Chapter 31 Corporate Finance Ross Test Bank

Published on February 2017 | Categories: Documents | Downloads: 206 | Comments: 0 | Views: 2086
of 65
Download PDF   Embed   Report

Comments

Content

Chapter 31 - International Corporate Finance

Chapter 31
International Corporate Finance
Multiple Choice Questions

1. A security issued in the United States that represents shares of a foreign stock and allows
that stock to be traded in the United States is called a(n):
A. American Depository Receipt.
B. Yankee bond.
C. Yankee stock.
D. Eurostock.
E. foreign obligation trust certificate.

2. The implicit exchange rate between two currencies when both are quoted in some third
currency is called a(n):
A. open exchange rate.
B. cross-rate.
C. backward rate.
D. forward rate.
E. interest rate.

3. International bonds issued in multiple countries but denominated in a single currency are
called:
A. Treasury bonds.
B. Bulldog bonds.
C. Eurobonds.
D. Yankee bonds.
E. Samurai bonds.

4. Money deposited in a financial center outside the country whose currency is involved is
called:
A. a foreign depository receipt.
B. an international exchange certificate.
C. Euroyen.
D. Eurocurrency.
E. Eurodollars.

31-1

Chapter 31 - International Corporate Finance

5. International bonds issued in a single country and denominated in that country's currency
are called:
A. Treasury bonds.
B. Eurobonds.
C. gilts.
D. Brady bonds.
E. foreign bonds.

6. A foreign bond issued in the United States and denominated in dollars is called a(n):
A. American Depository Receipt.
B. European Currency Unit.
C. Yankee bond.
D. swap bond.
E. Eurobond.

7. A foreign bond issued in Japan and denominated in yen is called a(n):
A. American Depository Receipt.
B. European Currency Unit.
C. swap bond.
D. Samurai bond.
E. Eurobond.

8. Gilts are government securities issued by:
A. Britain and Ireland.
B. Japan.
C. Germany.
D. Australia and New Zealand.
E. Italy.

31-2

Chapter 31 - International Corporate Finance

9. The rate most international banks charge one another for overnight Eurodollar loans is
called the:
A. Eurodollar yield to maturity.
B. London Interbank Offer Rate.
C. Paris Opening Interest Rate.
D. United States Treasury bill rate.
E. international prime rate.

10. The foreign exchange market is where:
A. one country's stocks are exchanged for another's.
B. one country's bonds are exchanged for another's.
C. one country's currency is traded for another's.
D. international banks make loans to one another.
E. international businesses finalize import/export relationships with one another.

11. The price of one country's currency expressed in terms of another country's currency is:
A. by definition, one unit of currency.
B. the cross inflation rate.
C. the depository rate.
D. the exchange rate.
E. the foreign interest rate.

12. An agreement to trade currencies based on the exchange rate today for settlement within
two business days is called a(n) _____ trade.
A. swap
B. option
C. futures
D. forward
E. spot

31-3

Chapter 31 - International Corporate Finance

13. The exchange rate on a spot trade is called the _____ exchange rate.
A. spot
B. forward
C. triangle
D. cross
E. open

14. An agreement to exchange currencies at some point in the future using an agreed-upon
exchange rate is called a _____ trade.
A. spot
B. forward
C. swap
D. floating
E. triangle

15. The idea that the exchange rate adjusts to keep buying power constant among currencies 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.

16. The idea that commodities have the same value no matter where they are purchased or
what currency is used is known as _____ parity.
A. forward exchange rates
B. absolute purchasing power
C. interest rate
D. relative purchasing power
E. uncovered interest rate

31-4

Chapter 31 - International Corporate Finance

17. _____ holds because of the possibility of covered interest arbitrage.
A. Uncovered interest parity
B. Interest rate parity
C. The international Fisher effect
D. Unbiased forward rates
E. Purchasing power parity

18. 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:
A. the unbiased forward rates condition.
B. uncovered interest rate parity.
C. the international Fisher effect.
D. purchasing power parity.
E. interest rate parity.

19. 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.

20. The condition stating that the expected percentage change in the exchange rate is equal to
the difference in interest rates between the countries is called:
A. the unbiased forward rates condition.
B. uncovered interest parity.
C. the international Fisher effect.
D. purchasing power parity.
E. interest rate parity.

31-5

Chapter 31 - International Corporate Finance

21. The theory that real interest rates are equal across countries 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.

22. Which of the following statements are correct concerning the foreign exchange market?
I. The trading floor of the foreign exchange market is located in London, England.
II. The foreign exchange market is the world's largest financial market.
III. The four primary currencies that are traded in the foreign exchange market are the U.S.
dollar, the British pound, the Canadian dollar, and the euro.
IV. Importers and exporters are key players in the foreign exchange market.
A. I and III only
B. II and IV only
C. I and II only
D. III and IV only
E. I and IV only

23. 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.
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

24. Spot trades must be settled:
A. on the day of the trade.
B. on the day following the day of the trade.
C. within two business days.
D. within three business days.
E. within one week of the trade date.

31-6

Chapter 31 - International Corporate Finance

25. Assume that the Euro is selling in the spot market for $1.10. Simultaneously, in the 3month forward market the Euro is selling for $1.12. Which one of the following statements
correctly describes this situation?
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. None of the other four statements correctly describes this situation.

26. Which of the following conditions must exist for absolute purchasing power parity to
hold?
I. the goods are identical
II. the goods have equal economic values
III. transaction costs are equal to zero
IV. there are no trade barriers
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

27. Relative purchasing power parity:
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 changes in exchange rates.
C. compares the real rate of return to the nominal rate of return.
D. looks at the factors that determine the changes in interest rates.
E. analyzes the changes in inflation rates to determine the cause.

28. Which one of the following statements is correct assuming that exchange rates are quoted
as units of foreign currency per dollar?
A. The exchange rate moves opposite to the value of the dollar.
B. The exchange rate rises when the U.S. inflation rate is higher than the foreign country's.
C. When a foreign currency appreciates in value it strengthens relative to the dollar.
D. The exchange rate falls as the dollar strengthens.
E. The exchange rate is unaffected by differences in the inflation rates of the two countries.

31-7

Chapter 31 - International Corporate Finance

29. Interest rate parity:
A. eliminates covered interest arbitrage opportunities.
B. exists when spot rates are equal for multiple countries.
C. means that the nominal risk-free rate of return must be the same across countries.
D. exists when the spot rate is equal to the futures rate.
E. eliminates exchange rate fluctuations.

30. The unbiased forward rate is a:
A. condition where a future spot rate is equal to the current spot rate.
B. guarantee of a future spot rate at one point in time.
C. condition where the spot rate is expected to remain constant over a period of time.
D. relationship between the future spot rate of two currencies at an equivalent point in time.
E. predictor of the future spot rate at the equivalent point in time.

31. The forward rate market is dependent upon:
A. current forward rates exceeding current spot rates.
B. current spot rates exceeding current forward rates over time.
C. current spot rates equaling current forward rates on average over time.
D. forward rates equaling the actual future spot rates on average over time.
E. current spot rates equaling the actual future spot rates on average over time.

32. The international Fisher effect says that _____ rates are equal across countries.
A. spot
B. one-year future
C. nominal
D. inflation
E. real

31-8

Chapter 31 - International Corporate Finance

33. The home currency approach:
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.

34. The home currency approach:
A. generally produces more reliable results than those found using the foreign currency
approach.
B. requires an applicable exchange rate for every time period for which there is a cash flow.
C. uses the current risk-free nominal rate to discount all of the cash flows related to a project.
D. stresses the use of the real rate of return to compute the net present value (NPV) of a
project.
E. converts a foreign denominated NPV into a dollar denominated NPV.

