international finance ch. 3

Suppose that in Israel the exchange rate is determined by the market, and the government makes no attempt to determine its level. This is an example of a ________ exchange rate system.

floating

Suppose that Nevada Co. has sold consulting services to Primedia, a company based in Belarus, for 530 rubles. At the time of the transaction, the prevailing exchange rate was $0.46. If Nevada Co's bank does not desire to hold such a large amount of rubles, which of the following exchange rates might they be willing to accept when Nevada Co. seeks to exchange the rubles for dollars?

$0.43 (only exchange rate lower than $0.46)

Suppose that, when you get to France, you win a raffle that pays for all of the expenses of your trip. Thus, you are able to save your 1,250 euros and convert them back to dollars when you return to the United States. At this point, your bank's bid rate is $1.54 per euro. When you convert your 1,250 euros back to dollars, you will be able to purchase $

$1,925 (1,250 euros x $1.54 per euro)

Suppose that this month the exchange rate has decreased to $1.83 and that it is time for Nevada Co. to makes its monthly purchase of materials from Spicurity.

$201,300 dollars (110,000 euros x 1.83 per euro), 110,000 euros

Suppose that Nevada Co., a US-based MNC, makes regular, monthly purchases of materials from a German supplier named Spicurity. These regular payments are typically in the amount of 110,000 euros. Last month the exchange rate was $1.85 per euro. Nevada Co. only has cash reserves in dollars, while Spicurity only has cash reserves in euros. Suppose both companies use the same bank. In order to conduct this transaction last month, Nevada Co. required __________ to pay for the materials. Thus, the bank handling the transaction reduced Nevada's account by this amount, denominated in dollars . The bank then converted this amount to ___________ and credited it to Spicurity's account

$203,500 dollars (110,000 euros x 1.85 per euro), 110,000 euros

If the exchange rate (dollars for pesos) is $0.78 per peso, then the cost of a good or service you purchase while in Mexico for 550 pesos is _____.

$429.00 (550 pesos x $0.78 per peso)

Suppose a Swedish company, Ikreal Co., issues ADRs in United States. The price of a share of Ikreal stock is 239 krona, while the spot rate for krona is $0.24 per krona. The price of the Israel ADR is _____

$57.36 (239 krona x $0.24 per krona)

While you originally had $2,000.00 before your initial exchange for euros, when you converted back to dollars you ended up with only $1,925.00. Because of the bid/ask spread, you have ______ less than when you started. In percentage terms, this is equivalent to ______ less than when you started.

$75 (2,000 - 1,925), 3.75% ([1.60-1.54]/1.60)

Before your vacation to France, you had also been considering a vacation to Iceland. Iceland's currency is the Krona, and at the time, your bank's bid rate was $0.007760 and its ask rate was $0.0081. In this case, the nominal bid/ask spread for the Krona is _______ dollars per krona. This can be misleading, however, since the bid/ask spread in percentage terms is _______ than that of the euro in this example.

0.0003400000 (0.0081 -0.007760); higher (0.0003400000/0.0081 = 4.2000% which is higher than 3.75%)

Assume that you plan to take a vacation in France, which uses the euro as its currency. You have $2,000.00 saved up for the trip. The ask rate at your bank is $1.60 per euro. When you convert your $2,000.00 to euros, you will be able to purchase

1,250 euros ($2,000 / 1.60 per euro)

Continue to assume a direct quotation of $2.00 per euro. Suppose you have also been given a direct quotation of $0.1 per peso. The cross exchange rate, indicating the euro value in terms of pesos, is _____ pesos per euro.

20 pesos ($2.00 per euro/$0.1 per peso)

Which of the following are reasons why an MNC might issue bonds in a particular foreign market? Check all that apply. The MNC intends to finance a project in a specific country and in a specific currency. There is a lower interest rate in that foreign country. There is stronger demand for bonds issued by the MNC in a foreign market as opposed to the domestic market. The currency in that foreign market is expected to depreciate against the MNC's home currency

All of the above

True or False: Short-term loans of six months or less, extended by banks to MNCs in Europe, are called eurocredit loans.

False

True or False: If a currency's LIBOR rate falls, the money market interest rates denominated in that currency also fall.

True

True or False: The high cost of SOX compliance leads some non-US firms to withdraw from US exchanges.

True

Suppose a Swedish company, Ikreal Co., issues ADRs in United States. All else equal, if the spot rate of the krona should decrease, the price of the Ikreal ADR should _______ .

decrease

Suppose you are given a spot rate for the euro of 1 euro=$2.001 euro=$2.00. This quote is an _______ quotation. To convert it to the other type of quotation, you can simply take the ______ of the quote you received. This would yield a rate of _____ euros per dollar.

direct; reciprocal; 0.5 (1 euro/$2.00)

6. Derivatives in the foreign exchange Suppose that an MNC wishes to purchase a foreign exchange derivative contract in order to hedge future payments they expect to make or receive. If the MNC wishes to purchase this derivative in an over-the-counter market, rather than an exchange, it will most likely choose to purchase which of the following types of contract?

forward contracts

An MNC has an incentive to invest short-term funds in a foreign currency if investments denominated in the foreign currency have a _________ interest rate than investments denominated in the home currency of the MNC.

higher

The spread is a function of a variety of factors. You can think of the spread as a function of these factors. For example: Spread=f(Order Costs, Inventory Costs, Competition, Volume, Currency Risk)Spread=f(Order Costs, Inventory Costs, Competition, Volume, Currency Risk) All else equal, if the competition increases then the spread will most likely _______ .

increase

weaker rights of shareholders stronger legal protection for shareholders less corporate corruption more uniform accounting laws

less trading activity more trading activity more trading activity more trading activity

If there is ___________ for a bond, a bondholder may not be able to sell a bond at the desired time or may have to decrease the price of their bonds in order to sell them. The risk of this occurrence is known as ________ risk.

no active market; liqudidity

Suppose that a currency's direct exchange rate is falling over time. This must mean that the indirect exchange rate for this currency is _______ over this same time period.

rising