Question 1

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?

Accepted Answer

A)  Kr6.4390
B)  Kr6.4872
C)  Kr6.5103
D)  Kr6.5174
E)  Kr6.6067F) A) and C)
G) A) and B)

Question 2

The camera you want to buy costs $230 in the U.S.How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing power parity exists.

Accepted Answer

A)  $238.77
B)  $242.19
C)  $243.52
D)  $248.60
E)  $278.38F) B) and D)
G) C) and D)

Question 3

Suppose the spot and three-month forward rates for the yen are ¥128.79 and ¥135.22, respectively.What is the approximate annual percent difference between the inflation rate in the U.S.and in Japan?

Accepted Answer

A)  3.93 percent
B)  4.21 percent
C)  16.67 percent
D)  21.52 percent
E)  22.28 percentF) B) and E)
G) A) and C)

Question 4

Which one of the following securities is used as a means of investing in a foreign stock that otherwise could not be traded in the United States?

Accepted Answer

A)  American Depository Receipt
B)  Yankee bond
C)  Yankee stock
D)  LIBOR
E)  giltF) A) and E)
G) B) and D)

Question 5

The home currency approach:

Accepted Answer

A)  discounts all of a project's foreign cash flows using the current spot rate.
B)  employs uncovered interest parity to project future exchange rates.
C)  computes the net present value (NPV)  of a project in the foreign currency and then converts that NPV into U.S.dollars.
D)  utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency.
E)  utilizes the international Fisher effect to compute the relevant exchange rates needed to compute the NPV of foreign cash flows in U.S.dollars.F) B) and D)
G) B) and C)

Question 6

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.6869.The expected inflation rate in Norway is 6 percent and in the U.S.it is 3.1 percent.A risk-free asset in the U.S.is yielding 4 percent.What risk-free rate of return should you expect on a Norwegian security?

Accepted Answer

A)  3.5 percent
B)  4.0 percent
C)  4.5 percent
D)  5.0 percent
E)  6.9 percentF) B) and E)
G) B) and D)

Question 7

Relative purchasing power parity:

Accepted Answer

A)  states that identical items should cost the same regardless of the currency used to make the purchase.
B)  relates differences in inflation rates to differences in exchange rates.
C)  compares the real rate of return to the nominal rate of return.
D)  explains the differences in real rates across national boundaries.
E)  relates future exchange rates to current spot rates.F) A) and B)
G) C) and E)

Question 8

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

Accepted Answer

A)  unbiased forward rates
B)  uncovered interest rate parity
C)  international Fisher effect
D)  purchasing power parity
E)  interest rate parityF) B) and D)
G) B) and C)

Question 9

Assume the euro is selling in the spot market for $1.33.Simultaneously, in the 3-month forward market the euro is selling for $1.35.Which one of the following statements correctly describes this situation?

Accepted Answer

A)  The spot market is out of equilibrium.
B)  The forward market is out of equilibrium.
C)  The dollar is selling at a premium relative to the euro.
D)  The euro is selling at a premium relative to the dollar.
E)  The euro is expected to depreciate in value.F) A) and E)
G) A) and B)

Question 10

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.7119.The expected inflation rate in Norway is 4 percent and in the U.S.3 percent.A risk-free asset in the U.S.is yielding 4.5 percent.What approximate real rate of return should you expect on a risk-free Norwegian security?

Accepted Answer

A)  1.0 percent
B)  1.5 percent
C)  2.0 percent
D)  2.5 percent
E)  3.0 percentF) A) and C)
G) C) and E)

Question 11

In the spot market, $1 is currently equal to £0.6211.Assume the expected inflation rate in the U.K.is 4.2 percent while it is 3.1 percent in the U.S.What is the expected exchange rate one year from now if relative purchasing power parity exists?

Accepted Answer

A)  £0.6161
B)  £0.6178
C)  £0.6239
D)  £0.6279
E)  £0.6291F) A) and C)
G) A) and B)

Question 12

You want to import $147,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $0.0203?

Accepted Answer

A)  Rs 6,887,424
B)  Rs 7,238,911
C)  Rs 7,241,379
D)  Rs 8,367,594
E)  Rs 8,415,096F) None of the above
G) A) and D)

Question 13

How many Euros can you get for $2,200 if one euro is worth $1.2762?

