Chapter 18
American depository receipt (ADR)
A security issued in the US that represents shares of a foreign stock
which is a strategy for hedging long term exchange rate risk? A. matching foreign currency inflows and outflows B. Lending in the foreign country where operations are located C. purchasing call and put options D. Seeking the World Bank's assistance in obtaining special investment terms
A. Matching foreign currency inflows and outflows
Gilts are securities issued by the:
British and Irish govts
Assume $1 buys CAN$1.07. The expected inflation rate is 3 percent in Canada and 2 percent in the US. How many Canadian dollars will $1 buy one year from now if relative purchasing power parity exists?
CAN$ per $1 US = 1.07 x (1 + (.03-.02)) = 1.0807
currently, $1 will buy CAN$.99 while $1 will buy AUS$.95. How many Canadian dollars are needed to buy one Australian dollar?
CAN$1.04 (CAN$.99/$1) x ($1/AUS$.95) = CAN $1.04/AUS$1
is US dollars are deposited in banks outside the US banking system, they are referred to as:
Eurodollars
____ states that any difference in interest rates between two countries for some period is equal to the difference between the forward and spot exchange rates, thus eliminating any arbitrage possibilities
IRP
Relative PPP implies that the change in an exchange rate is driven by the difference in the ______ of the 2 countries involved
Inflation rates
Alpha Co. imports raw materials and uses forward contracts to reduce ____
Short run exposure to exchange rate risk
Cross-rate
The implicit exchange rate between 2 currencies quoted in a third currency
if an international firm borrows money in the foreign country where it has operations, it can reduce___
long run exchange rate exposure
unanticipated changes in relative economic conditions that affect the value of a foreign operation are known as:
long-term exposure to exchange rate risk
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 rrate risk exposure than to hedge short term risks?
organized forward markets do not exist for long term needs of corps
changes in value due to the actions of govts 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 use of local financing from the govt of the foreign country where the operation is located can:
reduce political risk
the day-to-day fluctuations in exchange rates creates:
short term exchange rate risk exposure
The foregin exchange market allows for the trading of
currencies
what does interest rate parity do?
eliminates covered interest arbitrage opportunities
Money deposited in a financial center outside the country whose currency is involved is called:
eurocurrency
the price of one country's currency expressed in terms of another country's currency is called:
exchange rate
what is the acronym for the interest rate most international banks charge one another for overnight Eurodollar loans?
LIBOR
eurobond
a bond issued in multiple countries but denominated in a single currency
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
Currency (dollar) ____ occurs when the value of the dollar rises and it takes more foreign currency to buy a dollar
appreciation
The diff types of exchange rate risks include: (pick all that apply) - translation exposure - short-term exposure - long-term exposure -arbitrage exposure
- translation exposure -short term exposure - long term exposure
you are considering the purchase of an LCD TV that costs $699 in the US. If absolute purchasing power parity exists, the identical TV will cost ____ in Frnace when the exchange rate is $1.37 on the euro
cost of TV in Euros = $699/$1.37 = 510.22 Euros
when a US 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
How can a US corp. reduce political risk in a foreign country? A. require top mgmt. to sit on boards of foreign corps B. use local financing C. Require top mgmt. to run for local elections in the foreign country D. make use of lobbying in the foreign country
B. use local financing
the mgmt. of exchange rate risk should probably be centralized so that the firm has an understanding of: A. the competition's foreign exchange positions B. its overall positions in foreign currency C. all the money that can be made trade in foreign exchange
B. its overall positions in foreign curreny
TRUE/FALSE: If purchasing power parity did not hold, it would be possible to engage in arbitrage simply by transporting products to other countries
TRUE
a cross-rate between 2 foreign currencies is usually quoted in what currency?
The US dollar
protecting oneself from a change in the exchange rate by locking in the forward exchange rate today is called:
covered interest arbitrage
which is true concerning triangle arbitrage? (pick all that apply) - it helps keep the currency market in equilibrium - it involves only currencies other than the US dollar - it is a profitable situation involving three separate currency exchange transactions
-it helps keep the currencty market in equilibrium -it is a profitable situation involving three separate currency exchange transactions
Suppose the Euro currently costs $1.37 and the nominal risk-free interest rate in france is 3% while only 2% in the US. Interest rate parity implies the forward rate for the Euro will be:
$1.38
which refer to a firm with a large portion of its business outside of its parent country? (pick all that apply) -a multinational -a franchise -an international corp. -an indirect foreign investment
-a multinational -an international corp.
Which are financial factors that affect firms doing business globally? (pick all that apply) - HR issues - exchange rate risk -different accounting methods - foreign tax rates - differing interest rates - foreign govt intervention
-exchange rate risk -diff accntg methods - foreign tax rates -differing interest rates -foreign govt intervention
a security issued in the USA representing shares of a foreign stock is called a(n):
American depository receipt (ADR)
a foreign bond refers to a bond: A.. that is only traded in European markets B. that is issued in a single country, denominated in the currency of that country C. that is a british of irish govt security D. that is issued in multiple European countries only, denominated in the euro
B. That is issued in a single country, denominated in the currency of that country
an interest rate swap involves swapping a ____ payment for a _____ payment
Fixed rate; floating rate OR floating rate; fixed rate
conditions that must be present for absolute purchasing power to exist include: (pick all that apply) - transaction fees must occur in both trading directions -the goods must be identical -tariffs and duties must exist in both countries -there must be no trade barriers
- there must be no trade barriers - the good must be identical
which is correct when describing purchasing power parity? (pick all that apply) - parity is expressed as both absolute and relative -a unit of currenct in any country will buy the same quantity of goods - purchasing power parity is a major factor in the rate of change in exchange rates -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 -exchange rates adjust to keep purchasing power level between currencies
Currently, the spot exchange for the swiss franc is SF = $1.10 or SF1 = $1.12 90 days forward. Which is true? (pick all that apply) -the swiss franc is at a forward discount -the swiss franc is at a forward premium -the dollar is selling at a discount to the swiss franc -the dollar is selling at a premium to the swiss franc
-the swiss franc is at a forward premium -the dollar is selling at a discount to the swiss franc
The spot rate for the Japanese yen in 90 per $1. the one year-forward rate is 89 per $1. if risk free assets in japan currently earn 1% and interest rate parity holds, what is the rate on a one-year risk-free asset in the US?
2.1%