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Exam 31: International Corporate Finance

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Question 1

Multiple Choice

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"A commodity costs the same regardless of what currency is used to purchase it." This is a statement of:

A) Absolute Purchasing Power Parity.
B) Relative Purchasing Power Parity.
C) The First Principle of International Finance.
D) The Conservation of Currency Value.
E) None of these.

F) A) and E)
G) B) and E)

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Question 2

Multiple Choice

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The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate is called:

A) the unbiased forward rates condition.
B) uncovered interest rate parity.
C) the international Fisher effect.
D) purchasing power parity.
E) interest rate parity.

F) B) and E)
G) B) and D)

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Question 3

Multiple Choice

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

You are analyzing a very low-risk project with an initial cost of £120,000. The project is expected to return £40,000 the first year,£50,000 the second year and £60,000 the third and final year. The current spot rate is £.54. The nominal return relevant to the project is 4 percent in the U.K. and 3 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

The idea that the exchange rate adjusts to keep buying power constant among currencies is called:

Which of the following statements are correct? I. The usage of forward rates can help reduce the short-run exposure to exchange rate risk. II. Accounting translation gains are recorded on the income statement as other income. III. The long-run exchange rate risk faced by an international firm can be reduced if the firm borrows money in the foreign country where it has operations. IV. Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

Triangle arbitrage: I. is a profitable situation involving three separate currency exchange transactions. II) helps keep the currency market in equilibrium. III) opportunities can exist in either the spot or the forward market. IV) only involves currencies other than the U.S. dollar.

The home currency approach:

An agreement to trade currencies based on the exchange rate today for settlement within two business days is called a(n) _____ trade.

The acronym LIBOR stands for:

A risk-free asset in the U.S. is currently yielding 3 percent while a Canadian risk-free asset is yielding 2 percent. The current spot rate is C$.72 is equal to $1. What is the approximate two-year forward rate if interest rate parity holds?

What is required for absolute purchasing power parity to hold? Do you think absolute PPP would hold in the case where a computer retailer in the U.S. sits directly across the border from a computer retailer in Canada? How about Houston,Texas,and Winnipeg,Manitoba?

How well do you think relative purchasing power parity and uncovered interest parity behave? That is,do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?

Suppose that the spot rate on the Canadian dollar is C$1.40. The risk-free nominal rate in the U.S. is 8 percent while it is only 4 percent in Canada. Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?

The expected inflation rate in Switzerland is 2 percent while it is 3 percent in the U.S. A risk-free asset in the U.S. is yielding 3.5 percent. What real rate of return should you expect on a risk-free Swiss security?

A firm engaging in international investments:

The rate most international banks charge one another for overnight Eurodollar loans is called the:

A foreign bond issued in Japan and denominated in yen is called a(n) :

Absolute purchasing power parity is also known as:

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: