FIN 362 - CH 21

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. (Enter a numerical value in the blank.)

21

Which of the following agreements is a spot exchange rate for the Norwegian krone? 6.5NKr for $1 settled in 60 days 6.25NKr for $1 settled in 30 days 6NKr for $1 settled in 2 days 6.75NKr for $1 settled in 90 days

6NKr for $1 settled in 2 days

A ___ is a bond issued in multiple countries, but denominated in a single currency, typically the issuer's home currency. (Enter one word in the blank.)

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

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

Eurocurrency

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

Foreign bonds

______ 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

Match the following currencies to their country of origin. India Japan Mexico Canada United Kingdom Switzerland peso rupee pound Yen franc dollar

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

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

London

What are some ways in which a foreign subsidiary can remit cash flows to a parent? Management fees for central services Royalties for the use of trade names and patents Dividends Capital gains on stock holdings

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

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

Matching foreign currency inflows and outflows

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.

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. Transaction fees must occur in both trading directions Tariffs and duties must exist in both countries

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

The different types of exchange rate risk include which of the following? Translation exposure Arbitrage exposure Short-term exposure Long-term exposure

Translation exposure Short-term exposure Long-term exposure

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

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

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

Funds from a foreign subsidiary that cannot currently be remitted are sometimes said to be ___.

blocked

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

can reduce political risk

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

covered interest arbitrage

The foreign exchange market allows for the trading of ______.

currency

Absolute purchasing power parity should hold more closely for items that are ___.

easily transported

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

British and Irish government securities are called ______.

gilts

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

indirect

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 foreign exchange market ___.

is an over-the-counter market

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

Corporations with significant foreign operations are often called ___.

multinationals

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

nominal

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

political

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

price

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

purchasing power parity

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

short-term exchange rate risk

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

spot

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 According to the unbiased forward rate condition, the expected spot rate for the yen in 6 months is the current 6-month forward rate.

Match the international corporate finance terminology below with its correct definition. ADR Cross-rate Eurobond Eurocurrency Money deposited in a financial center outside of the country with the involved currency. The implicit exchange rate between two currencies quoted in a third currency. A security issued in the US that represents shares of a foreign stock. 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 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

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

American Depository Receipt

Which of the following refer to a firm with a large portion of its business outside of its parent country? A franchise An indirect foreign investment An international corporation A multinational

An international corporation A multinational

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

Gilts are securities issued by the ___.

British and Irish governments

Which of the following are correct when describing purchasing power parity? (Select all that apply.) Parity is expressed as both absolute and relative. Purchasing power parity is a major factor in the rate of change in exchange rates. A unit of currency in any country will buy the same quantity of goods. 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.

_________ PPP explains the exchange rate change over time.

Relative Absolute PPP explains the absolute level of exchange rate.

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

T-bill

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

The cross-rate

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 uses the international Fisher effect. The foreign currency approach is computationally easier. The foreign currency approach computes NPV in both foreign and domestic currencies. The foreign currency approach makes use of uncovered interest rate parity.

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

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

The home currency approach