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Exam 21: International Corporate Finance

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Question 51

Multiple Choice

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Which one of the following is a suggested method of reducing a U.S.importer's short-run exposure to exchange rate risk?

A) entering a forward exchange agreement timed to match the invoice date
B) investing U.S.dollars when an order is placed and using the investment proceeds to pay the invoice
C) exchanging funds on the spot market at the time an order is placed with a foreign supplier
D) exchanging funds on the spot market at the time an order is received
E) exchanging funds on the spot market at the time an invoice is payable

F) A) and D)
G) A) and E)

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Question 52

Multiple Choice

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Assume the current spot rate is C$1.1875 and the one-year forward rate is C$1.1724.The nominal risk-free rate in Canada is 4 percent while it is 3 percent in the U.S.Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

A) $0.018
B) $0.023
C) $0.029
D) $0.031
E) $0.035

F) A) and D)
G) A) and C)

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Question 53

Multiple Choice

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You want to invest in a project in Canada.The project has an initial cost of C$2.2 million and is expected to produce cash inflows of C$900,000 a year for 3 years.The project will be worthless after the first 3 years.The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S.The applicable interest rate for the project in Canada is 13 percent.The current spot rate is C$1 = $0.8158.What is the net present value of this project in Canadian dollars?

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1925.The nominal risk-free rate in Canada is 3 percent while it is 4 percent in the U.S.Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

Assume the spot rate for the British pound currently is £0.6211 per $1.Also assume the one-year forward rate is £0.6347 per $1.A risk-free asset in the U.S.is currently earning 3.4 percent.If interest rate parity holds,what rate can you earn on a one-year risk-free British security?

What conditions are necessary for absolute purchasing power parity (PPP)to exist? Is it realistic to believe PPP can exist within a country let alone across national borders?

Based on the information below,what is the cross-rate for Australian dollars in terms of Swiss francs? $\begin{array} { l c } \text { Currency } & \text { U.S. \$Equivalent } \\\hline \text { Australia dollar } & 0.7125 \\\text { Switzerland franc } & 0.8008\end{array}$

Which one of the following names matches the country where the bond is issued?

Using currencies A,B,and C construct an example in which triangle arbitrage exists and then show how to exploit it.

Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate?

Today,you can exchange $1 for £0.6522.Last week,£1 was worth $1.6104.How much profit or loss would you now have if you had converted £100 into dollars last week?

Which of the following statements are correct? I.The usage of forward rates increases the short-run exposure to exchange rate risk. II.Accounting translation gains and losses are recorded in the equity section of the balance sheet. III.The long-run exchange rate risk faced by an international firm can be reduced if a firm borrows money in the foreign country where the firm has operations. IV.Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

The international Fisher effect states that _____ rates are equal across countries.

Assume the spot rate on the Canadian dollar is C$1.1847.The risk-free nominal rate in the U.S.is 5 percent while it is only 4 percent in Canada.What one-year forward rate will create interest rate parity?

Absolute purchasing power parity is most apt to exist for which one of the following items?

Suppose the exchange rates are as follows: $\begin{array} { c c } \frac { \text { Currency } } { \text { United Kingdom pound } } & \frac { \text { Currency per U.S. \$ } } { 0.5403 } \\6 \text {-months forward } & 0.5363\end{array}$ Assume interest rate parity holds and the current six-month risk-free rate in the United States is 3.1 percent.What must the six-month risk-free rate be in Great Britain?

Suppose the spot and six-month forward rates on the Norwegian krone are Kr6.36 and Kr6.56,respectively.The annual risk-free rate in the United States is 4.5 percent,and the annual risk-free rate in Norway is 7 percent.What would the six-month forward rate have to be on the Norwegian krone to prevent arbitrage?

Currently,$1 will buy C$1.2103 while $1.2762 will buy €1.What is the exchange rate between the Canadian dollar and the euro?