FRL Ch. 21 Vocab

1) 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? A) American Depository Receipt B) Yankee bond C) Yankee stock D) LxIBOR E) Gilt

A) American Depository Receipt

50) Which one of the following statements is correct? A) The use of forward rates increases the short-run exposure to exchange rate risk. B) Accounting translation gains and losses are recorded in the equity section of the balance sheet. C) There is no known method of reducing long-run exchange rate risk. D) A firm can record a profit on its income statement from a foreign subsidiary even when that subsidiary has no profit thanks to exchange rate risk. E) Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

B) Accounting translation gains and losses are recorded in the equity section of the balance sheet.

2) Assume that $1 is equal to £.77 and equal to C$1.27. Based on this, you could say that C$1 is equal to: C$1(£.77/C$1.27) = £.61. The exchange rate of C$1 = £.61 is referred to as the: A) open exchange rate. B) cross-rate. C) backward rate. D) forward rate. E) interest rate.

B) cross-rate.

3) International bonds issued in multiple countries but denominated in a single currency are called: A) Treasury bonds. B) Bulldog bonds. C) Eurobonds. D) Yankee bonds. E) Samurai bonds.

C) Eurobonds.

11) The LIBOR is primarily used as the basis for the rate charged on: A) short-term debt in the Lisbon market. B) mortgage loans in the Lisbon market. C) Eurodollar loans in the London market. D) U.S. federal funds. E) interbank loans in the U.S.

C) Eurodollar loans in the London market.

37) Which of the following variables used in the covered interest arbitrage formula is correctly defined? A) S0: Current spot rate expressed in dollars per unit of foreign currency. B) Ft: Future inflation rate at Time t. C) F1: 360-day forward rate. D) RUS: U.S. real risk-free interest rate. E) RFC: Foreign country real interest rate.

C) F1: 360-day forward rate.

9) Where does most of the trading in Eurobonds occur? A) Munich B) Frankfurt C) London D) New York E) Paris

C) London

27) Which one of the following formulas expresses the absolute purchasing power parity relationship between the U.S. dollar and the British pound? A) S0 = PUK(PUS) B) PUS = Ft(PUK) C) PUK = S0(PUS) D) Ft = PUS(PUK) E) S0(Ft) = PUK(PUS)

C) PUK = S0(PUS)

53) Which one of the following types of operations would be subject to the most political risk if the operation were conducted outside of a firm's home country? A) Accounting and payroll functions B) Partial assembly of components unique to the finished product C) Raw materials production D) Packing materials manufacturing E) Production of minor parts such as nuts and bolts

C) Raw materials production

4) U.S. dollars deposited in a bank in Switzerland are called: A) foreign depository receipts. B) international exchange certificates. C) francs. D) Eurocurrency. E) Eurodollars.

D) Eurocurrency.

17) 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 which of the following markets can this exchange be arranged? A) ADR B) National registry C) National discount exchange D) Forex E) Eurobond market

D) Forex

32) Assume quotes are based on units of foreign currency per dollar and the U.S. dollar appreciated against the euro today. This means that: A) it now takes more euros to buy one dollar. B) the exchange rate between the dollar and euro weakened. C) the U.S. inflation rate exceeds the inflation rate in Euroland. D) it now takes more dollars to buy one euro. E) the U.S. interest rate is less than the interest rate in Euroland.

A) it now takes more euros to buy one dollar.

49) The type of exchange rate risk known as translation exposure is best described as the: A) risk that a positive net present value (NPV) project could turn into a negative NPV project because of changes in the exchange rate between two countries. B) problem encountered by an accountant of an international firm who is trying to record balance sheet account values. C) fluctuation in prices faced by importers of foreign goods. D) variance in relative pay rates based on the currency used to pay an employee. E) variance between the revenue of an exporter who uses forward rates and an equivalent exporter who does not use forward rates.

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

30) Relative purchasing power parity: A) states that identical items should cost the same regardless of the currency used to make the purchase. B) relates differences in inflation rates to differences in exchange rates. C) compares the real rate of return to the nominal rate of return. D) explains the differences in real rates across national boundaries. E) relates changes in exchange rates to changes in interest rates.

