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Exam 20: International Corporate Finance

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Question 21

Multiple Choice

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

A) spot
B) forward
C) futures
D) option
E) swap

F) A) and C)
G) A) and B)

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Question 22

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

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

F) C) and E)
G) All of the above

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Question 23

Multiple Choice

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_____ holds because of the possibility of covered interest arbitrage.

Which of the following are the basic kinds of swaps?

The camera you want to buy costs $399 in the U.S.If absolute purchasing power parity exists,the identical camera will cost _____ in Canada if the exchange rate is C$1 = $.8349.

You want to invest in a project in Canada.The project has an initial cost of C$1.2 million and is expected to produce cash inflows of C$600,000 a year for 3 years.The project will be worthless after the first 3 years.The expected inflation rate in Canada is 4% while it is only 3% in the U.S.The applicable interest rate in Canada is 8%.The current spot rate is C$1 = $.69.What is the net present value of this project in Canadian dollars using the foreign currency approach?

The idea that commodities have the same value no matter where they are purchased or what currency is used is known as _____ parity.

The current spot rate is C$1.362 and the one-year forward rate is C$1.371.The nominal risk-free rate in Canada is 6% while it is 3.5% 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.

The unbiased forward rate is a:

The spot rate for the British pound currently is $\le$ .55 per $1.The one-year forward rate is $\le$ .58 per $1.A risk-free asset in the U.S.is currently earning 2%.If interest rate parity holds,approximately what rate can you earn on a one-year risk-free British security?

The implicit exchange rate between two currencies when both are quoted in some third currency is called a(n) :

Suppose that the spot rate on the Canadian dollar is C$1.15.The risk-free nominal rate in the U.S.is 5% while it is only 4% in Canada.Which one of the following three-year forward rates best establishes the approximate interest rate parity condition?

You are planning a trip to Australia.Your hotel will cost you A$220 per night for five nights.You expect to spend another A$3,250 for meals,tours,souvenirs,and so forth.How much will this trip cost you in U.S.dollars given the following exchange rates?

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

Which one of the following statements is correct assuming that exchange rates are quoted as units of foreign currency per dollar?

The expected inflation rate in Finland is 2% while it is 4% in the U.S.A risk-free asset in the U.S.is yielding 5.5%.What real rate of return should you expect on a risk-free Norwegian security?

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:

The spot rate for the Japanese yen currently is *106 per $1.The one-year forward rate is *105 per $1.A risk-free asset in Japan is currently earning 3%.If interest rate parity holds,approximately what rate can you earn on a one-year risk-free U.S.security?

You just returned from some extensive traveling throughout the Americas.You started your trip with $10,000 in your pocket.You spent 1.4 million pesos while in Chile.You spent another 40,000 bolivars in Venezuela.Then on the way home,you spent 34,000 pesos in Mexico.How many dollars did you have left by the time you returned to the U.S.given the following exchange rates?

The foreign exchange market is where: