frl chapter 21

Interest rate parity:

eliminates covered interest arbitrage opportunities.

A basic interest rate swap generally involves trading a:

fixed rate for a variable rate.

The forward rate market is dependent upon:

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

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

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?

military weapons factory

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

Spot trades must be settled:

within 2 business days

Assume you can buy 52 British pounds with 100 Canadian dollars. How much profit can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars?

$1.33

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.

1,2,3

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 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

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

foreign bonds

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

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

gilt

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

relative purchasing 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.

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

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?

doreign exchange market

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

How many Euros can you get for $2,100 if one euro is worth $1.2762?

1,645

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

A new coat costs 3,900 Russian rubles. How much will the identical coat cost in Euros if absolute purchasing power parity exists and the following exchange rates apply?

112.97

You are planning a trip to Australia. Your hotel will cost you A$145 per night for seven nights. You expect to spend another A$2,800 for meals, tours, souvenirs, and so forth. How much will this trip cost you in U.S. dollars given the following exchange rates?

2,559

You just returned from some extensive traveling throughout the Americas. You started your trip with $20,000 in your pocket. You spent 3.4 million pesos while in Chile and 16,500 bolivares in Venezuela. Then on the way home, you spent 47,500 pesos in Mexico. How many dollars did you have left by the time you returned to the U.S. given the following exchange rates? (Note: Multiple symbols are used to designate various currencies. For example, the U.S. dollar is notated as "$" or as "USD".)

3,535

he camera you want to buy costs $289 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing power

349.79

You want to import $147,000 worth of rugs from India. How many rupees will you need to pay for this purchase if one rupee is worth $0.0202?

7,277

You have 100 British pounds. A friend of yours is willing to exchange 180 Canadian dollars for your 100 British pounds. What will be your profit or loss if you accept your friend's offer, given the following exchange rates?

7.63 loss

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

Eurodollar loans in the London market.

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.

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

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

Rembrandt: Netherlands

Which one of the following statements is correct given the following exchange rates?

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

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

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

exchange rate

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: A. spot rate.

forward rate

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

silver

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

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

ich 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 parity

Long-run exposure to exchange rate risk relates to:

unexpected changes in relative economic conditions.