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

29) Absolute purchasing power parity is most apt to exist for which one of the following items? A) A pound of beef B) A computer C) An ounce of silver D) An automobile E) A cell phone

C) An ounce of silver

46) The foreign currency approach to capital budgeting analysis: A) produces different results than the home currency approach. B) is computationally harder to use than the home currency approach. C) computes the NPV of a project in both the foreign and the domestic currency. D) requires an exchange rate for each time period for which there is a cash flow. E) converts all foreign cash flows into dollar cash flows.

C) computes the NPV of a project in both the foreign and the domestic currency.

23) Mr. Black and Mr. White have agreed to exchange C$12,500 for $10,000 with the exchange occurring four months from now. This agreed-upon exchange rate is called the: A) spot rate. B) swap rate. C) forward rate. D) parity rate. E) triangle rate.

C) forward rate.

22) Assume that on Friday, one South African rand was worth $.0953 and on the following Monday the value was $.0962. Also assume one Kuwaiti dinar was worth $3.56 on Friday and $3.54 on the following Monday. Given these rates, which one of the following statements must be correct? A) On Thursday, one U.S. dollar was equal to .0944 South African rand. B) On Friday, one U.S. dollar was worth 10.388 rands. C) Both the South African rand and the Kuwaiti dinar appreciated against the U.S. dollar from Friday to Monday. D) The South African rand appreciated from Friday to Monday against the U.S. dollar. E) The U.S. dollar depreciated from Friday to Monday against the Kuwaiti dinar.

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

16) Assume the euro is selling in the spot market for $1.15. Simultaneously, in the three-month forward market the euro is selling for $1.17. Which one of the following statements correctly describes this situation? A) The spot market is out of equilibrium. B) The forward market is out of equilibrium. C) The dollar is selling at a premium relative to the euro. D) The euro is selling at a premium relative to the dollar. E) The euro is expected to depreciate in value.

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

18) The price of one euro expressed in U.S. dollars is referred to as a(n): A) ADR rate. B) cross inflation rate. C) depository rate. D) exchange rate. E) foreign interest rate.

D) exchange rate.

12) A basic interest rate swap generally involves trading a: A) short-term rate for a long-term rate. B) foreign rate for a domestic rate. C) government rate for a corporate rate. D) fixed rate for a variable rate. E) taxable rate for a tax-exempt rate.

D) fixed rate for a variable rate.

41) The forward rate market is dependent upon: A) current forward rates exceeding current spot rates. B) current spot rates exceeding current forward rates over time. C) current spot rates equaling current forward rates, on average, over time. D) forward rates equaling the actual future spot rates on average over time. E) current spot rates equaling the actual future spot rates on average over time.

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

55) Assume a firm has $5 million of overseas profits that are invested in U.S. financial assets. These profits have not been repatriated. Given this, the firm is prohibited from using any of the $5 million to: A) build a new factory in Europe. B) pay bonuses to its foreign managers. C) acquire new equipment for installation in its Asian plant. D) pay dividends. E) invest in euros.

D) pay dividends.

10) Which one of the following names matches the country where the bond is issued? A) Empire: United Kingdom B) Western: United States C) Samurai: China D) Bulldog: France E) Dim sum: Hong Kong

E) Dim sum: Hong Kong

40) The unbiased forward rate condition supports the idea that the current forward rate is a: A) condition where a future spot rate is equal to the current spot rate. B) guarantee of a future spot rate at one point in time. C) condition where the spot rate is expected to remain constant over a period of time. D) relationship between the future spot rates of two currencies at an equivalent point in time. E) predictor of the future spot rate at the equivalent point in time.

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

43) The international Fisher effect states that ________ rates are equal across countries. A) spot B) one-year future C) nominal interest D) inflation E) real interest

E) real interest

56) One goal of the Tax Cuts and Jobs Act of 2017 is to encourage corporations to: A) claim all overseas profits as U.S. profits to avoid paying taxes to foreign governments. B) bring their overseas cash back to the U.S. at a one-time tax rate of 8 percent. C) distribute all of their overseas profits as dividends to avoid all U.S. taxes. D) bring all of their foreign assets back to the U.S. by paying a one-time tax rate of 15.5 percent on those assets. E) repatriate their untaxed overseas profits.

