange occurring 4 months

C. forward rate.

the most political risk if the operationwere conducted outside of a firm's home country?

C. military weapons manufacturing

Absolute purchasing power parity is most apt to exist for which one of the following items?

C. silver

47. Long-run exposure to exchange rate risk relates to:

C. unexpected changes in relative economic conditions.

Spot trades must be settled:

C. within two business days.

Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British pounds

E. spot trade

4. U.S. dollars deposited in a bank in Switzerland are called:

D. Eurocurrency.

statements is correct concerning the foreign exchange market?

D. Importers, exporters, and speculators are key players in the foreign exchange market.

correct given the following exchange rates? .

D. The South African rand appreciated from Thursday to Friday against the U.S. dollar.

risk that a firm faces when it opens a facility in a foreign country,

D. exchange rate risk

10. The price of one Euro expressed in U.S. dollars is referred to as a(n):

D. exchange rate.

A basic interest rate swap generally involves trading a:

D. fixed rate for a variable rate.

A large U.S. company has £500,000 in excess cash from its foreign operations.

D. foreign exchange market

40. The forward rate market is dependent upon:

D. forward rates equaling the actual future spot rates on average over time.

. Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 =

D. purchasing power parity

The condition stating that the interest rate differential between two countries

E. interest rate parity.

The unbiased forward rate is a:

E. predictor of the future spot rate at the equivalent point in time.

Party A has agreed to exchange $1 million U.S. dollars for $1.21 million Canadian dollars.

E. swap