CH 21 MC

Assume $1 = C$1.1098 and $1 = £.6018. Also assume you can buy £55 for C$100. How much profit can you earn using triangle arbitrage if you start out with $100?

C. $1.43

The interest rate parity approximation formula is:

C. Ft = So x [1 + (Rfc - Rus)] ^t.

Assume the current spot rate is C$1.1103 and the one-year forward rate is C$1.1025. The nominal risk-free rate in Canada is 3.5 percent while it is 4 percent in the U.S. Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

A. $.0023

You are planning a trip to Australia. Your hotel will cost you A$110 per night for seven nights. You expect to spend another A$3,400 for meals, tours, souvenirs, and so forth. How much will this trip cost you in U.S. dollars if $1 = A$1.0787?

A. $3,866

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

A risk-free asset in the U.S. is currently yielding 4 percent while a Canadian risk-free asset is yielding 2 percent. Assume the current spot rate is C$1.2103. What is the approximate three-year forward rate if interest rate parity holds?

A. C$1.1391

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

A. E(St) = So x [1 + (hfc - hus)] ^t

Interest rate parity:

A. Eliminates covered interest arbitrage opportunities.

Which one of the following statements is correct?

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

Currently, $1 will buy C$1.1028 while $1.2334 will buy €1. What is the exchange rate between the Canadian dollar and the euro?

D. C$1.3602 = €1

Suppose the current spot rate for the Norwegian krone is $1 = NKr5.5923. The expected inflation rate in Norway is 2.2 percent and in the U.S. 1.8 percent. A risk-free asset in the U.S. is yielding 3.4 percent. What approximate real rate of return should you expect on a risk-free Norwegian security?

B. 1.6 percent

The expected inflation rate in Finland is 3.3 percent while it is 2.4 percent in the U.S. A risk-free asset in the U.S. is yielding 4.3 percent. What approximate real rate of return should you expect on a risk-free Finnish security?

B. 1.9 percent

Assume $1 is currently equal to A$1.1024 in the spot market. Also assume the expected inflation rate in Australia is 2.8 percent as compared to 3.4 percent in the U.S. What is the expected exchange rate one year from now if relative purchasing power parity exists?

B. A$1.0958

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.

B. Appreciate; depreciate

Assume that $1 is equal to ¥102.32 and also equal to C$1.0958. Based on this, you could say that C$1 is equal to: C$1(¥102.32 / C$1.0958) = ¥93.37. The exchange rate of C$1 = ¥93.37 is referred to as the:

B. Cross-rate.

Relative purchasing power parity:

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

The home currency approach:

B. 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:

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

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?

B. Uncovered interest parity

How many euros can you get for $2,500 if one euro is worth $1.2803?

B. €1,952.67

Which of the following variables used in the covered interest arbitrage formula is correctly defined?

C. F1: 360-day forward rate

Where does most of the trading in Eurobonds occur?

C. London

Assume $1 can buy you either ¥102.38 or £.6027. If a TV in London costs £990, what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

C. ¥168,170

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

D. Eurocurrency.

Which one of the following conditions is not required for absolute purchasing power parity to exist?

E. Spot and forward rates must be equal.

The home currency approach:

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

The unbiased forward rate is a:

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

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

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.

You are considering a project in South Africa which has an initial cost of R385,000. The project is expected to return a one-time payment of R428,900 four years from now. The risk-free rate of return is 3.5 percent in the U.S. and 2.4 percent in South Africa. The inflation rate is 4 percent in the U.S. and 3 percent in South Africa. Currently, you can buy R10.48 for $1. How much will the payment of R428,900 be worth in U.S. dollars four years from now?

A. $42,777

You are analyzing a project with an initial cost of £130,000. The project is expected to return £20,000 the first year, £50,000 the second year, and £90,000 the third and final year. There is no salvage value. The current spot rate is £.6211. The nominal risk-free return is 5.5 percent in the U.K. and 6 percent in the U.S. The return relevant to the project is 14 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

A. -$19,062

Assume the spot rate on the pound is £ .5920 and the 6-month forward rate is .5929. Also assume interest rate parity holds and the current six-month risk-free rate in the United States is 3.1 percent. What must the six-month risk-free rate be in Great Britain?

A. 3.25 percent

Assume the spot rate on the Canadian dollar is C$1.0926. The risk-free nominal rate in the U.S. is 3.8 percent while it is 4.1 percent in Canada. Which one of the following four-year forward rates best establishes the approximate interest rate parity condition?