Accepted Answer

A)  €1,638.09
B)  €1,723.87
C)  €2,676.67
D)  €2,680.02
E)  €2,684.15F) None of the above
G) C) and D)

Question 14

Uncovered interest parity is defined as:

Accepted Answer

A)  E(St)  = S0 × [1 + (hFC - hUS) ]t.
B)  E(St)  = S0 × [1 + (RFC - RUS) ]t.
C)  E(St)  = S0 × [1 - (RFC - RUS) ]t.
D)  E(St)  = S0 × [1 + (RUS - RF
C)  ]t.
E)  E(St)  = S0 × [1 + (RFC + RUS) ]t.F) B) and C)
G) A) and C)

Question 15

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.

Accepted Answer

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

Question 16

Mr.Black has agreed to a currency exchange with Mr.White.The parties have agreed to exchange C$12,500 for $10,000 with the exchange occurring 4 months from now.This agreed-upon exchange rate is called the:

Accepted Answer

A)  spot rate.
B)  swap rate.
C)  forward rate.
D)  parity rate.
E)  triangle rate.F) A) and B)
G) C) and E)

Question 17

The interest rate parity approximation formula is:

Accepted Answer

A)  Ft = S0 × [1 + (RFC + RUS) ]t.
B)  Ft = S0 × [1 - (RFC - RUS) ]t.
C)  Ft = S0 × [1 + (RFC - RUS) ]t.
D)  Ft = S0 × [1 + (RFC × RUS) ]t.
E)  Ft = S0 × [1 - (RFC + RUS) ]t.F) C) and E)
G) C) and D)

Question 18

Today, you can get either 121 Canadian dollars or 1,288 Mexican pesos for 100 U.S.dollars.Last year, 100 U.S.dollars was worth 115 Canadian dollars or 1,291 Mexican pesos.Which one of the following statements is correct given this information?

Accepted Answer

A)  $100 converted into Canadian dollars last year would now be worth $105.22.
B)  $100 converted into Mexican pesos last year would now be worth $99.77.
C)  $100 converted into Mexican pesos last year would now be worth $100.36.
D)  $100 converted into Canadian dollars last year would now be worth $95.05.
E)  $100 invested in Canadian dollars last year would now be worth $100.F) A) and E)
G) A) and B)

Question 19

Which one of the following statements is correct concerning the foreign exchange market?

Accepted Answer

A)  The trading floor of the foreign exchange market is located in London, England.
B)  The foreign exchange market is the world's second largest financial market.
C)  The four primary currencies that are traded in the foreign exchange market are the U.S.dollar, the British pound, the French franc, and the euro.
D)  Importers, exporters, and speculators are key players in the foreign exchange market.
E)  The U.S.created a communications network called SWIFT to facilitate currency trading.F) A) and B)
G) A) and C)

Question 20

A large U.S.company has £500,000 in excess cash from its foreign operations.The company would like to exchange these funds for U.S.dollars.In which of the following markets can this exchange be arranged?

Accepted Answer

A)  ADR
B)  national registry
C)  national discount window
D)  foreign exchange market
E)  Eurobond marketF) C) and D)
G) A) and C)

Exam 21: Options and Corporate Finance

The home currency approach:

Correct Answer
verified

Assume the euro is selling in the spot market for $1.33.Simultaneously, in the 3-month forward market the euro is selling for $1.35.Which one of the following statements correctly describes this situation?

Correct Answer
verified

Correct Answer
verified

A large U.S.company has £500,000 in excess cash from its foreign operations.The company would like to exchange these funds for U.S.dollars.In which of the following markets can this exchange be arranged?

Correct Answer
verified

You want to import $147,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $0.0203?

Correct Answer
verified

Which one of the following statements is correct concerning the foreign exchange market?

Correct Answer
verified

Uncovered interest parity is defined as:

Correct Answer
verified

The interest rate parity approximation formula is:

Correct Answer
verified

The camera you want to buy costs $230 in the U.S.How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing power parity exists.

Correct Answer
verified

Which one of the following securities is used as a means of investing in a foreign stock that otherwise could not be traded in the United States?

