Question 1

Interest rate parity defines the relationships among which of the following?

Accepted Answer

A)   Spot exchange rates, future exchange rates, interest rates, and inflation rates
B)   Real and nominal interest rates across countries
C)   Real interest and inflation rates
D)   Forward exchange rates, relative interest rates, and spot exchange rates
E)   Spot exchange rates, forward exchange rates, nominal interest rates, and real interest ratesF) A) and E)
G) A) and B) D

Question 2

Explain what is meant when a news broadcaster states "the value of the dollar fell today relative to all currencies". How will this change in value affect U.S. imports and exports?

Accepted Answer

The statement means that the value of th...

Question 3

Explain how a firm can structure its operations such that it creates its own internal hedge to long-run exposure to exchange rate risk.

Accepted Answer

The example given in the book is BMW. BM...

Question 4

The U.S. dollar equivalent is 0.4502 for the Brazilian real and 1.4729 for the U.K. pound. Which one of the following statements is correct given this information?

Accepted Answer

A)   One U.S. dollar will buy 0.4502 Brazilian reals.
B)   If you have 0.4502 Brazilian reals, they are worth 1.4729 U.K. pounds.
C)   One U.K. pound will buy 1.4729 U.S. dollars.
D)   One Brazilian real will buy 1.4729 U.K. pounds.
E)   One U.S. dollar will buy 1.4729 U.K. pounds.F) None of the above
G) C) and E)

Question 5

Suppose the spot exchange rate for the Hungarian forint is HUF 238. Interest rates in the United States are 4.1 percent per year. They are 3.6 percent in Hungary. What do you predict the exchange rate will be in three years?

Accepted Answer

A)   HUF 234.45
B)   HUF 236.90
C)   HUF 241.59
D)   HUF 236.81
E)   HUF 239.19F) D) and E)
G) A) and B)

Question 6

You have just agreed to a forward trade that will be settled six months from now. When will the exchange rate for this transaction be determined?

Accepted Answer

A)   Today
B)   Three months from today because that is the half-way point
C)   Anytime you prefer within the next 6 months
D)   Whenever the spot rate six months from today is known
E)   Six months from nowF) A) and B)
G) All of the above

Question 7

The foreign subsidiary of a U.S. firm is profitable when profits are measured in the foreign currency but those profits become losses when measured in U.S. dollars. This is an example of which one of the following?

Accepted Answer

A)   Interest rate disparities
B)   Short-run exposure to exchange rate risk
C)   Long-run exposure to exchange rate risk
D)   Political risk associated with the foreign operations
E)   Translation exposure to exchange rate riskF) B) and C)
G) A) and E)

Question 8

Which one of the following is the risk arising from changes in value caused by political actions?

Accepted Answer

A)   Exchange rate risk
B)   Political risk
C)   Translation risk
D)   LIBOR risk
E)   Cross rate riskF) A) and B)
G) C) and D)

Question 9

You are planning a trip to the U.K. and plan on spending 3,600 pounds. How many dollars will this trip cost you if the currency per U.S. dollar is 0.6789 pounds?

Accepted Answer

A)   $2,444.04
B)   $3,892.16
C)   $5,302.70
D)   $5,890.01
E)   $6,044.04F) All of the above
G) None of the above

Question 10

The 1-year forward rate for the Swiss franc is Sf1.1375 = $1. The spot rate is Sf1.1426 = $1. The interest rate on a risk-free asset in Switzerland is 3.3 percent. If interest rate parity exists, a 1 year risk-free security in the U.S. is yielding _____ percent.

Accepted Answer

A)   2.28 percent
B)   2.51 percent
C)   2.98 percent
D)   3.40 percent
E)   3.76 percentF) B) and C)
G) None of the above

Question 11

The exchange rates in New York for $1 are C$1.2381 and £0.6789. In Toronto, C$1 will buy £0.5487. How much profit can you earn on $10,000 using triangle arbitrage?

