FRL 301 - Chapter 21

Which one of the following securities is used as a means of investing in a foreign stock that otherwise could not be traded in the United States?

American Depository Receipt

Assume that $1 is equal to ¥98 and also equal to C$1.21. Based on this, you could say that C$1 is equal to: C$1(¥98/C$1.21) = ¥80.99. The exchange rate of C$1 = ¥80.99 is referred to as the:

Cross-rate

Which one of the following formulas correctly describes the relative purchasing power parity relationship?

E(St) = S0 × [1 + (hFC - hUS)]t

Interest rate parity:

Eliminates covered interest arbitrage opportunities.

International bonds issued in multiple countries but denominated solely in the issuer's currency are called:

Eurobonds

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

Eurocurrency

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

Eurodollar loans in the London market

Which one of the following is the risk that a firm faces when it opens a facility in a foreign country, given that the exchange rate between the firm's home country and this foreign country fluctuates over time?

Exchange Rate Risk

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

Exchange rate

A large U.S. company has £500,000 in excess cash from its foreign operations. The company would like to exchange these funds for U.S. dollars. In one of the following markets can this exchange be arranged?

Foreign Exchange Market

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

Foreign bonds

Mr. Black has agreed to a currency exchange with Mr. White. The parties have agreed to exchange C$12,500 for $10,000 with the exchange occurring 4 months from now. This agreed-upon exchange rate is called the:

Forward rate

The forward rate market is dependent upon:

Forward rates equaling the actual future spot rates on average over time

A trader has just agreed to exchange $2 million U.S. dollars for $1.55 million Euros six months from today. This exchange is an example of a:

Forward trade

The interest rate parity approximation formula is:

Ft = S0 × [1 + (RFC - RUS)]t.

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

PUK = S0 × PUS

The market value of the Blackwell Corporation just declined by 5 percent. Analysts believe this decrease in value was caused by recent legislation passed by Congress. Which type of risk does this illustrate?

Political Risk

The unbiased forward rate is a:

Predictor of the future spot rate at the equivalent point in time.

Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127?

Purchasing Power Parity

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

Real

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

Rembrandt: Netherlands

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

Silver

George and Pat just made an agreement to exchange currencies based on today's exchange rate. Settlement will occur tomorrow. Which one of the following is the exchange rate that applies to this agreement?

Spot exchange rate

Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £0.62. The traders agree to settle this trade within two business day. What is this exchange called?

Spot trade

Party A has agreed to exchange $1 million U.S. dollars for $1.21 million Canadian dollars. What is this agreement called?

Swap

Assume the euro is selling in the spot market for $1.33. Simultaneously, in the 3-month forward market the euro is selling for $1.35. Which one of the following statements correctly describes this situation?

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

Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate?

Unbiased Forward Rates

Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates?

Uncovered Interest Rates

Spot trades must be settled:

Within two (2) business days

The home currency approach:

employs uncovered interest parity to project future exchange rates.

Which one of the following is a suggested method of reducing a U.S. importer's short-run exposure to exchange rate risk?

entering a forward exchange agreement timed to match the invoice date

A basic interest rate swap generally involves trading a

fixed rate for a variable rate

You would like to purchase a security that is issued by the British government. Which one of the following should you purchase?

gilt

Relative purchasing power parity:

relates differences in inflation rates to differences in exchange rates.

The home currency approach:

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

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

the problem encountered by an accountant of an international firm who is trying to record balance sheet account values

Long-run exposure to exchange rate risk relates to:

unexpected changes in relative economic conditions

Which of the following conditions are required for absolute purchasing power parity to exist? I. goods must be identical II. goods must have equal economic value III. transaction costs must be zero IV. there can be no barriers to trade

I, II, III, and IV

Triangle arbitrage: 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. IV. is based solely on differences in exchange ratios between spot and futures markets.

I, II, and III only

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. III. requires an exchange rate for each time period for which there is a cash flow. IV. computes the NPV of a project in both the foreign and the domestic currency.

I, II, and IV only

Which of the following variables used in the covered interest arbitrage formula are correctly defined? I. RFC: Foreign country nominal risk-free interest rate II. RUS: U.S. real risk-free interest rate III. F1: 360-day forward rate IV. S0: Current spot rate expressed in units of foreign currency per one U.S. dollar

I, III, and IV only

Which of the following statements are correct? I. The usage of forward rates increases the short-run exposure to exchange rate risk. 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 money in the foreign country where the firm has operations. IV. Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

II and III only

Which one of the following statements is correct concerning the foreign exchange market?

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

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

Interest Rate Parity

Which one of the following supports the idea that real interest rates are equal across countries?

International Fisher Effect

Where does most of the trading in Eurobonds occur?

London

On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following Monday morning. Which one of the following is most likely the interest rate that will be charged on this loan?

London Interbank Offer Rate