A. C$1.1058

Assume the current spot rate is C$1.0875 and the one-year forward rate is C$1.0724. The nominal risk-free rate in Canada is 4 percent while it is 3 percent in the U.S. Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

B. $.0246

You just returned from some extensive traveling throughout the Americas. You started your trip with $20,000 in your pocket. You spent 3.1 million pesos while in Chile and 548,200 pesos in Colombia. Then on the way home, you spent 47,500 pesos in Mexico. Assume the exchanges rates you encountered were $1 = Ps562 in Chile; $1 = Ps1,928 in Colombia; and $.0767 = Ps1 in Mexico. How many dollars did you have left by the time you returned to the U.S.?

B. $10,556

You are analyzing a project with an initial cost of £50,000. The project is expected to return £12,000 the first year, £36,000 the second year, and £40,000 the third and final year. There is no salvage value. Assume the current spot rate is £.6346. The nominal return relevant to the project is 12 percent in the U.S. The nominal risk-free rate in the U.S. is 3.4 percent while it is 4.1 percent in the U.K. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

B. $26,509

Uncovered interest parity is defined as:

B. E(St) = So x [1 + (Rfc - Rus)] ^t.

Assume the spot rate for the Japanese yen currently is ¥102.32 per $1 and the one-year forward rate is ¥102.69 per $1. A risk-free asset in Japan is currently earning 2.5 percent. If interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S. security?

C. 2.14 percent

Assume the spot exchange rate for the Hungarian forint is HUF221. Also assume the inflation rate in the United States is 1.6 percent per year while it is 3.5 percent in Hungary. What is the expected exchange rate 3 years from now?

C. 233.84

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

E. Real

Suppose the spot and six-month forward rates on the Norwegian krone are NKr5.94 and NKr6.05 respectively. The annual risk-free rate in the United States is 4.5 percent, and the annual risk-free rate in Norway is 7 percent. What would the six-month forward rate have to be on the Norwegian krone to prevent arbitrage?

A. NKr6.0138

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?

A. Spot exchange rate

Today, you can exchange $1 for £.5926. Last week, £1 was worth $1.6729 How much profit or loss would you now have in pounds if you had converted £100 into dollars last week and back into pounds this week?

A. loss of ₤.86

Assume $1 is currently equal to £.6211. Also assume the expected inflation rate in the U.K. is 2.6 percent while it is 4.3 percent in the U.S. What is the expected exchange rate four years from now if relative purchasing power parity exists?

A. £.5799

You have £100. A friend of yours wants to exchange C$175 for your £100. What will be your profit or loss if you accept your friend's offer, if you can exchange C$1 for $.9134 and exchange £1 for $1.7240?

A. £7.28 loss

You are expecting a payment of NKr450,000 three years from now. The risk-free rate of return is 3 percent in the U.S. and 4 percent in Norway. The inflation rate is 2.5 percent in the U.S. and 3 percent in Norway. Currently, you can buy NKr5.94 for $1. How much will the payment three years from now be worth in U.S. dollars?

B. $73,530

Lakonishok Equipment has an investment opportunity in Europe. The project costs €9.5 million and is expected to produce cash flows of €2.7 million in year 1, €3.1 million in year 2, and €2.8 million in year 3. The current spot exchange rate is $1.23 / €. The current risk-free rate in the United States is 3.2 percent, compared to that in Europe of 3.5 percent. The appropriate discount rate for the project is estimated to be 18 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €6.5 million. What is the NPV of the project?

B. $745,598

You observe that the inflation rate in the United States is .78 percent per year and that T-bills currently yield 2.94 percent annually. Using the approximate international Fisher effect, what do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 3.53 percent per year?

B. 1.37 percent

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?

B. London Interbank Offer Rate.

Assume €1 = $1.2762 and $1 = S$1.2522. A new coat costs S$187 in Singapore. How much will the identical coat cost in euros if absolute purchasing power parity exists?

B. €117.02

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

B. Forward trade.

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

C. An ounce of silver

Assume the spot rate on the Canadian dollar is C$1.0947. The risk-free nominal rate in the U.S. is 3.8 percent while it is 4.1 percent in Canada. What one-year forward rate will create interest rate parity?

C. C$1.0979

You want to invest in a project in Canada. The project has an initial cost of C$828,000 and is expected to produce cash inflows of C$355,000 a year for three years. The project will be worthless after the first three years. The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S. The applicable interest rate for the project in Canada is 12 percent. The current spot rate is C$1 = $.9126. What is the net present value of this project in Canadian dollars?