35. The foreign currency approach to capital budgeting analysis:
I. is computationally easier to use than the home currency approach.
II. produces the same results as the home currency approach.
III. utilizes the uncovered interest parity relationship.
IV. computes the net present value of a project in both the foreign and in the domestic
currency.
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV

31-9

Chapter 31 - International Corporate Finance

36. An international firm which imports raw materials can reduce its _____ exposure to _____
rate risk by entering into a forward contract.
A. long-term; inflation
B. short-term; inflation
C. short-run; exchange
D. long-run; exchange
E. total; interest

37. The changes in the relative economic conditions between countries are referred to as the:
A. international Fisher effect.
B. international exchange rate effect.
C. translation exposure to exchange rate risk.
D. long-run exposure to exchange rate risk.
E. the interest rate parity risk.

38. 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.
A. I and III only
B. II and IV only
C. II and III only
D. I and IV only
E. I and II only

39. The most important complication of international finance is the:
A. basic principles of corporate finance do not apply.
B. process of foreign exchange valuation of different currencies.
C. NPV principle can not be applied to foreign operations.
D. All of the above.
E. None of the above.

31-10

Chapter 31 - International Corporate Finance

40. The cross rate is the:
A. exchange rate between the U.S. dollar and another currency.
B. exchange rate between two currencies, neither of which is generally the U.S. dollar.
C. rate converting the direct rate into the indirect rate.
D. estimated based on the weighted average cost of capital by the agent at the exchange kiosk.
E. None of the above.

41. Which of the following are the basic kinds of swaps?
A. Interest rate
B. Currency
C. Management
D. Both A and B.
E. None of the above.

42. A swap can be an agreement between two parties to:
A. exchange a floating rate currency for dollars.
B. exchange a floating rate currency for a fixed interest rate currency.
C. exchange a floating rate debt payment for a fixed rate debt payment.
D. All are legitimate swaps.
E. None of the above.

43. The acronym LIBOR stands for:
A. London Interbank Offer Rate.
B. Lending Institution Bank Receipt.
C. Leading Indicator Borrowing Rate.
D. Loan Interest Bank Order Receipt.
E. London International Opportunity Rate.

31-11

Chapter 31 - International Corporate Finance

44. Triangular arbitrage would take place if the _____ rate between two currencies was not
_____ to the ratio of the two direct rates.
A. cross; equal
B. spot; equal
C. cross; less than
D. spot; less than
E. cross; greater than

45. When the German mark is quoted as $.52, this quote is a(n):
A. triangular rate.
B. indirect rate.
C. direct rate.
D. cross rate.
E. None of the above.

46. When the German mark is quoted as 1.923 marks to the dollar, this quote is a(n):
A. indirect rate.
B. direct rate.
C. cross rate.
D. triangular rate.
E. None of the above.

47. What kind of trade involves agreeing today on an exchange rate for settlement in 90
days?
A. Spot trade
B. Futures trade
C. Forward trade
D. Triangle trade
E. None of the above

31-12

Chapter 31 - International Corporate Finance

48. "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 the above.

49. "The rate of change in commodity price levels between two countries determines the rate
of change in exchange rates between the two countries." This is a statement of:
A. Absolute Purchasing Power Parity.
B. Relative Purchase Power Parity.
C. International Fisher Effect.
D. Interest Rate Parity.
E. Unbiased Forward Rates.

50. Suppose the spot exchange rate is 2 U.S. dollars per British pound. The forward exchange
rate is 1.9 dollars per pound. Which of the following is true?
A. The U.S. inflation rate is lower.
B. The pound is selling at a premium.
C. The pound is selling at a discount.
D. U.S. interest rates are lower.
E. More than one of the above is true.

51. Which one of following statements is not correct?
A. Importers are participants in the foreign exchange market.
B. The foreign exchange market is an over-the-counter market.
C. There are no speculators in the foreign exchange market.
D. Exporters are participants in the foreign exchange market.
E. Portfolio managers are participants in the foreign exchange market.

31-13

Chapter 31 - International Corporate Finance

52. Suppose that the one-year forward rate on pounds is $1.75£. Given no arbitrage
opportunities, this implies that traders expect:
A. the spot rate to be $1.75£ in one year.
B. the spot rate to be greater than $1.75£ in one year.
C. the spot rate to be less than $1.75£ in one year.
D. the spot rate to be greater than or equal to $1.75£ in one year.
E. the spot rate to be less than or equal to $1.75£ in one year.

53. Remitting cash flows is a term used to describe:
A. cash flows earned in a foreign country.
B. moving cash flows from the foreign subsidiary to the parent firm.
C. forecasting the value of foreign currency one-year hence.
D. forecasting the value of U.S. currency one-year hence.
E. None of the above.

54. Financial Accounting Standard Board Statement Number 52 requires that most assets and
liabilities be translated at the current exchange rate. Gains and losses are recorded:
A. against shareholder's equity.
B. as a normal part of income.
C. as an extraordinary item against income.
D. as a footnote to the statements.
E. only on the income tax statements.

55. The law of one price is also known as:
A. relative purchasing power parity.
B. absolute purchasing power parity.
C. complete purchasing power parity.
D. interest rate parity.
E. the international Fisher Effect.

31-14

Chapter 31 - International Corporate Finance

56. Absolute purchasing power parity is also known as:
A. The law of one price.
B. relative purchasing power parity.
C. complete purchasing power parity.
D. interest rate parity.
E. the international Fisher Effect.

57. A firm engaging in international investments:
A. could provide indirect diversification.
B. could lower the risk premium on international projects.
C. could lead to lower risk adjusted discount rates.
D. A and B.
E. A, B, and C.

58. A foreign subsidiary can remit funds to a parent in the following form(s):
A. dividends.
B. management fees for central services.
C. royalties on the use of trade names.
D. royalties on the use of patents.
E. All of the above.

59. How many euros can you get for $2,500 given the following exchange rates?

A. €2,306
B. €2,357
C. €2,451
D. €2,652
E. €2,675

31-15

Chapter 31 - International Corporate Finance

60. You are planning a trip to Australia. Your hotel will cost you A$150 per night for five
nights. You expect to spend another A$2,000 for meals, tours, souvenirs, and so forth. How
much will this trip cost you in U.S. dollars given the following exchange rates?

A. $1,926
B. $2,007
C. $2,782
D. $2,856
E. $3,926

61. You want to import $45,000 worth of rugs from India. How many rupees will you need to
pay for this purchase if one rupee is worth $.0218?
A. 1,843,010Rs
B. 2,032,018Rs
C. 2,064,220Rs
D. 2,075,002Rs
E. 2,076,289Rs

62. Currently, $1 will buy C$1.36 while $1.10 will buy €1. What is the exchange rate between
the Canadian dollar and the euro?
A. C$1 = €1.10
B. C$1 = €.9091
C. C$1 = €1.2364
D. C$1.36 = €1.10
E. C$1.36 = €.9091

63. Assume that ¥107.62 equal $1. Also assume that 7.5415Skr equal $1. How many Japanese
yen can you acquire in exchange for 6,200 Swedish krona?
A. ¥419
B. ¥434
C. ¥41,719
D. ¥46,757
E. ¥88,476

31-16

Chapter 31 - International Corporate Finance

64. 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?

A. $3,887
B. $4,039
C. $4,117
D. $4,244
E. $4,299

65. Assume that you can buy 250 Canadian dollars with 100 British pounds. Which one of the
following statements is correct given the following exchange rates? Assume that you start out
with British pounds.

A. You can earn a profit of C$2.47 by using triangle arbitrage.
B. You can earn a profit of £1.17 by using triangle arbitrage.
C. You can earn a profit of C$1.17 by using triangle arbitrage.
D. You can earn a profit of £2.47 by using triangle arbitrage.
E. You can not earn a profit given the current exchange rates.

31-17

Chapter 31 - International Corporate Finance

66. Assume that you can buy 245 Canadian dollars with 100 British pounds. How much profit
can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S.
dollars?

A. $0.86
B. $0.93
C. $1.09
D. $1.37
E. $1.55

67. Today, you can exchange $1 for £.5428. Last week, £1 was worth $1.88. If you had
converted £100 into dollars last week you would now have a:
A. profit of $2.05.
B. loss of $2.01.
C. profit of £2.01.
D. loss of $2.05.
E. profit of £2.05.

