International Finance

Which of the following are true of the Tax Cuts and Jobs Act of 2017?

It instituted a flat 21 percent tax rate. It imposed a one-time tax of 15.5 percent on cash, securities, and receivables.

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

its overall positions in foreign currency

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

1. Dividends 2. Management fees for central services 3. Royalties on the use of trade names and patents

Eurobond

Bond issued in multiple countries but denominated in a single currency

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

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

Can$1.05. Reason: (Can$.99/$1) × ($1/A$.95) = Can$1.04/A$1

Relative PPP

Does not tell us what determines the absolute level of the exchange rate. It tells us what determines the change in the exchange rate over time. The change in the exchange rate is determined by the difference in the inflation rates of the two countries. Tells us that the exchange rate will rise if the U.S. inflation rate is lower than the foreign country's.

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

Exchange rate risk

Which is a strategy 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.

Cross-Rate

The implicit exchange rate between two currencies (usually non-U.S.) quoted in some third currency (usually the U.S. dollar).

Almost all currency trading takes place in terms of the

U.S. Dollar

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 (UIP)

Forward trade

agreement to exchange currency at some time in the future

Spot Trade

an agreement to trade currencies based on the exchange rate today for settlement within two business days

Dollar _______ occurs when the value of a dollar rises and it takes more foreign currency to buy a dollar.

appreciation

The foreign exchange market allows for the trading of

currency

International ________ rates, interest rates, and inflation rates are closely related.

exchange

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

Unexpected changes in economic conditions can cause fluctuations in the value of a foreign operation. The risk of those fluctuations is known as

long-term exposures to exchange rate risk

Individual divisions of a firm attempting to hedge risk could cause the overall firm's exchange rate risk to go up. This serves as evidence that

management of overall rate risk is probably best handled on a centralized basis.

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

political

direct/American quote

price in dollars of a foreign currency. Number of dollars it takes to buy one unit of foreign currency

Political risk

refers to changes in value that arise as a consequence of political actions. Not a problem faced exclusively by international firms.

An international firm that has contractual agreements to buy and sell goods in the near future at set prices are subject to

short-term exchange rate risk exposure.

Triangle arbitrage

the act of exchanging through three currencies to exploit a mispriced trio of currency quotes. It helps keep the currency market in equilibrium. Arbitrage opportunities can exist in either the spot or the forward markets.

Spot exchange Rate

the exchange rate at which a foreign exchange dealer will convert one currency into another that particular day

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

the home currency approach

The foreign exchange market ___.

world's largest financial market. Market where one country's currency is traded for another's. Over-the-counter market so no single location where traders get together.

Different types of participants in the foreign exchange market:

1. Importers who pay for goods using foreign currencies 2. Exporters who receive foreign currency and may want to convert to the domestic currency. 3. portfolio managers who buy or sell foreign stocks and bonds 4. foreign exchange brokers who match buy and sell orders 5. traders who "make a market" in foreign currencies 6. Speculators who try to profit from changes in exchange rates

Which of the following issues are not faced by a purely domestic U.S. firm?

Foreign tax rates Foreign exchange rates

The _________ exchange rate quote for the Swiss franc shows that you could buy .97 Swiss francs for $1, written CHF.97/USD1.

indirect

The day-to-day fluctuations in exchange rates create ___.

short-term exchange rate risk exposure

The difference between the cash flows generated by a foreign project and the amount that is actually repatriated to the parent firm is referred to as ______ cash flows.

unremitted

Forward exchange rate

The exchange rates governing forward exchange transactions. Will not be settled sometime in the next 12 months

True or false: Multinationals face financial factors that purely domestic firms do not.

True. Multinations must consider foreign exchange rates, differing interest rates from country to country, complex accounting methods for foreign operations, foreign tax rates, and foreign government intervention.

indirect/European quote

Amount of foreign currency per U.S. dollar

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

use local financing

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 foreign currency depreciates in value and therefore weakens relative to the dollar)

When it is reported that the dollar is stronger in the foreign exchange market it means that ___.

the dollar is more valuable and can buy more of other currencies

Purchasing Power Parity (PPP)

the idea that the exchange rate adjusts to keep purchasing power constant among currencies Absolute and relative a major factor in the rate of change in exchange rates.

The theory that real interest rates are equal across countries is called _________.

the international Fisher effect

exchange rate

the price of one country's currency expressed in terms of another country's currency.

Swaps

Interest rate (two parties exchange a floating-rate payment for a fixed-rate payment or vice versa) and currency (agreements to deliver one currency in exchange for another).

______ 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.

Interest rate parity (IRP)

London Interbank Offered Rate (LIBOR)

Interest rate that international banks charge one another for overnight Eurodollar loans in the London market.

Funds 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

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

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

foreign bonds

One of the most significant complications faced by multinationals daily is

foreign exchange rates

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

forward

In covered interest arbitrage, investors protect themselves against changes in exchange rates by locking in the _____.

forward exchange rate today

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

American Depositary Receipt (ADR)

A security issued in the United States representing shares of a foreign stock and allowing that stock to be traded in the United States.

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

Short-term exposure Translation exposure Long-term exposure

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

T-bill

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

The two procedures produce the same answer

Absolute PPP

a commodity costs the same regardless of what currency is used to purchase it or where it is selling. To hold true: 1. The transaction costs of trading apples-shipping, insurance, spoilage, and so on - must be zero 2. There must be no barriers to trading apples - no tariffs, taxes, or other political barriers. 3. an apple in NY must be identical to an apple in London. It won't do for you to send red apples to London if the English only eat green apples.

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.

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

long-term exposures to exchange rate risk

Eurocurrency

money deposited in a financial center outside of the country whose currency is involved

Corporations with significant foreign operations are often called ___.

multinationals

True or false: The Tax Cuts and Jobs Act of 2017 eliminated the repatriation issue with overseas earnings.

True. New repatriated earnings are no longer subject to additional U.S. taxes, thereby eliminating the repatriation issue.