C. C$24,650

The foreign currency approach to capital budgeting analysis:

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

International bonds issued in multiple countries but denominated in a single currency are called:

C. Eurobonds.

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

C. Eurodollar loans in the London market.

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 four months from now. This agreed-upon exchange rate is called the:

C. Forward rate.

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

C. International Fisher effect.

Triangle arbitrage:

C. Is a profitable situation involving three separate currency exchange transactions.

Suppose the spot exchange rate is C$1.064 and the six-month forward rate is C$1.071. 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.

C. Premium; appreciate

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

C. Puk = So x Pus

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?

C. Raw materials production.

You want to import $180,000 worth of rugs from India. How many rupees will you need to pay for this purchase if one rupee is worth $.01663?

C. Rs10,823,812

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.

Assume ¥102.36 equal $1. Also assume that SKr6.5103 equal $1. How many Japanese yen can you acquire in exchange for 5,000 Swedish kronor?

C. ¥78,614

Assume the direct quote on the euro is 1.23 and the indirect quote on the Swiss franc is .88. What is the cross-rate for euros in terms of Swiss francs?

C. €.9239 / SF1

Suppose the spot exchange rates are ¥102 = $1 and £1 = $1.57. Also suppose the cross-rate is ¥159= £1. What is the arbitrage profit per one U.S. dollar?

D. $.0072

Assume you can exchange $100 today for C$109.58 or for 1,304 Mexican pesos. Assume that last year, $100 was equivalent to C$105.48 or 1,310 Mexican pesos. Which one of the following statements is correct given this information?

D. $100 converted into Canadian dollars last year would now be worth $96.26.

Suppose your company imports computer motherboards from Singapore. The exchange rate is currently S$1.2537 / US$. You have just placed an order for 30,000 motherboards at a cost to you of 170.90 Singapore dollars each. You will pay for the shipment when it arrives in 120 days. You can sell the motherboards for $148 each. What will your profit be if the exchange rate goes up by 8 percent over the next 120 days?

D. $653,430

Suppose the spot and three-month forward rates for the yen are ¥102.32 and ¥102.27, respectively. What is the approximate annual percent difference between the inflation rate in Japan and in the U.S.?

D. -.20 percent

Assume the spot rate for the British pound currently is £.6369 per $1. Also assume the one-year forward rate is £.6421 per $1. A risk-free asset in the U.S. is currently earning 3.2 percent. If interest rate parity holds, what rate can you earn on a one-year risk-free British security?

D. 4.04 percent

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?

D. Exchange rate risk

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. The company would like to exchange these funds for U.S. dollars. In which of the following markets can this exchange be arranged?

D. Foreign exchange market

The forward rate market is dependent upon:

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

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

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

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?

D. Purchasing power parity.

On Friday, one South African rand was worth $.0953; on Monday the value was $.0962. On Friday, one Kuwaiti dinar was worth $3.56; on Monday it was worth $3.54. Given these rates, which one of the following statements must be correct?

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

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

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

Assume $1 is currently equal to £.6189 in the spot market. Assume the expected inflation rate in the U.K. is 2.8 percent while it is 3.1 percent in the U.S. What is the expected exchange rate one year from now if relative purchasing power parity exists?

D. £.6170

You are expecting a payment of C$100,000 two years from now. The risk-free rate of return is 3.8 percent in the U.S. and 4.1 percent in Canada. The inflation rate is 2 percent in the U.S. and 3 percent in Canada. Suppose the current exchange rate is C$1 = $.9132. How much will the payment two years from now be worth in U.S. dollars?

E. $90,775

Suppose the current spot rate for the Norwegian krone is $1 = NKr5.9433. The expected inflation rate in Norway is 3.1 percent and in the U.S. it is 1.7 percent. A risk-free asset in the U.S. is yielding 3.2 percent. What risk-free rate of return should you expect on a Norwegian security?

E. 4.6 percent

The camera you want to buy costs $230 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $.9128? Assume absolute purchasing power parity exists.

E. C$251.97

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:

E. Interest rate parity.

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?

E. Political risk

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

E. Rembrandt: Netherlands

You want to invest in a riskless project in Sweden. The project has an initial cost of SKr3.86 million and is expected to produce cash inflows of SKr1.76 million a year for three years. The project will be worthless after three years. The expected inflation rate in Sweden is 3.2 percent while it is 2.8 percent in the U.S. A risk-free security is paying 4.1 percent in the U.S. The current spot rate is $1 = SKr7.7274. What is the net present value of this project in Swedish krona if the international Fisher effect applies?

E. SKr978,177

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 = £.5928. The traders agree to settle this trade within two business days. What is this exchange called?

E. Spot trade

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

E. Swap

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

E. Bulldog bond

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

E. Foreign bonds