Unit 15

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

-A multinational -An international corporation

Which of the following are true concerning triangle arbitrage?

-Arbitrage opportunities can exist in either the spot of the forward markets. -It helps keep the currency market in equilibrium.

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

its overall positions in foreign currency

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

long-term exposures to exchange rate risk

A Eurobond refers to a bond:

that is issued in multiple countries, usually denominated in the currency of the issuer's country

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

translation

Users of the foreign exchange market include

-Importers who pay for goods using foreign currencies -Foreign exchange brokers who match buy and sell orders -Speculators who try to profit from change in exchange rates

Currently, the spot exchange rate for the Swiss franc is SF 1 =$1.10 or SF 1 = $1.12 90 days forward. Which of the following is true?

-The dollar is selling at a discount to the Swiss franc -The Swiss franc is at a forward premium

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

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

An interest rate swap involves swapping a ___ payment for a ___ payment.

-fixed rate; floating rate -floating rate; fixed rate

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

American Depository Receipt

Currently, $1 will buy Can$.99 while $1 will buy A$.95. How many Canadian dollars are needed to buy one Australian dollar?

Can$1.04

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

Eurocurrency

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

Eurodollars

Match the following currencies to their country of origin.

India=rupee Japan=Yen Mexico=peso Canada=dollar United Kingdom=pound Switzerland=franc

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

Short-run exposure to exchange rate risk

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

cross-rate

If the Japanese Yen is less expensive in the forward market than it is today, it is said to be selling at a(n)___.

discount

Changes in value due to the actions of governments is referred to as ___ risk.

political

The day-to-day fluctuations in exchange rates create

short-term exchange rate risk exposure

Which of the following are financial factors that affect firms doing business globally?

-Exchange rate risk -Differing interest rates -Foreign tax rates -Foreign government intervention -Different accounting methods

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

spot trade

What is one of the most important aspects of doing business internationally?

Exchange rate risk

Gilts are securities issued by the ___.

British and Irish governments.

What is the acronym for the interest rate most international banks charge one another for overnight Eurodollar loans?

LIBOR

The foreign exchange market allows for the trading of

currencies

The exchange rate in an agreement to exchange currency at some time in the future is called the ___ rate.

forward

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

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

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

can reduce political risk

Match the international corporate finance terminology below with its correct definition.

ADR - A security issued in the US that represents shares of foreign stock. Cross-rate - The implicit exchange rate between two currencies quoted in a third currency. Eurobond - A bond issued in multiple countries but denominated in a single currency. Eurocurrency - Money deposited in a financial center outside of the country with the involved currency.

Please use this information on the following four questions. You are given the following transactions (in billions): •Intel (a US company) receives $4 in royalty payments from a Korean firm. •The US Federal Reserve sells $10 and purchases euros •US bondholders pay $12 in interest to Japanese investors •US imports $10 in consumer electronics •German investors buy $5 in Dell stock •US exports $8 in lumber •Indian investors buy $16 in US T-Bills Assume that these transactions are the only ones that occur during the reporting period. That is, do not worry about the offsetting credit/debit that would usually occur. Using these transactions, answer the following questions. Please enter only the numbers and do not enter a dollar sign. You should signify whether they are surpluses by using a "+' sign and deficits by entering a "-" sign.

1. What is the balance on current account? (-10) 2. What is the balance on capital account? (+21) 3. What is the balance in the official reserves account? (-10) 4. By how much is the statistical discrepancies in surplus or deficit? (-1)