Correct Answer
verified

Suppose the spot and three-month forward rates for the yen are ¥128.79 and ¥135.22, respectively.What is the approximate annual percent difference between the inflation rate in the U.S.and in Japan?

Correct Answer
verified

How many Euros can you get for $2,200 if one euro is worth $1.2762?

Correct Answer
verified

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.7119.The expected inflation rate in Norway is 4 percent and in the U.S.3 percent.A risk-free asset in the U.S.is yielding 4.5 percent.What approximate real rate of return should you expect on a risk-free Norwegian security?

Correct Answer
verified

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.6869.The expected inflation rate in Norway is 6 percent and in the U.S.it is 3.1 percent.A risk-free asset in the U.S.is yielding 4 percent.What risk-free rate of return should you expect on a Norwegian security?

Correct Answer
verified

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.

Correct Answer
verified

In the spot market, $1 is currently equal to £0.6211.Assume the expected inflation rate in the U.K.is 4.2 percent while it is 3.1 percent in the U.S.What is the expected exchange rate one year from now if relative purchasing power parity exists?

Correct Answer
verified

Mr.Black has agreed to a currency exchange with Mr.White.The parties have agreed to exchange C$12,500 for $10,000 with the exchange occurring 4 months from now.This agreed-upon exchange rate is called the:

Correct Answer
verified

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

Correct Answer
verified

Relative purchasing power parity:

Correct Answer
verified

Today, you can get either 121 Canadian dollars or 1,288 Mexican pesos for 100 U.S.dollars.Last year, 100 U.S.dollars was worth 115 Canadian dollars or 1,291 Mexican pesos.Which one of the following statements is correct given this information?

Correct Answer
verified

Exam 21: Options and Corporate Finance

The home currency approach:

Correct AnswerverifiedShow Answer

Assume the euro is selling in the spot market for $1.33.Simultaneously, in the 3-month forward market the euro is selling for $1.35.Which one of the following statements correctly describes this situation?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A large U.S.company has £500,000 in excess cash from its foreign operations.The company would like to exchange these funds for U.S.dollars.In which of the following markets can this exchange be arranged?

Correct AnswerverifiedShow Answer

You want to import $147,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $0.0203?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct concerning the foreign exchange market?

Correct AnswerverifiedShow Answer

Uncovered interest parity is defined as:

Correct AnswerverifiedShow Answer

The interest rate parity approximation formula is:

Correct AnswerverifiedShow Answer

The camera you want to buy costs $230 in the U.S.How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing power parity exists.

Correct AnswerverifiedShow Answer

Which one of the following securities is used as a means of investing in a foreign stock that otherwise could not be traded in the United States?

Correct AnswerverifiedShow Answer

Suppose the spot and three-month forward rates for the yen are ¥128.79 and ¥135.22, respectively.What is the approximate annual percent difference between the inflation rate in the U.S.and in Japan?

Correct AnswerverifiedShow Answer

How many Euros can you get for $2,200 if one euro is worth $1.2762?

Correct AnswerverifiedShow Answer

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.7119.The expected inflation rate in Norway is 4 percent and in the U.S.3 percent.A risk-free asset in the U.S.is yielding 4.5 percent.What approximate real rate of return should you expect on a risk-free Norwegian security?

Correct AnswerverifiedShow Answer

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.6869.The expected inflation rate in Norway is 6 percent and in the U.S.it is 3.1 percent.A risk-free asset in the U.S.is yielding 4 percent.What risk-free rate of return should you expect on a Norwegian security?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

In the spot market, $1 is currently equal to £0.6211.Assume the expected inflation rate in the U.K.is 4.2 percent while it is 3.1 percent in the U.S.What is the expected exchange rate one year from now if relative purchasing power parity exists?

Correct AnswerverifiedShow Answer

Mr.Black has agreed to a currency exchange with Mr.White.The parties have agreed to exchange C$12,500 for $10,000 with the exchange occurring 4 months from now.This agreed-upon exchange rate is called the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Relative purchasing power parity:

Correct AnswerverifiedShow Answer

Today, you can get either 121 Canadian dollars or 1,288 Mexican pesos for 100 U.S.dollars.Last year, 100 U.S.dollars was worth 115 Canadian dollars or 1,291 Mexican pesos.Which one of the following statements is correct given this information?

Correct AnswerverifiedShow Answer

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