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Exam 21: International Corporate Finance

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Question 31

Multiple Choice

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George and Pat just made an agreement to exchange currencies based on today's exchange rate.Settlement will occur tomorrow.Which one of the following is the exchange rate that applies to this agreement?

A) spot exchange rate
B) forward exchange rate
C) triangle rate
D) cross rate
E) current rate

F) All of the above
G) A) and B)

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Question 32

Multiple Choice

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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.is based solely on differences in exchange ratios between spot and futures markets.

A) I and IV only
B) II and III only
C) I,II,and III only
D) II,III,and IV only
E) I,II,III,and IV

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

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Question 33

Multiple Choice

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Which of the following conditions are required for absolute purchasing power parity to exist? I.goods must be identical II.goods must have equal economic value III.transaction costs must be zero IV.there can be no barriers to trade

Describe the foreign currency and home currency approaches to capital budgeting for a foreign project.Which is better? Which approach would you recommend a U.S.firm use? Justify your 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?

Suppose the exchange rates are as follows: 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?

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?

Which one of the following supports the idea that real interest rates are equal across countries?

Suppose your company imports computer motherboards from Singapore.The exchange rate is currently 1.5803S$/US$.You have just placed an order for 30,000 motherboards at a cost to you of 170.90 Singapore dollars each.You will pay for the shipment when it arrives in 120 days.You can sell the motherboards for $148 each.What will your profit be if the exchange rate goes up by 8 percent over the next 120 days?

Which of the following variables used in the covered interest arbitrage formula are correctly defined? I.R_FC: Foreign country nominal risk-free interest rate II.R_US: U.S.real risk-free interest rate III.F₁: 360-day forward rate IV.S₀: Current spot rate expressed in units of foreign currency per one U.S.dollar

The interest rate parity approximation formula is:

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?

Which one of the following formulas correctly describes the relative purchasing power parity relationship?

A new coat costs 3,900 Russian rubles.How much will the identical coat cost in Euros if absolute purchasing power parity exists and the following exchange rates apply?

Interest rate parity:

You are analyzing a project with an initial cost of £130,000.The project is expected to return £20,000 the first year,£50,000 the second year and £90,000 the third and final year.There is no salvage value.The current spot rate is £0.6211.The nominal risk-free return is 5.5 percent in the U.K.and 6 percent in the U.S.The return relevant to the project is 14 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?

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?

The forward rate market is dependent upon:

Assume that ¥95.42 equal $1.Also assume that SKr7.7274 equal $1.How many Japanese yen can you acquire in exchange for 3,000 Swedish krone?

On Friday evening,Bank A loans Bank B Eurodollars that must be repaid the following Monday morning.Which one of the following is most likely the interest rate that will be charged on this loan?