68. Today, you can get either 140 Canadian dollars or 1,140 Mexican pesos for 100 U.S.
dollars. Last year, 100 U.S. dollars was worth 139 Canadian dollars and 1,160 Mexican pesos.
Which one of the following statements is correct given this information?
A. $100 invested in Canadian dollars last year would now be worth 1,148.20 Mexican pesos.
B. $100 invested in Mexican pesos last year would now be worth $98.28.
C. $100 invested in Mexican pesos last year would now be worth $102.03
D. $1,200 invested in Canadian dollars last year would now be worth $1,208.63.
E. $1,200 invested in Canadian dollars last year would now be worth $1,191.43.

31-18

Chapter 31 - International Corporate Finance

69. 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 = $.7349.
A. $266.67
B. $293.23
C. $505.09
D. $542.93
E. $566.67

70. A new sweater costs 1,449.95 Russian rubles. How much will the identical sweater cost in
Euros if absolute purchasing power parity exists and the following exchange rates apply?

A. €41.09
B. €43.08
C. €45.90
D. €58.25
E. €60.75

71. Assume that $1 can buy you either ¥107 or £.55. If a TV in London costs £500, what will
that identical TV cost in Tokyo if absolute purchasing power parity exists?
A. ¥95,255
B. ¥96,667
C. ¥97,273
D. ¥98,008
E. ¥118,889

72. In the spot market, $1 is currently equal to A$1.42. The expected inflation rate is 3 percent
in Australia and 2 percent in the U.S.. What is the expected exchange rate one year from now
if relative purchasing power parity exists?
A. A$1.4058
B. A$1.4062
C. A$1.4286
D. A$1.4342
E. A$1.4484

31-19

Chapter 31 - International Corporate Finance

73. In the spot market, $1 is currently equal to £.55. The expected inflation rate in the U.K. is
4 percent and in the U.S. 3 percent. What is the expected exchange rate two years from now if
relative purchasing power parity exists?
A. £.5391
B. £.5445
C. £.5555
D. £.5611
E. £.5667

74. The current spot rate is C$1.400 and the one-year forward rate is C$1.344. The nominal
risk-free rate in Canada is 4 percent while it is 8 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.
A. $.0000
B. $.0033
C. $.0040
D. $.0833
E. $.0840

75. 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 percent while it is 3.5 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.
A. $.0018
B. $.0045
C. $.0120
D. $.0180
E. $.0240

31-20

Chapter 31 - International Corporate Finance

76. 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 5 percent. If interest rate parity
holds, approximately what rate can you earn on a one-year risk-free U.S. security?
A. 6.00%
B. 6.12%
C. 6.20%
D. 6.25%
E. 6.33%

77. The spot rate for the British pound currently is £.55 per $1. The one-year forward rate is
£.58 per $1. A risk-free asset in the U.S. is currently earning 3 percent. If interest rate parity
holds, approximately what rate can you earn on a one-year risk-free British security?
A. 4.01%
B. 4.31%
C. 6.22%
D. 6.87%
E. 8.62%

78. 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 $1. What is the
approximate two-year forward rate if interest rate parity holds?
A. C$.7057
B. C$.7128
C. C$.7136
D. C$.7189
E. C$.7272

79. 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 oneyear forward rates best establishes the approximate interest rate parity condition?
A. C$1.278
B. C$1.344
C. C$1.355
D. C$1.456
E. C$1.512

31-21

Chapter 31 - International Corporate Finance

80. Suppose that the spot rate on the Canadian dollar is C$1.18. The risk-free nominal rate in
the U.S. is 5 percent while it is only 4 percent in Canada. Which one of the following threeyear forward rates best establishes the approximate interest rate parity condition?
A. C$1.120
B. C$1.145
C. C$1.192
D. C$1.216
E. C$1.239

81. You are considering a project in Poland which has an initial cost of 250,000PLN. The
project is expected to return a one-time payment of 400,000PLN 5 years from now. The riskfree rate of return is 3 percent in the U.S. and 4 percent in Poland. The inflation rate is 2
percent in the U.S. and 5 percent in Poland. Currently, you can buy 375PLN for 100USD.
How much will the payment 5 years from now be worth in U.S. dollars?
A. $101,490
B. $142,060
C. $1,462,350
D. $1,489,025
E. $1,576,515

82. You are expecting a payment of 500,000PLN 3 years from now. The risk-free rate of
return is 4 percent in the U.S. and 2 percent in Poland. The inflation rate is 4 percent in the
U.S. and 1 percent in Poland. Currently, you can buy 380PLN for 100USD. How much will
the payment 3 years from now be worth in U.S. dollars?
A. $138,700
B. $138,900
C. $139,800
D. $142,300
E. $144,169

31-22

Chapter 31 - International Corporate Finance

83. You are expecting a payment of C$100,000 four years from now. The risk-free rate of
return is 3 percent in the U.S. and 4 percent in Canada. The inflation rate is 3 percent in the
U.S. and 2 percent in Canada. The current exchange rate is C$1 = $.72. How much will the
payment four years from now be worth in U.S. dollars?
A. $68,887
B. $69,191
C. $69,300
D. $72,222
E. $74,953

84. The current spot rate for the Norwegian krone is $1 = NKr6.83. The expected inflation
rate in Norway is 2 percent and in the U.S. 4 percent. A risk-free asset in the U.S. is yielding 5
percent. What risk-free rate of return should you expect on a Norwegian security?
A. 2%
B. 3%
C. 4%
D. 5%
E. 6%

85. The current spot rate for the Norwegian krone is $1 = NKr6.83. The expected inflation
rate in Norway is 3 percent and in the U.S. 2 percent. A risk-free asset in the U.S. is yielding
4.5 percent. What real rate of return should you expect on a risk-free Norwegian security?
A. 4.5%
B. 5.0%
C. 5.5%
D. 6.0%
E. 6.5%

86. The expected inflation rate in Finland is 2 percent while it is 4 percent in the U.S. A riskfree asset in the U.S. is yielding 5.5 percent. What real rate of return should you expect on a
risk-free Finnish security?
A. 2.0%
B. 2.5%
C. 3.0%
D. 3.5%
E. 4.0%

31-23

Chapter 31 - International Corporate Finance

87. 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 percent while it is
only 3 percent in the U.S. The applicable interest rate in Canada is 8 percent. 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?
A. C$335,974
B. C$342,795
C. C$346,258
D. C$349,721
E. C$356,750

88. You want to invest in a riskless project in Sweden. The project has an initial cost of
SKr2.1 million and is expected to produce cash inflows of SKr810,000 a year for 3 years. The
project will be worthless after the first 3 years. The expected inflation rate in Sweden is 2
percent while it is 5 percent in the U.S. A risk-free security is paying 6 percent in the U.S. The
current spot rate is $1 = SKr7.55. What is the net present value of this project in Swedish
krona using the foreign currency approach? Assume that the international Fisher effect
applies.
A. SKr185,607
B. SKr191,175
C. SKr196,910
D. SKr197,867
E. SKr202,818

89. 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?
A. $33,232
B. $34,040
C. $34,067
D. $34,422
E. $35,009

31-24

Chapter 31 - International Corporate Finance

90. You are analyzing a project with an initial cost of £80,000. The project is expected to
return £10,000 the first year, £40,000 the second year and £50,000 the third and final year.
The current spot rate is £.56. The nominal risk-free return is 5 percent in the U.K. and 7
percent in the U.S. The return relevant to the project is 8 percent in the U.K. and 9.25 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?
A. $7,787
B. $8,002
C. $8,312
D. $8,511
E. $8,885

Essay Questions

91. What is triangle arbitrage? Using the U.S. dollar, the Canadian dollar, and the euro,
construct an example in which triangle arbitrage exists, and then show how to exploit it.

92. 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?

31-25

Chapter 31 - International Corporate Finance

93. 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?

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

95. Are exchange rate changes between the U.S. dollar and the Japanese yen necessarily good
or bad for Japanese automakers? Explain your reasoning.

31-26

Chapter 31 - International Corporate Finance

Chapter 31 International Corporate Finance Answer Key

Multiple Choice Questions

1. A security issued in the United States that represents shares of a foreign stock and allows
that stock to be traded in the United States is called a(n):
A. American Depository Receipt.
B. Yankee bond.
C. Yankee stock.
D. Eurostock.
E. foreign obligation trust certificate.

