Chapter 21

Eurobond

A bond issued in multiple countries but denominated in a single currency

ADR

A security issued in the US that represents shares of a foreign stock

A security issued in the United States that represents shares of a foreign stock is called a ( n )

American Depository Receipt

Gilts are securities issued by the

British and Irish governments

A _____ is a bond issued in multiple countries , but denominated in a single currency , typically the issuer's home currency

Eurobond

A bond issued in multiple countries , but denominated in a single currency is called

Eurobond

If U.S. dollars are deposited in banks outside the U.S. banking system , they are referred to as

Eurocurrency

Bonds that are issued in a single country and are usually denominated in that country's currency are called .

Foreign bonds

What are some strategies for hedging long - term exchange rate risk ?

Matching foreign currency inflows and outflows

Eurocurrency

Money deposited in a financial center outside of the country with the involved currency

Why is it more challenging to manage long - term exchange rate risk exposure than to hedge short - term risks ?

Organized forward markets do not exist for long - term needs of corporations .

_____ PPP explains the exchange rate change over time .

Relative

What is the implicit exchange rate between two currencies when both are quoted in a third currency ?

The cross - rate

Which method employs uncovered interest parity to project future exchange rates ?

The home currency approach

Cross - rate

The implicit exchange rate between two currencies quoted in a third currency

What is the difference in results between the home currency approach and the foreign currency approach ?

The two procedures produce the same answer

An agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called

a forward trade

Interest rate parity

eliminates covered interest arbitrage opportunities

Unlike Eurobonds , _____ bonds are issued in a single country and are usually denominated in that country's currency .

foreign

A _____ trade is an agreement to exchange currency at some time in the future .

forward

The use of _____ exchange agreements can help reduce the short - term exposure to exchange rate risk .

forward

British and Irish government securities are called

gilts

Relative purchasing power parity says that the expected percentage change in an exchange rate is equal to the difference in the _____ rates between the two countries .

inflation

The London Interbank Offer Rate is the cornerstone in pricing money markets and short - term debt because

interest rates are usually quoted as some spread over this rate

The management of exchange rate risk should probably be centralized so that the firm has an understanding of

its overall positions in foreign currency

If an international firm borrows money in the foreign country where it has operations it can reduce

long - run exchange rate exposure

The foreign exchange market is where

one country's currency is traded for another country's currency

Changes in the value of international investments due to the actions of governments is referred to as _____ risk .

political

The concept that exchange rates adjust to keep purchasing power constant among currencies is referred to as

purchasing power parity

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

real

The day - to - day fluctuations in exchange rates create _______ exposure .

short - term exchange rate risk

The unbiased forward rate condition may not hold if

traders in the forward market are willing to pay a premium to avoid uncertainty

Currently $ 1 buys ¥ 89 on the spot market . The 6 - month forward rate is ¥ 90 . According to the unbiased forward rate condition , the expected spot rate for the yen in 6 months is

¥ 90

What are some ways in which a foreign subsidiary can remit cash flows to a parent ?

•Management fees for central services •Dividends •Royalties for the use of trade names and patents

_____ refers to any difference in interest rates between two countries for some period offset by just the change in the relative value of the currencies , thus eliminating any arbitrage possibilities .

IRP

The natural consequences of international operations in a world where relative currency values move up and down is called

exchange rate risk

The amount of foreign currency required to purchase one U.S. dollar is called the _____ exchange rate .

indirect

Corporations with significant foreign operations are often called .

multinationals

The _____ of one currency based on another country's currency is known as the exchange rate .

price

An agreement to trade currencies within two business days at today's exchange rate is called a _____ trade .

spot

When a U.S. company calculates its accounting net income , it must report all income , including income from foreign operations , in dollars . This leads to _____ exposure to exchange rate risk .

translation

The number of U.S. dollars required to buy one unit of foreign currency is referred to as

a direct quote

FASB 52 requires that assets and liabilities be translated at the current exchange rate and that the gains and losses be recorded

against shareholders ' equity

True or false : The Tax Cuts and Jobs Act of 2017 eliminates the tax issue about repatriating overseas profits .

True

The implicit exchange rate between two currencies when both are quoted in a third currency is called the

cross - rate

Conditions that must be present for absolute purchasing power to exist include which of the following ?

•There must be no trade barriers •The goods must be identical

Money deposited in a financial center outside the country whose currency is involved is called

Eurocurrency

True or false : For multinational firms , it is important to have decentralized departments for managing exchange rate risks so that there is a different team for each type of currency exposure .

False

True or false : Political risk refers only to problems for U.S. companies caused by foreign governments .

False

The use of local financing from the government of the foreign country where the operation is located

can reduce political risk .

Which of the following are ways for a U.S. corporation to reduce political risk in a foreign country ?

Use local financing

Which of the following are correct when describing purchasing power parity ? ( Select all that apply . )

•Exchange rates adjust to keep purchasing power level between currencies . •Parity is expressed as both absolute and relative . •Purchasing power parity is a major factor in the rate of change in exchange rates .

A foreign subsidiary can remit funds to the parent company in which of the following ways ?

•Royalties •Dividends •Management fees

Exploiting a disequlibrium between spot rates , forward rates , and differences in interest rates is called

covered interest arbitrage

Unanticipated changes in relative economic conditions that affect the value of a foreign operation are known as

long - term exposures to exchange rate riski

In formulas involving the relationship between spot exchange rates , forward exchange rates , and interest rates , the T - bill rate can be used for the U.S. _____ risk - free rate .

nominal

Which of the following transactions is equivalent to entering a forward contract for an importing firm ?

Borrowing domestically and investing in the foreign currency of interest for the length of the forward contract

According to the international Fisher effect , if real returns are higher in Brazil than in the United States , money would flow out of the U.S. financial markets into Brazilian markets and the result would be that asset prices in

Brazil would rise and their returns would fall

The _____ Interbank Offered Rate is the rate that most international banks charge one another for loans of Eurodollars overnight in the _____ market .

London ; London

The Tax Cuts and Jobs Act of 2017 introduced a new flat tax rate of ___ percent which reduced the incentive for companies to leave cash overseas

21

Which of the following agreements is a spot exchange rate for the Norwegian krone ?

6NKr for $ 1 settled in 2 days

Alpha Co. imports raw materials and uses forward contracts to reduce which of the following risks ?

Short - run exposure to exchange rate risk

The _____ rate is generally used for the U.S. nominal risk - free rate ( Rus ) .

T - bill

In covered interest _____ you are covered in the event of a change in the exchange rate because you lock in the forward exchange rate today .

arbitrage

The price of one country's currency expressed in terms of another country's currency is called the

exchange rate

Which of the following refer to a firm with a large portion of its business outside of its parent country ?

•An international corporation •A multinational

Match the country with the currency

•India —-> rupee •Japan —-> Yen •Mexico —-> peso •Canada —-> dollar •United Kingdom —-> pound •Switzerland —-> franc

Which of the following are conditions necessary for absolute purchasing power parity ?

•No trade barriers •No transaction costs •Identical goods

When compared to the home currency approach , which of the following are true for the foreign currency approach to capital budgeting ?

•The foreign currency approach computes NPV in both foreign and domestic currencies •The foreign currency approach is computationally easier

The different types of exchange rate risk include which of the following ?

•Translation exposure •Short - term exposure •Long - term exposure

The foreign currency approach to capital budgeting analysis

•computes the NPV of a project in both the foreign and domestic currency •is computationally easier than the home currency approach •produces the same results as the home currency approach