Accepted Answer

A)   $6.56
B)   $6.88
C)   $6.97
D)   $7.03
E)   $7.11F) B) and C)
G) D) and E)

Question 12

The spot rate on the Norwegian kroner is 6.689. The exchange rate one year from now is expected to be 6.745 assuming that relative interest rate parity exists. Interest rates in Norway are 3.7 percent. What is the interest rate in the U.S.?

Accepted Answer

A)   2.86 percent
B)   3.02 percent
C)   3.59 percent
D)   4.54 percent
E)   4.68 percentF) A) and B)
G) A) and D)

Question 13

The market where euros, pesos, dollars, and pounds are traded is referred to as which one of the following?

Accepted Answer

A)   ADR market
B)   LIBOR market
C)   Gilt market
D)   Euromarket
E)   Foreign exchange marketF) B) and D)
G) None of the above E

Question 14

Currently, you can exchange €100 for $133. The inflation rate in Euroland is expected to be 2.5 percent. In one year, it is expected that €100 can be exchanged for $136. Assume relative purchasing power parity exists. What is the expected inflation rate in the U.S.?

Accepted Answer

A)   3.84 percent
B)   4.26 percent
C)   4.71 percent
D)   5.21 percent
E)   5.68 percentF) B) and E)
G) All of the above C

Question 15

Assume a canned soft drink costs $1 in the U.S. and $1.30 in Canada. At the same time, the currency per U.S. dollar is C$1.30. Which one of the following conditions exists in this situation?

Accepted Answer

A)   Absolute purchasing power parity
B)   Interest rate parity
C)   Relative purchasing power parity
D)   Translation exposure
E)   Equal spot and forward ratesF) D) and E)
G) C) and E)

Question 16

You are planning an extended trip to Hong Kong. You have located some housing that you can lease for 10,500 Hong Kong dollars per month. What is the cost per month in U.S. dollars if the exchange rate is HK$1 = $0.1290?

Accepted Answer

A)   $1,208.15
B)   $1,354.50
C)   $78,311.27
D)   $81,395.35
E)   $84,206.19F) A) and D)
G) A) and B)

Question 17

The current spot rate between the U.K. and the U.S. is £0.6764 per $1. The expected inflation rate in the U.S. is 1.8 percent. The expected inflation rate in the U.K. is 3.4 percent. If relative purchasing power parity exists, what will the exchange rate be 2 years from now?

Accepted Answer

A)   £0.6549/$1
B)   £.0.6656/$1
C)   £.0.6872/$1
D)   £0.6982/$1
E)   £.5331/$1F) B) and C)
G) A) and E)

Question 18

Suppose the Swiss franc exchange rate is Sf1.1426 = $1, and the euro exchange rate is €0.7538 = $1. What is the cross rate in terms of Swiss francs per euro?

Accepted Answer

A)   Sf1.5074 = €1
B)   Sf1.5098 = €1
C)   Sf1.5132 = €1
D)   Sf1.5146 = €1
E)   Sf1.5158 = €1F) A) and E)
G) C) and D)

Question 19

Which one of the following states that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate?

Accepted Answer

A)   Arbitrage equilibrium
B)   Relative purchasing power parity
C)   Absolute purchasing power parity
D)   Interest rate parity
E)   Cross rate parityF) None of the above
G) D) and E)

Question 20

Which one of the following statements is correct?

Accepted Answer

A)   Exchange rates are adjusted each morning and held constant until the next morning.
B)   The four most common currencies traded in the foreign exchange market are the U.S. dollar, franc, euro, and peso.
C)   All of South America uses the peso as their currency.
D)   New Zealand uses the same currency as Australia and that is the A$.
E)   The foreign exchange market is the largest financial market in the world.F) A) and B)
G) A) and D)

Exam 18: International Aspects of Financial Management

Interest rate parity defines the relationships among which of the following?