Difficulty level: Easy
Topic: AMERICAN DEPOSITORY RECEIPT
Type: DEFINITIONS

2. The implicit exchange rate between two currencies when both are quoted in some third
currency is called a(n):
A. open exchange rate.
B. cross-rate.
C. backward rate.
D. forward rate.
E. interest rate.

Difficulty level: Easy
Topic: CROSS-RATE
Type: DEFINITIONS

31-27

Chapter 31 - International Corporate Finance

3. International bonds issued in multiple countries but denominated in a single currency are
called:
A. Treasury bonds.
B. Bulldog bonds.
C. Eurobonds.
D. Yankee bonds.
E. Samurai bonds.

Difficulty level: Easy
Topic: EUROBONDS
Type: DEFINITIONS

4. Money deposited in a financial center outside the country whose currency is involved is
called:
A. a foreign depository receipt.
B. an international exchange certificate.
C. Euroyen.
D. Eurocurrency.
E. Eurodollars.

Difficulty level: Easy
Topic: EUROCURRENCY
Type: DEFINITIONS

5. International bonds issued in a single country and denominated in that country's currency
are called:
A. Treasury bonds.
B. Eurobonds.
C. gilts.
D. Brady bonds.
E. foreign bonds.

Difficulty level: Easy
Topic: FOREIGN BONDS
Type: DEFINITIONS

31-28

Chapter 31 - International Corporate Finance

6. A foreign bond issued in the United States and denominated in dollars is called a(n):
A. American Depository Receipt.
B. European Currency Unit.
C. Yankee bond.
D. swap bond.
E. Eurobond.

Difficulty level: Easy
Topic: YANKEE BOND
Type: DEFINITIONS

7. A foreign bond issued in Japan and denominated in yen is called a(n):
A. American Depository Receipt.
B. European Currency Unit.
C. swap bond.
D. Samurai bond.
E. Eurobond.

Difficulty level: Medium
Topic: SAMURAI BOND
Type: DEFINITIONS

8. Gilts are government securities issued by:
A. Britain and Ireland.
B. Japan.
C. Germany.
D. Australia and New Zealand.
E. Italy.

Difficulty level: Medium
Topic: GILTS
Type: DEFINITIONS

31-29

Chapter 31 - International Corporate Finance

9. The rate most international banks charge one another for overnight Eurodollar loans is
called the:
A. Eurodollar yield to maturity.
B. London Interbank Offer Rate.
C. Paris Opening Interest Rate.
D. United States Treasury bill rate.
E. international prime rate.

Difficulty level: Easy
Topic: LONDON INTERBANK OFFER RATE
Type: DEFINITIONS

10. The foreign exchange market is where:
A. one country's stocks are exchanged for another's.
B. one country's bonds are exchanged for another's.
C. one country's currency is traded for another's.
D. international banks make loans to one another.
E. international businesses finalize import/export relationships with one another.

Difficulty level: Easy
Topic: FOREIGN EXCHANGE MARKET
Type: DEFINITIONS

11. The price of one country's currency expressed in terms of another country's currency is:
A. by definition, one unit of currency.
B. the cross inflation rate.
C. the depository rate.
D. the exchange rate.
E. the foreign interest rate.

Difficulty level: Easy
Topic: EXCHANGE RATE
Type: DEFINITIONS

31-30

Chapter 31 - International Corporate Finance

12. An agreement to trade currencies based on the exchange rate today for settlement within
two business days is called a(n) _____ trade.
A. swap
B. option
C. futures
D. forward
E. spot

Difficulty level: Medium
Topic: SPOT TRADE
Type: DEFINITIONS

13. The exchange rate on a spot trade is called the _____ exchange rate.
A. spot
B. forward
C. triangle
D. cross
E. open

Difficulty level: Easy
Topic: SPOT EXCHANGE RATE
Type: DEFINITIONS

14. An agreement to exchange currencies at some point in the future using an agreed-upon
exchange rate is called a _____ trade.
A. spot
B. forward
C. swap
D. floating
E. triangle

Difficulty level: Easy
Topic: FORWARD TRADE
Type: DEFINITIONS

31-31

Chapter 31 - International Corporate Finance

15. The idea that the exchange rate adjusts to keep buying power constant among currencies 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.

Difficulty level: Easy
Topic: PURCHASING POWER PARITY
Type: DEFINITIONS

16. The idea that commodities have the same value no matter where they are purchased or
what currency is used is known as _____ parity.
A. forward exchange rates
B. absolute purchasing power
C. interest rate
D. relative purchasing power
E. uncovered interest rate

Difficulty level: Medium
Topic: ABSOLUTE PURCHASING POWER PARITY
Type: DEFINITIONS

17. _____ holds because of the possibility of covered interest arbitrage.
A. Uncovered interest parity
B. Interest rate parity
C. The international Fisher effect
D. Unbiased forward rates
E. Purchasing power parity

Difficulty level: Medium
Topic: COVERED INTEREST ARBITRAGE
Type: DEFINITIONS

31-32

Chapter 31 - International Corporate Finance

18. 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:
A. the unbiased forward rates condition.
B. uncovered interest rate parity.
C. the international Fisher effect.
D. purchasing power parity.
E. interest rate parity.

Difficulty level: Easy
Topic: INTEREST RATE PARITY
Type: DEFINITIONS

19. 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.

Difficulty level: Easy
Topic: UNBIASED FORWARD RATES
Type: DEFINITIONS

20. The condition stating that the expected percentage change in the exchange rate is equal to
the difference in interest rates between the countries is called:
A. the unbiased forward rates condition.
B. uncovered interest parity.
C. the international Fisher effect.
D. purchasing power parity.
E. interest rate parity.

Difficulty level: Medium
Topic: UNCOVERED INTEREST PARITY
Type: DEFINITIONS

31-33

Chapter 31 - International Corporate Finance

21. The theory that real interest rates are equal across countries 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.

Difficulty level: Easy
Topic: INTERNATIONAL FISHER EFFECT
Type: DEFINITIONS

22. Which of the following statements are correct concerning the foreign exchange market?
I. The trading floor of the foreign exchange market is located in London, England.
II. The foreign exchange market is the world's largest financial market.
III. The four primary currencies that are traded in the foreign exchange market are the U.S.
dollar, the British pound, the Canadian dollar, and the euro.
IV. Importers and exporters are key players in the foreign exchange market.
A. I and III only
B. II and IV only
C. I and II only
D. III and IV only
E. I and IV only

Difficulty level: Medium
Topic: FOREIGN EXCHANGE MARKET
Type: CONCEPTS

31-34

Chapter 31 - International Corporate Finance

23. 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.
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

Difficulty level: Medium
Topic: TRIANGLE ARBITRAGE
Type: CONCEPTS

24. Spot trades must be settled:
A. on the day of the trade.
B. on the day following the day of the trade.
C. within two business days.
D. within three business days.
E. within one week of the trade date.

Difficulty level: Medium
Topic: SPOT TRADES
Type: CONCEPTS

25. Assume that the Euro is selling in the spot market for $1.10. Simultaneously, in the 3month forward market the Euro is selling for $1.12. Which one of the following statements
correctly describes this situation?
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. None of the other four statements correctly describes this situation.

Difficulty level: Medium
Topic: PREMIUM/DISCOUNT
Type: CONCEPTS

31-35

Chapter 31 - International Corporate Finance

26. Which of the following conditions must exist for absolute purchasing power parity to
hold?
I. the goods are identical
II. the goods have equal economic values
III. transaction costs are equal to zero
IV. there are no trade barriers
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

Difficulty level: Medium
Topic: ABSOLUTE PURCHASING POWER PARITY
Type: CONCEPTS

27. Relative purchasing power parity:
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 changes in exchange rates.
C. compares the real rate of return to the nominal rate of return.
D. looks at the factors that determine the changes in interest rates.
E. analyzes the changes in inflation rates to determine the cause.

Difficulty level: Medium
Topic: RELATIVE PURCHASING POWER PARITY
Type: CONCEPTS

28. Which one of the following statements is correct assuming that exchange rates are quoted
as units of foreign currency per dollar?
A. The exchange rate moves opposite to the value of the dollar.
B. The exchange rate rises when the U.S. inflation rate is higher than the foreign country's.
C. When a foreign currency appreciates in value it strengthens relative to the dollar.
D. The exchange rate falls as the dollar strengthens.
E. The exchange rate is unaffected by differences in the inflation rates of the two countries.

Difficulty level: Medium
Topic: CURRENCY APPRECIATION
Type: CONCEPTS

31-36

Chapter 31 - International Corporate Finance

29. Interest rate parity:
A. eliminates covered interest arbitrage opportunities.
B. exists when spot rates are equal for multiple countries.
C. means that the nominal risk-free rate of return must be the same across countries.
D. exists when the spot rate is equal to the futures rate.
E. eliminates exchange rate fluctuations.

Difficulty level: Medium
Topic: INTEREST RATE PARITY
Type: CONCEPTS

30. The unbiased forward rate is a:
A. condition where a future spot rate is equal to the current spot rate.
B. guarantee of a future spot rate at one point in time.
C. condition where the spot rate is expected to remain constant over a period of time.
D. relationship between the future spot rate of two currencies at an equivalent point in time.
E. predictor of the future spot rate at the equivalent point in time.

Difficulty level: Medium
Topic: UNBIASED FORWARD RATES
Type: CONCEPTS

31. The forward rate market is dependent upon:
A. current forward rates exceeding current spot rates.
B. current spot rates exceeding current forward rates over time.
C. current spot rates equaling current forward rates on average over time.
D. forward rates equaling the actual future spot rates on average over time.
E. current spot rates equaling the actual future spot rates on average over time.

Difficulty level: Medium
Topic: UNBIASED FORWARD RATES
Type: CONCEPTS

31-37

Chapter 31 - International Corporate Finance

32. The international Fisher effect says that _____ rates are equal across countries.
A. spot
B. one-year future
C. nominal
D. inflation
E. real

Difficulty level: Medium
Topic: INTERNATIONAL FISHER EFFECT
Type: CONCEPTS

33. The home currency approach:
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.

Difficulty level: Medium
Topic: HOME CURRENCY APPROACH
Type: CONCEPTS

34. The home currency approach:
A. generally produces more reliable results than those found using the foreign currency
approach.
B. requires an applicable exchange rate for every time period for which there is a cash flow.
C. uses the current risk-free nominal rate to discount all of the cash flows related to a project.
D. stresses the use of the real rate of return to compute the net present value (NPV) of a
project.
E. converts a foreign denominated NPV into a dollar denominated NPV.

Difficulty level: Medium
Topic: HOME CURRENCY APPROACH
Type: CONCEPTS

31-38

Chapter 31 - International Corporate Finance

35. The foreign currency approach to capital budgeting analysis:
I. is computationally easier to use than the home currency approach.
II. produces the same results as the home currency approach.
III. utilizes the uncovered interest parity relationship.
IV. computes the net present value of a project in both the foreign and in the domestic
currency.
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV

Difficulty level: Medium
Topic: FOREIGN CURRENCY APPROACH
Type: CONCEPTS

36. An international firm which imports raw materials can reduce its _____ exposure to _____
rate risk by entering into a forward contract.
A. long-term; inflation
B. short-term; inflation
C. short-run; exchange
D. long-run; exchange
E. total; interest

Difficulty level: Medium
Topic: EXCHANGE RATE RISK
Type: CONCEPTS

37. The changes in the relative economic conditions between countries are referred to as the:
A. international Fisher effect.
B. international exchange rate effect.
C. translation exposure to exchange rate risk.
D. long-run exposure to exchange rate risk.
E. the interest rate parity risk.

Difficulty level: Medium
Topic: EXCHANGE RATE RISK
Type: CONCEPTS

31-39

Chapter 31 - International Corporate Finance

38. 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.
A. I and III only
B. II and IV only
C. II and III only
D. I and IV only
E. I and II only

Difficulty level: Medium
Topic: EXCHANGE RATE RISK
Type: CONCEPTS

39. The most important complication of international finance is the:
A. basic principles of corporate finance do not apply.
B. process of foreign exchange valuation of different currencies.
C. NPV principle can not be applied to foreign operations.
D. All of the above.
E. None of the above.

Difficulty level: Easy
Topic: CURRENCY VALUATION
Type: CONCEPTS

40. The cross rate is the:
A. exchange rate between the U.S. dollar and another currency.
B. exchange rate between two currencies, neither of which is generally the U.S. dollar.
C. rate converting the direct rate into the indirect rate.
D. estimated based on the weighted average cost of capital by the agent at the exchange kiosk.
E. None of the above.

Difficulty level: Easy
Topic: CROSS RATE
Type: CONCEPTS

31-40

Chapter 31 - International Corporate Finance

41. Which of the following are the basic kinds of swaps?
A. Interest rate
B. Currency
C. Management
D. Both A and B.
E. None of the above.

Difficulty level: Easy
Topic: SWAPS
Type: CONCEPTS

42. A swap can be an agreement between two parties to:
A. exchange a floating rate currency for dollars.
B. exchange a floating rate currency for a fixed interest rate currency.
C. exchange a floating rate debt payment for a fixed rate debt payment.
D. All are legitimate swaps.
E. None of the above.

Difficulty level: Medium
Topic: SWAPS
Type: CONCEPTS

43. The acronym LIBOR stands for:
A. London Interbank Offer Rate.
B. Lending Institution Bank Receipt.
C. Leading Indicator Borrowing Rate.
D. Loan Interest Bank Order Receipt.
E. London International Opportunity Rate.

Difficulty level: Easy
Topic: LIBOR
Type: CONCEPTS

31-41

Chapter 31 - International Corporate Finance

44. Triangular arbitrage would take place if the _____ rate between two currencies was not
_____ to the ratio of the two direct rates.
A. cross; equal
B. spot; equal
C. cross; less than
D. spot; less than
E. cross; greater than

Difficulty level: Medium
Topic: TRIANGULAR ARBITRAGE
Type: CONCEPTS

45. When the German mark is quoted as $.52, this quote is a(n):
A. triangular rate.
B. indirect rate.
C. direct rate.
D. cross rate.
E. None of the above.

Difficulty level: Easy
Topic: DIRECT EXCHANGE RATE
Type: CONCEPTS

46. When the German mark is quoted as 1.923 marks to the dollar, this quote is a(n):
A. indirect rate.
B. direct rate.
C. cross rate.
D. triangular rate.
E. None of the above.

Difficulty level: Easy
Topic: INDIRECT EXCHANGE RATE
Type: CONCEPTS

31-42

Chapter 31 - International Corporate Finance

47. What kind of trade involves agreeing today on an exchange rate for settlement in 90
days?
A. Spot trade
B. Futures trade
C. Forward trade
D. Triangle trade
E. None of the above

Difficulty level: Easy
Topic: FORWARD TRADES
Type: CONCEPTS

48. "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 the above.

Difficulty level: Medium
Topic: ABSOLUTE PURCHASING POWER PARITY
Type: CONCEPTS

49. "The rate of change in commodity price levels between two countries determines the rate
of change in exchange rates between the two countries." This is a statement of:
A. Absolute Purchasing Power Parity.
B. Relative Purchase Power Parity.
C. International Fisher Effect.
D. Interest Rate Parity.
E. Unbiased Forward Rates.

Difficulty level: Medium
Topic: RELATIVE PURCHASING POWER PARITY
Type: CONCEPTS

31-43

Chapter 31 - International Corporate Finance

50. Suppose the spot exchange rate is 2 U.S. dollars per British pound. The forward exchange
rate is 1.9 dollars per pound. Which of the following is true?
A. The U.S. inflation rate is lower.
B. The pound is selling at a premium.
C. The pound is selling at a discount.
D. U.S. interest rates are lower.
E. More than one of the above is true.

