FRL3000 Ch 21 connect study set
Money deposited in a financial center outside the country whose currency is involved is called __________.
Eurocurrency
Which of the following issues are not faced by a purely domestic Canadian firm?
Foreign exchange rates Sarbanes-Oxley requirements Foreign tax rates
The different types of exchange rate risk include which of the following?
Long-term exposure Translation exposure Short-term exposure
Which of the following are correct when describing purchasing power parity?
Purchasing power parity is a major factor in the rate of change in exchange rates. Parity is expressed as both absolute and relative. Exchange rates adjust to keep purchasing power level between currencies.
If purchasing power parity did not hold, it would be possible to engage in _____________________ simply bu transporting products to other countries.
arbitrage
Exploiting a disequilibrium 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 risk
A project in Mexico is expected to return a payment of Ps40,000 three years from now. The risk-free rate is 2 percent in the U.S. and 4 percent in Mexico. Assume the current spot rate is $1 = Ps10. What will the payment be worth in U.S. dollars when it is received?
$3,769.29
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 rate
The expected inflation rate in the U.K. is 2 percent compared to 4 percent in the U.S. The risk-free rate in the U.S. is 5 percent. According to the international Fisher effect, the U.K. risk-free rate is ____________ percent.
3
Which one of the following agreements is a spot exchange rate for the Norwegian Krone?
6NKr for $1 settled in 2 days
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
Gilts are securities issued by the ______________.
British and Irish governments
Bonds that are issued in a single country and are usually denominated in that country's currency are called:
Foreign bonds
The _________ rate is generally used for the U.S. nominal risk-free rate (Rus).
T-bill
Which of the following are ways for the U.S. corporation to reduce political risk in a foreign country?
Use local financing
Interest Rate Parity
eliminates covered interest arbitrage opportunities
The price of one country's currency expressed in terms of another country's currency is called the ________.
exchange rate
T/F Political risk refers only to problems for U.S. companies caused by foreign governments.
false
One of the most significant complications faced daily by multinationals is _______.
foreign exchange
A ___________ trade is an agreement to exchange currency at some time in the future.
forward
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
When two parties exchange a floating rate payment for a fixed rate payment, it is called a(n):
interest rate swap
The management of exchange rate risk should probably be centralized so that the firm has an understanding of _____________.
its overall positions in foreign currency
Assume the spot exchange rate is Fr 1=$1.0810 and the 90 day forward rate is Fr 1=1.0815. Given this the Swiss Franc is selling a __________ relative to the U.S. dollar.
premium
The international fisher effect asserts that _______ interest rates are equal across countries.
real
The day to day fluctuations in exchange rates create ________.
short-term exchange rate risk exposure
The unbiased forward rate condition may not hold if _____________.
traders in the forward market are willing to pay a premium to avoid uncertainty
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
T/F: The tax cuts and job acts of 2017 eliminates the tax issue about repatriating overseas profits
true
The spot rate for the Japanese yen is currently ¥90 per $1. The 1-year forward rate is ¥89 per $1. If risk-free assets in Japan earn 1 percent and interest rate parity holds, what is the approximate rate on a 1-year risk-free asset in the U.S.?
2.11%
Relative purchasing power parity tells us that the exchange rate will rise if the U.S. inflation rate is lower than that of a foreign country. That foreign currency will then ____________ in value relative to the US dollar.
depreciate
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
Match the following currencies to their country origin
India=rupee Japan=Yen Mexico=peso Canada=dollar United Kingdom=pound Switzerland=franc
The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates between the countries is called __________.
uncovered interest parity
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.
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
Assume $1 buys Can$1.07. The expected inflation rate is 3 percent in Canada and 2 percent in the U.S. How many Canadian dollars will $1 buy one year from now if relative purchasing power parity exists?
Can$1.0807
What are some ways in which a foreign subsidiary can remit cash flows to a parent?
Dividends Royalties for the use of trade names and patents Management fees for central services
A bond issued in multiple countries, but denominated in a single currency is called:
Eurobonds
Which of the following are true concerning triangle arbitrage?
It is a profitable situation involving three separate currency exchange transactions. Arbitrage opportunities can exist in either the spot of the forward markets. It helps keep the currency market in equilibrium.
What is the acronym for the interest rate most international banks charge one another for overnight Eurodollar loans?
LIBOR
A foreign subsidiary can remit funds to the parent company in which of the following ways?
Management fees Royalties Dividends
What are some strategies for hedging long-term exchange rate risk?
Matching foreign currency inflows and outflows
The foreign currency approach to capital budgeting analysis
computes the NPV of a project in both the foreign and domestic currency produces the same results as the home currency approachis computationally easier than the home currency approach
Which of the following are conditions necessary for absolute purchasing power parity?
No trade barriers No transaction costs Identical costs
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.
What is the implicit 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 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
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
Dollar _____ occurs when the value of a dollar rises and it takes more foreign currency to buy a dollar.
appreciation
Absolute purchasing power parity tells us that___________.
$1 will buy you the same number of tangerines
What will be the value one year from now from investing $1 in a covered interest arbitrage position if: Rpc = 4 percent; S0 = A$2; F1 = A$1.95?
$1.0667
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
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