E) repatriate their untaxed overseas profits.

5) International bonds and domestic bonds issued by the same domestic issuer are usually: A) identical in all respects. B) issued jointly in unlimited quantities. C) treated as identical bonds for taxation purposes. D) issued in different currencies. E) subject to different regulations.

E) subject to different regulations.

31) Which one of the following formulas correctly describes the relative purchasing power parity relationship? A) E(St) = S0[1 + (hFC − hUS)]t B) E(St) = S0[1 - (hFC − hUS)]t C) E(St) = S0[1 + (hUS + hFC)]t D) E(St) = S0[1 − (hUS − hFC)]t E) E(St) = S0[1 + (hUS - hFC)]t

A) E(St) = S0[1 + (hFC − hUS)]t

47) Which one of the following is a suggested 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 B) Investing U.S. dollars when an order is placed and using the investment proceeds to pay the invoice C) Exchanging funds on the spot market at the time an order is placed with a foreign supplier D) Exchanging funds on the spot market at the time an order is received E) Exchanging funds on the spot market at the time an invoice is payable

A) Entering a forward exchange agreement timed to match the invoice date

20) George and Pat just made an agreement to exchange U.S. dollars for Australian dollars based on today's exchange rate. Settlement will occur tomorrow. Which one of the following is the exchange rate that applies to this agreement? A) Spot exchange rate B) Forward exchange rate C) Triangle rate D) Cross rate E) Current rate

A) Spot exchange rate

34) Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate? A) Unbiased forward rates B) Uncovered interest rate parity C) International Fisher effect D) Purchasing power parity E) Interest rate parity

A) Unbiased forward rates

38) Interest rate parity: A) eliminates covered interest arbitrage opportunities. B) exists when spot rates are equal for multiple countries. C) means the nominal risk-free rate must be equal across countries. D) exists when the spot rate is equal to the forward rate. E) eliminates exchange rate fluctuations.

A) eliminates covered interest arbitrage opportunities.

42) Uncovered interest parity is defined as: A) E(St) = S0[1 + (hFC − hUS)]t. B) E(St) = S0[1 + (RFC − RUS)]t. C) E(St) = S0[1 − (RFC − RUS)]t. D) E(St) = S0[1 + (RUS − RFC)]t. E) E(St) = S0[1 + (hFC + hUS)]t.

B) E(St) = S0[1 + (RFC − RUS)]t.

7) 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? A) Eurodollar yield to maturity B) London Interbank Offer Rate C) Paris Opening Interest Rate D) United States Treasury bill rate E) International prime rate

B) London Interbank Offer Rate

35) 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? A) Unbiased forward rates condition B) Uncovered interest parity C) International Fisher effect D) Purchasing power parity E) Interest rate parity

B) Uncovered interest parity

25) Assume the spot rate on the Japanese yen is ¥110.05 while it is C$1.1379 on the Canadian dollar. The respective three-month forward rates are ¥111.75 and C$1.1339. The value of the U.S. dollar will ________ with respect to the yen and will ________ with respect to the Canadian dollar. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate E) depreciate; remain constant

B) appreciate; depreciate

44) The home currency approach: A) discounts all of a project's foreign cash flows using the current spot rate. B) employs the uncovered interest parity relationship to project future exchange rates. C) computes the net present value (NPV) of a project in the foreign currency and then converts that NPV into U.S. dollars. D) utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency. E) utilizes the international Fisher effect to compute the required future exchange rates.

B) employs the uncovered interest parity relationship to project future exchange rates.

21) A trader has just agreed to exchange British pounds for French francs three months from today. This exchange is an example of a: A) spot trade. B) forward trade. C) short sale. D) floating swap. E) triangle arbitrage.

B) forward trade.

45) The home currency approach: A) generally produces more reliable results than those found using the foreign currency approach. B) requires an applicable exchange rate for every time period for which there is a cash flow. C) uses the current risk-free nominal rate to discount all cash flows related to a project. D) stresses the use of the real rate of return to compute the net present value (NPV) of a project. E) converts a foreign denominated NPV into a dollar denominated NPV.