Difficulty level: Medium
Topic: EXCHANGE RATES
Type: CONCEPTS

51. Which one of following statements is not correct?
A. Importers are participants in the foreign exchange market.
B. The foreign exchange market is an over-the-counter market.
C. There are no speculators in the foreign exchange market.
D. Exporters are participants in the foreign exchange market.
E. Portfolio managers are participants in the foreign exchange market.

Difficulty level: Medium
Topic: FOREIGN EXCHANGE MARKET
Type: CONCEPTS

52. Suppose that the one-year forward rate on pounds is $1.75£. Given no arbitrage
opportunities, this implies that traders expect:
A. the spot rate to be $1.75£ in one year.
B. the spot rate to be greater than $1.75£ in one year.
C. the spot rate to be less than $1.75£ in one year.
D. the spot rate to be greater than or equal to $1.75£ in one year.
E. the spot rate to be less than or equal to $1.75£ in one year.

Difficulty level: Easy
Topic: SPOT RATES
Type: CONCEPTS

31-44

Chapter 31 - International Corporate Finance

53. Remitting cash flows is a term used to describe:
A. cash flows earned in a foreign country.
B. moving cash flows from the foreign subsidiary to the parent firm.
C. forecasting the value of foreign currency one-year hence.
D. forecasting the value of U.S. currency one-year hence.
E. None of the above.

Difficulty level: Medium
Topic: CASH FLOW TRANSFERS
Type: CONCEPTS

54. Financial Accounting Standard Board Statement Number 52 requires that most assets and
liabilities be translated at the current exchange rate. Gains and losses are recorded:
A. against shareholder's equity.
B. as a normal part of income.
C. as an extraordinary item against income.
D. as a footnote to the statements.
E. only on the income tax statements.

Difficulty level: Medium
Topic: GAINS AND LOSSES - FASB 52
Type: CONCEPTS

55. The law of one price is also known as:
A. relative purchasing power parity.
B. absolute purchasing power parity.
C. complete purchasing power parity.
D. interest rate parity.
E. the international Fisher Effect.

Difficulty level: Medium
Topic: LAW OF ONE PRICE
Type: CONCEPTS

31-45

Chapter 31 - International Corporate Finance

56. Absolute purchasing power parity is also known as:
A. The law of one price.
B. relative purchasing power parity.
C. complete purchasing power parity.
D. interest rate parity.
E. the international Fisher Effect.

Difficulty level: Medium
Topic: ABSOLUTE PURCHASING POWER PARITY
Type: CONCEPTS

57. A firm engaging in international investments:
A. could provide indirect diversification.
B. could lower the risk premium on international projects.
C. could lead to lower risk adjusted discount rates.
D. A and B.
E. A, B, and C.

Difficulty level: Medium
Topic: COST OF CAPITAL FOR INTERNATIONAL FIRMS
Type: CONCEPTS

58. A foreign subsidiary can remit funds to a parent in the following form(s):
A. dividends.
B. management fees for central services.
C. royalties on the use of trade names.
D. royalties on the use of patents.
E. All of the above.

Difficulty level: Medium
Topic: REMITTANCE OF CASH FLOWS
Type: CONCEPTS

31-46

Chapter 31 - International Corporate Finance

59. How many euros can you get for $2,500 given the following exchange rates?

A. €2,306
B. €2,357
C. €2,451
D. €2,652
E. €2,675
$2,500  (€.9426  $1) = €2,357

Difficulty level: Medium
Topic: CURRENCY CONVERSION
Type: PROBLEMS

60. You are planning a trip to Australia. Your hotel will cost you A$150 per night for five
nights. You expect to spend another A$2,000 for meals, tours, souvenirs, and so forth. How
much will this trip cost you in U.S. dollars given the following exchange rates?

A. $1,926
B. $2,007
C. $2,782
D. $2,856
E. $3,926
[(A$150  5) + A$2,000]  ($1  A$1.4278) = $1,926

Difficulty level: Medium
Topic: CURRENCY CONVERSION
Type: PROBLEMS

31-47

Chapter 31 - International Corporate Finance

61. You want to import $45,000 worth of rugs from India. How many rupees will you need to
pay for this purchase if one rupee is worth $.0218?
A. 1,843,010Rs
B. 2,032,018Rs
C. 2,064,220Rs
D. 2,075,002Rs
E. 2,076,289Rs
$45,000  (1Rs  $.0218) = 2,064,220Rs

Difficulty level: Medium
Topic: CURRENCY CONVERSION
Type: PROBLEMS

62. Currently, $1 will buy C$1.36 while $1.10 will buy €1. What is the exchange rate between
the Canadian dollar and the euro?
A. C$1 = €1.10
B. C$1 = €.9091
C. C$1 = €1.2364
D. C$1.36 = €1.10
E. C$1.36 = €.9091
$1 = €1  1.10 = €.9091; C$1.36 = €.9091

Difficulty level: Medium
Topic: CROSS-RATE
Type: PROBLEMS

31-48

Chapter 31 - International Corporate Finance

63. Assume that ¥107.62 equal $1. Also assume that 7.5415Skr equal $1. How many Japanese
yen can you acquire in exchange for 6,200 Swedish krona?
A. ¥419
B. ¥434
C. ¥41,719
D. ¥46,757
E. ¥88,476
6,200SKr  (¥107.62  7.5415SKr) = ¥88,476

Difficulty level: Medium
Topic: CROSS-RATE
Type: PROBLEMS

64. 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?

A. $3,887
B. $4,039
C. $4,117
D. $4,244
E. $4,299
$10,000 - (1.4mCLP  1USD  633.31CLP) - (40,000VEB  .0882USD  1VEb.) (34,000MXD  1USD  1,919.39MXd.) = 10,000USD - 2,210.61USD - 3,528USD 17.71USD = 4,243.68USD = $4,244

Difficulty level: Challenge
Topic: CROSS-RATE
Type: PROBLEMS

31-49

Chapter 31 - International Corporate Finance

65. Assume that you can buy 250 Canadian dollars with 100 British pounds. Which one of the
following statements is correct given the following exchange rates? Assume that you start out
with British pounds.

A. You can earn a profit of C$2.47 by using triangle arbitrage.
B. You can earn a profit of £1.17 by using triangle arbitrage.
C. You can earn a profit of C$1.17 by using triangle arbitrage.
D. You can earn a profit of £2.47 by using triangle arbitrage.
E. You can not earn a profit given the current exchange rates.
[£100  (C$250  £100)  ($1  C$1.35)  (£1  $1.8305)] - £100 = £1.17 profit

Difficulty level: Medium
Topic: TRIANGLE ARBITRAGE
Type: PROBLEMS

66. Assume that you can buy 245 Canadian dollars with 100 British pounds. How much profit
can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S.
dollars?

A. $0.86
B. $0.93
C. $1.09
D. $1.37
E. $1.55
[$100  (C$1.35  $1)  (£100  C$245)  ($1.8305  $1)] - $100 = $.86

Difficulty level: Challenge
Topic: TRIANGLE ARBITRAGE
Type: PROBLEMS

31-50

Chapter 31 - International Corporate Finance

67. Today, you can exchange $1 for £.5428. Last week, £1 was worth $1.88. If you had
converted £100 into dollars last week you would now have a:
A. profit of $2.05.
B. loss of $2.01.
C. profit of £2.01.
D. loss of $2.05.
E. profit of £2.05.
[£100  ($1.88  £1)  (£.5428  $1)] - £100 = £2.05

Difficulty level: Medium
Topic: CURRENCY APPRECIATION/DEPRECIATION
Type: PROBLEMS

68. Today, you can get either 140 Canadian dollars or 1,140 Mexican pesos for 100 U.S.
dollars. Last year, 100 U.S. dollars was worth 139 Canadian dollars and 1,160 Mexican pesos.
Which one of the following statements is correct given this information?
A. $100 invested in Canadian dollars last year would now be worth 1,148.20 Mexican pesos.
B. $100 invested in Mexican pesos last year would now be worth $98.28.
C. $100 invested in Mexican pesos last year would now be worth $102.03
D. $1,200 invested in Canadian dollars last year would now be worth $1,208.63.
E. $1,200 invested in Canadian dollars last year would now be worth $1,191.43.
$1,200  ($139  $100)  ($100  $140) = $1,191.43

Difficulty level: Medium
Topic: CURRENCY APPRECIATION/DEPRECIATION
Type: PROBLEMS

31-51

Chapter 31 - International Corporate Finance

69. 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 = $.7349.
A. $266.67
B. $293.23
C. $505.09
D. $542.93
E. $566.67
$399  (C$1  $.7349) = C$542.93

Difficulty level: Medium
Topic: ABSOLUTE PURCHASING POWER PARITY
Type: PROBLEMS

70. A new sweater costs 1,449.95 Russian rubles. How much will the identical sweater cost in
Euros if absolute purchasing power parity exists and the following exchange rates apply?