Correct AnswerverifiedD

Explain what is meant when a news broadcaster states "the value of the dollar fell today relative to all currencies". How will this change in value affect U.S. imports and exports?

Correct AnswerverifiedThe statement means that the value of th...View AnswerShow Answer

Explain how a firm can structure its operations such that it creates its own internal hedge to long-run exposure to exchange rate risk.

Correct AnswerverifiedThe example given in the book is BMW. BM...View AnswerShow Answer

The U.S. dollar equivalent is 0.4502 for the Brazilian real and 1.4729 for the U.K. pound. Which one of the following statements is correct given this information?

Correct AnswerverifiedShow Answer

Suppose the spot exchange rate for the Hungarian forint is HUF 238. Interest rates in the United States are 4.1 percent per year. They are 3.6 percent in Hungary. What do you predict the exchange rate will be in three years?

Correct AnswerverifiedShow Answer

You have just agreed to a forward trade that will be settled six months from now. When will the exchange rate for this transaction be determined?

Correct AnswerverifiedShow Answer

The foreign subsidiary of a U.S. firm is profitable when profits are measured in the foreign currency but those profits become losses when measured in U.S. dollars. This is an example of which one of the following?

Correct AnswerverifiedShow Answer

Which one of the following is the risk arising from changes in value caused by political actions?

Correct AnswerverifiedShow Answer

You are planning a trip to the U.K. and plan on spending 3,600 pounds. How many dollars will this trip cost you if the currency per U.S. dollar is 0.6789 pounds?

Correct AnswerverifiedShow Answer

The 1-year forward rate for the Swiss franc is Sf1.1375 = $1. The spot rate is Sf1.1426 = $1. The interest rate on a risk-free asset in Switzerland is 3.3 percent. If interest rate parity exists, a 1 year risk-free security in the U.S. is yielding _____ percent.

Correct AnswerverifiedShow Answer

The exchange rates in New York for $1 are C$1.2381 and £0.6789. In Toronto, C$1 will buy £0.5487. How much profit can you earn on $10,000 using triangle arbitrage?

Correct AnswerverifiedShow Answer

The spot rate on the Norwegian kroner is 6.689. The exchange rate one year from now is expected to be 6.745 assuming that relative interest rate parity exists. Interest rates in Norway are 3.7 percent. What is the interest rate in the U.S.?

Correct AnswerverifiedShow Answer

The market where euros, pesos, dollars, and pounds are traded is referred to as which one of the following?

Correct AnswerverifiedE

Currently, you can exchange €100 for $133. The inflation rate in Euroland is expected to be 2.5 percent. In one year, it is expected that €100 can be exchanged for $136. Assume relative purchasing power parity exists. What is the expected inflation rate in the U.S.?

Correct AnswerverifiedC

Assume a canned soft drink costs $1 in the U.S. and $1.30 in Canada. At the same time, the currency per U.S. dollar is C$1.30. Which one of the following conditions exists in this situation?

Correct AnswerverifiedShow Answer

You are planning an extended trip to Hong Kong. You have located some housing that you can lease for 10,500 Hong Kong dollars per month. What is the cost per month in U.S. dollars if the exchange rate is HK$1 = $0.1290?

Correct AnswerverifiedShow Answer

The current spot rate between the U.K. and the U.S. is £0.6764 per $1. The expected inflation rate in the U.S. is 1.8 percent. The expected inflation rate in the U.K. is 3.4 percent. If relative purchasing power parity exists, what will the exchange rate be 2 years from now?

Correct AnswerverifiedShow Answer

Suppose the Swiss franc exchange rate is Sf1.1426 = $1, and the euro exchange rate is €0.7538 = $1. What is the cross rate in terms of Swiss francs per euro?

Correct AnswerverifiedShow Answer

Which one of the following states that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

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The statement means that the value of th...
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The example given in the book is BMW. BM...
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E

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C

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