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

39) The interest rate parity approximation formula is: A) Ft = S0[1 + (RFC + RUS)]t. B) Ft = S0[1 − (RFC − RUS)]t. C) Ft = S0[1 + (RFC - RUS)]t. D) Ft = S0[1 + RFC(RUS)]t. E) Ft = S0(1 − RFC/RUS)t.

C) Ft = S0[1 + (RFC - RUS)]t.

36) Which one of the following supports the idea that real interest rates are equal across countries? A) Unbiased forward rates condition B) Uncovered interest rate parity C) International Fisher effect D) Purchasing power parity E) Interest rate parity

C) International Fisher effect

6) You would like to purchase a foreign bond that is issued by the Netherlands government. Which one of the following should you purchase? A) Samurai bond B) Kronor bond C) Rembrandt bond D) Swap E) Bulldog bond

C) Rembrandt bond

14) Triangle arbitrage: A) is illegal in the U.S. B) prevents the currency markets from obtaining equilibrium. C) is a profitable opportunity involving three separate currency exchange transactions. D) opportunities can exist only in the forward markets. E) is based solely on differences in exchange rates between spot and futures markets.

C) is a profitable opportunity involving three separate currency exchange transactions.

24) Suppose the spot exchange rate is C$1.273 and the six-month forward rate is C$1.275. The U.S. dollar is selling at a ________ relative to the Canadian dollar and the U.S. dollar is expected to ________ relative to the Canadian dollar. A) discount; appreciate B) discount; depreciate C) premium; appreciate D) premium; depreciate E) premium; remain constant

C) premium; appreciate

54) A U.S. firm has significant profits that were earned overseas. When U.S. taxes are paid on these profits, the profits are considered to be: A) abrogated. B) blocked. C) repatriated. D) confiscated. E) taken over.

C) repatriated.

48) Long-run exposure to exchange rate risk relates to: A) daily variations in exchange rates. B) variances between spot and future rates. C) unexpected changes in relative economic conditions. D) differences between future spot rates and related forward rates. E) accounting gains and losses created by fluctuating exchange rates.

C) unexpected changes in relative economic conditions.

15) Spot trades must be settled: A) at the time of the trade. B) on the day following the trade date. C) within two business days. D) within three business days. E) within one week of the trade date.

C) within two business days.

13) Which one of the following statements is correct concerning the foreign exchange market? A) The trading floor of the foreign exchange market is located in London. B) The foreign exchange market is the world's second largest financial market. C) The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the British pound, the French franc, and the euro. D) A cross-rate is the exchange rate of a non-U.S. currency expressed in another non-U.S. currency. E) The price in U.S. dollars of a foreign currency is referred to as an indirect quote.

D) A cross-rate is the exchange rate of a non-U.S. currency expressed in another non-U.S. currency.

51) 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? A) International risk B) Diversifiable risk C) Purchasing power risk D) Exchange rate risk E) Political risk

D) Exchange rate risk

26) 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? A) Unbiased forward rates condition B) Uncovered interest rate parity C) International fisher effect D) Purchasing power parity E) Interest rate parity

D) Purchasing power parity

52) 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? A) International risk B) Diversifiable risk C) Purchasing power risk D) Exchange rate risk E) Political risk

E) Political risk

28) Which one of the following conditions is not required for absolute purchasing power parity to exist? A) No trade barriers can exist. B) Goods must be identical. C) Transaction costs must be zero. D) There can be no spoilage. E) Spot and forward rates must be equal.

E) Spot and forward rates must be equal.

19) 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 = £.78. The traders agree to settle this trade within two business days. What is this exchange called? A) Swap B) Option trade C) Futures trade D) Forward trade E) Spot trade

E) Spot trade

8) Party A has agreed to exchange $1 million U.S. for $1.02 million Canadian. What is this agreement called? A) Gilt B) LIBOR C) SWIFT D) Yankee agreements E) Swap

E) Swap

33) 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: A) the unbiased forward rates condition. B) uncovered interest rate parity. C) the international Fisher effect. D) purchasing power parity. E) interest rate parity.

E) interest rate parity.