A. €41.09
B. €43.08
C. €45.90
D. €58.25
E. €60.75
1,449.95Ru  ($1  29.019Ru)  (€1  $1.2159) = €41.09

Difficulty level: Challenge
Topic: ABSOLUTE PURCHASING POWER PARITY
Type: PROBLEMS

31-52

Chapter 31 - International Corporate Finance

71. Assume that $1 can buy you either ¥107 or £.55. If a TV in London costs £500, what will
that identical TV cost in Tokyo if absolute purchasing power parity exists?
A. ¥95,255
B. ¥96,667
C. ¥97,273
D. ¥98,008
E. ¥118,889
£500  ($1  £.55)  (¥107  $1) = ¥97,273

Difficulty level: Medium
Topic: ABSOLUTE PURCHASING POWER PARITY
Type: PROBLEMS

72. In the spot market, $1 is currently equal to A$1.42. The expected inflation rate is 3 percent
in Australia and 2 percent in the U.S.. What is the expected exchange rate one year from now
if relative purchasing power parity exists?
A. A$1.4058
B. A$1.4062
C. A$1.4286
D. A$1.4342
E. A$1.4484
E(S1) = A$1.42  [1 + (.03 - .02)]1 = A$1.4342

Difficulty level: Challenge
Topic: RELATIVE PURCHASING POWER PARITY
Type: PROBLEMS

31-53

Chapter 31 - International Corporate Finance

73. In the spot market, $1 is currently equal to £.55. The expected inflation rate in the U.K. is
4 percent and in the U.S. 3 percent. What is the expected exchange rate two years from now if
relative purchasing power parity exists?
A. £.5391
B. £.5445
C. £.5555
D. £.5611
E. £.5667
E(S2) = £.55  [1 + (.04 - .03)]2 = £.5611

Difficulty level: Medium
Topic: RELATIVE PURCHASING POWER PARITY
Type: PROBLEMS

74. The current spot rate is C$1.400 and the one-year forward rate is C$1.344. The nominal
risk-free rate in Canada is 4 percent while it is 8 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.
A. $.0000
B. $.0033
C. $.0040
D. $.0833
E. $.0840
Arbitrage profit = [$1  (C$1.40  $1)  1.04  ($1  C$1.344)] - ($1  1.08) = $.0033

Difficulty level: Challenge
Topic: COVERED INTEREST ARBITRAGE
Type: PROBLEMS

31-54

Chapter 31 - International Corporate Finance

75. 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 percent while it is 3.5 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.
A. $.0018
B. $.0045
C. $.0120
D. $.0180
E. $.0240
Arbitrage profit = [$1  (C$1.362  $1)  1.06  ($1  C$1.371)] - ($1  1.035) = $.0180

Difficulty level: Challenge
Topic: COVERED INTEREST ARBITRAGE
Type: PROBLEMS

76. 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 5 percent. If interest rate parity
holds, approximately what rate can you earn on a one-year risk-free U.S. security?
A. 6.00%
B. 6.12%
C. 6.20%
D. 6.25%
E. 6.33%
(¥105  ¥106) = [1.05  (1 + RUS)]; 105 + 105RUS = 111.30; RUS = 6%

Difficulty level: Medium
Topic: INTEREST RATE PARITY
Type: PROBLEMS

31-55

Chapter 31 - International Corporate Finance

77. The spot rate for the British pound currently is £.55 per $1. The one-year forward rate is
£.58 per $1. A risk-free asset in the U.S. is currently earning 3 percent. If interest rate parity
holds, approximately what rate can you earn on a one-year risk-free British security?
A. 4.01%
B. 4.31%
C. 6.22%
D. 6.87%
E. 8.62%
(£.58  £.55) = [(1 + RFc.  1.03]; .5974 = .55 + .55RFC; RFC = 8.62%

Difficulty level: Challenge
Topic: INTEREST RATE PARITY
Type: PROBLEMS

78. 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 $1. What is the
approximate two-year forward rate if interest rate parity holds?
A. C$.7057
B. C$.7128
C. C$.7136
D. C$.7189
E. C$.7272
F2 = C$.72  [1 + (.02 - .03)]2 = C$.7057

Difficulty level: Medium
Topic: INTEREST RATE PARITY
Type: PROBLEMS

31-56

Chapter 31 - International Corporate Finance

79. 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 oneyear forward rates best establishes the approximate interest rate parity condition?
A. C$1.278
B. C$1.344
C. C$1.355
D. C$1.456
E. C$1.512
F1 = C$1.40  [1 + (.04 - .08)]1 = C$1.344

Difficulty level: Medium
Topic: INTEREST RATE PARITY
Type: PROBLEMS

80. Suppose that the spot rate on the Canadian dollar is C$1.18. The risk-free nominal rate in
the U.S. is 5 percent while it is only 4 percent in Canada. Which one of the following threeyear forward rates best establishes the approximate interest rate parity condition?
A. C$1.120
B. C$1.145
C. C$1.192
D. C$1.216
E. C$1.239
F3 = C$1.18  [1 + (.04 - .05)]3 = C$1.145

Difficulty level: Medium
Topic: INTEREST RATE PARITY
Type: PROBLEMS

31-57

Chapter 31 - International Corporate Finance

81. You are considering a project in Poland which has an initial cost of 250,000PLN. The
project is expected to return a one-time payment of 400,000PLN 5 years from now. The riskfree rate of return is 3 percent in the U.S. and 4 percent in Poland. The inflation rate is 2
percent in the U.S. and 5 percent in Poland. Currently, you can buy 375PLN for 100USD.
How much will the payment 5 years from now be worth in U.S. dollars?
A. $101,490
B. $142,060
C. $1,462,350
D. $1,489,025
E. $1,576,515
E(S5) = (375PLN  100USD.  [1 + (.04 - .03)]5 = 3.941288PLN; 400,000PLN  ($1 
3.941288PLN) = $101,489.67 = $101,490

Difficulty level: Challenge
Topic: UNCOVERED INTEREST PARITY
Type: PROBLEMS

82. You are expecting a payment of 500,000PLN 3 years from now. The risk-free rate of
return is 4 percent in the U.S. and 2 percent in Poland. The inflation rate is 4 percent in the
U.S. and 1 percent in Poland. Currently, you can buy 380PLN for 100USD. How much will
the payment 3 years from now be worth in U.S. dollars?
A. $138,700
B. $138,900
C. $139,800
D. $142,300
E. $144,169
E(S3) = (380PLN  100USD.  [1 + (.02 - .04)]3 = 3.576530PLN; 500,000PLN  ($1 
3.576530PLN) = $139,800

Difficulty level: Challenge
Topic: UNCOVERED INTEREST PARITY
Type: PROBLEMS

31-58

Chapter 31 - International Corporate Finance

83. You are expecting a payment of C$100,000 four years from now. The risk-free rate of
return is 3 percent in the U.S. and 4 percent in Canada. The inflation rate is 3 percent in the
U.S. and 2 percent in Canada. The current exchange rate is C$1 = $.72. How much will the
payment four years from now be worth in U.S. dollars?
A. $68,887
B. $69,191
C. $69,300
D. $72,222
E. $74,953
E(S4) = (C$1  $.72)  [1 + (.04 - .03)]4 = C$1.445283; C$100,000  ($1  C$1.445283) =
$69,190.60 = $69,191

Difficulty level: Challenge
Topic: UNCOVERED INTEREST PARITY
Type: PROBLEMS

84. The current spot rate for the Norwegian krone is $1 = NKr6.83. The expected inflation
rate in Norway is 2 percent and in the U.S. 4 percent. A risk-free asset in the U.S. is yielding 5
percent. What risk-free rate of return should you expect on a Norwegian security?
A. 2%
B. 3%
C. 4%
D. 5%
E. 6%
.05 - .04 = RFC - .02; RFC = .03 = 3%

Difficulty level: Medium
Topic: INTERNATIONAL FISHER EFFECT
Type: PROBLEMS

31-59

Chapter 31 - International Corporate Finance

85. The current spot rate for the Norwegian krone is $1 = NKr6.83. The expected inflation
rate in Norway is 3 percent and in the U.S. 2 percent. A risk-free asset in the U.S. is yielding
4.5 percent. What real rate of return should you expect on a risk-free Norwegian security?
A. 4.5%
B. 5.0%
C. 5.5%
D. 6.0%
E. 6.5%
.045 - .02 = RFC - .03; RFC = .055 = 5.5%

Difficulty level: Medium
Topic: INTERNATIONAL FISHER EFFECT
Type: PROBLEMS

86. The expected inflation rate in Finland is 2 percent while it is 4 percent in the U.S. A riskfree asset in the U.S. is yielding 5.5 percent. What real rate of return should you expect on a
risk-free Finnish security?
A. 2.0%
B. 2.5%
C. 3.0%
D. 3.5%
E. 4.0%
.055 - .04 = RFC - .02; RFC = .035 = 3.5%

Difficulty level: Medium
Topic: INTERNATIONAL FISHER EFFECT
Type: PROBLEMS

31-60

Chapter 31 - International Corporate Finance

87. 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 percent while it is
only 3 percent in the U.S. The applicable interest rate in Canada is 8 percent. 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?
A. C$335,974
B. C$342,795
C. C$346,258
D. C$349,721
E. C$356,750
.NPV = -C$1.2m + (C$600,000  1.081) + (C$600,000  1.082) + (C$600,000  1.083) =
C$346,258

Difficulty level: Challenge
Topic: FOREIGN CURRENCY APPROACH
Type: PROBLEMS

88. You want to invest in a riskless project in Sweden. The project has an initial cost of
SKr2.1 million and is expected to produce cash inflows of SKr810,000 a year for 3 years. The
project will be worthless after the first 3 years. The expected inflation rate in Sweden is 2
percent while it is 5 percent in the U.S. A risk-free security is paying 6 percent in the U.S. The
current spot rate is $1 = SKr7.55. What is the net present value of this project in Swedish
krona using the foreign currency approach? Assume that the international Fisher effect
applies.
A. SKr185,607
B. SKr191,175
C. SKr196,910
D. SKr197,867
E. SKr202,818
.06 - .05 = RFC - .02; RFC = .03; NPV = -SKr2.1m + (SKr810,000  1.031) + (SKr810,000 
1.032) + (SKr810,000  1.033) = SKr191,175

Difficulty level: Challenge
Topic: FOREIGN CURRENCY APPROACH
Type: PROBLEMS

31-61

Chapter 31 - International Corporate Finance

89. 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?
A. $33,232
B. $34,040
C. $34,067
D. $34,422
E. $35,009
E(S1) = .54  [1 + (.04 - .03)]1 = .545400
E(S2) = .54  [1 + (.04 - .03)]2 = .550854
E(S3) = .54  [1 + (.04 - .03)]3 = .556363
CF0 = -£120,000  ($1  £.540000) = -$222,222.22
CO1 = £40,000  ($1  £.545400) = $73,340.67
CO2 = £50,000  ($1  £.550854) = $90,768.15
CO3 = £60,000  ($1  £.556363) = $107,843.26
NPV = -$222,222.22 + ($73,340.67  1.031) + ($90,768.15  1.032) + ($107,843.26  1.033) =
$33,232

Difficulty level: Challenge
Topic: HOME CURRENCY APPROACH
Type: PROBLEMS

31-62

Chapter 31 - International Corporate Finance

90. You are analyzing a project with an initial cost of £80,000. The project is expected to
return £10,000 the first year, £40,000 the second year and £50,000 the third and final year.
The current spot rate is £.56. The nominal risk-free return is 5 percent in the U.K. and 7
percent in the U.S. The return relevant to the project is 8 percent in the U.K. and 9.25 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?
A. $7,787
B. $8,002
C. $8,312
D. $8,511
E. $8,885
E(S1) = .56  [1 + (.05 - .07)]1 = .548800
E(S2) = .56  [1 + (.05 - .07)]2 = .537824
E(S3) = .56  [1 + (.05 - .07)]3 = .527068
CF0 = -£80,000  ($1  £.560000) = -$142,857.14
CO1 = £10,000  ($1  £.548800) = $18,221.57
CO2 = £40,000  ($1  £.537824) = $74,373.77
CO3 = £50,000  ($1  £.527068) = $94,864.42
NPV = -$142,857.14 + ($18,221.57  1.09251) + ($74,373.77  1.09252) + ($94,864.42 
1.09253) = $8,885.40 = $8,885

Difficulty level: Challenge
Topic: HOME CURRENCY APPROACH
Type: PROBLEMS

Essay Questions

91. What is triangle arbitrage? Using the U.S. dollar, the Canadian dollar, and the euro,
construct an example in which triangle arbitrage exists, and then show how to exploit it.
Students should construct an example similar to Example 31.2 in the text.

Topic: TRIANGLE ARBITRAGE
Type: ESSAYS

31-63

Chapter 31 - International Corporate Finance

92. 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?
Each of the variables in these equations must be estimated so it is unlikely, even unrealistic,
to expect them to hold with any high degree of accuracy. In addition, most countries manage
the value of their currencies to some extent which adds a significant amount of noise to the
exchange rate process.

Topic: RELATIVE PPP AND UNCOVERED INTEREST PARITY
Type: ESSAYS

93. 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?
The requirements for absolute PPP to hold are zero trading costs, lack of trade barriers, and
identical goods. Absolute PPP would likely hold to some degree for U.S. and Canadian firms
sitting on the border directly across from one another, especially with the reduction of
trading costs brought about by NAFTA. However, absolute PPP most likely does not hold for
the Houston and Winnipeg firms because of the significant transportation and search costs
between these two disparate locations.

Topic: ABSOLUTE PURCHASING POWER PARITY
Type: ESSAYS

31-64

Chapter 31 - International Corporate Finance

94. Describe the foreign currency and home currency approaches to capital budgeting. Which
is better? Which approach would you recommend a U.S. firm use? Justify your answer.
In the home currency approach, you must forecast both the foreign cash flows and the future
expected exchange rates, convert the foreign currency cash flows into dollars, and discount
those dollar cash flows at the cost of capital for dollar-denominated investments. In the
foreign currency approach, you forecast the foreign cash flows, determine the discount rate
appropriate for cash flows denominated in the foreign currency and discount those cash flows
to the present. You then convert the NPV to dollars using the current exchange rate. If done
properly, both approaches give identical results. However, the foreign currency approach is
computationally somewhat more straightforward.

Topic: INTERNATIONAL CAPITAL BUDGETING
Type: ESSAYS

95. Are exchange rate changes between the U.S. dollar and the Japanese yen necessarily good
or bad for Japanese automakers? Explain your reasoning.
On the plus side, a strengthened dollar makes Japanese cars less expensive in dollars, thus
increasing the automaker's export sales. In addition, American cars sold in Japan will be
relatively more expensive, thus making Japanese cars more price competitive in their home
market. On the other hand, raw materials and any other goods and services purchased from
America will be more expensive for the manufacturer, creating upward pressure on its cost
structure and squeezing profits. The net result may very well be a tradeoff of higher sales
volume versus lower per unit profits.

Topic: EXCHANGE RATES AND FIRM VALUE
Type: ESSAYS

31-65

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close