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Financial Management: Principles and Applications, 11e (Titman)
Chapter 19 International Business Finance
1) Trading in foreign exchange markets is dominated by:
A) Russian rubles, Indian rupees and Indonesian rupeas.
B) Spanish pesetas, German marks, French francs.
C) Chinese renminbis, Indian rupees and pesos of various Latin American countries.
D) U. S. dollars, the British pound, the euro and the yen.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: foreign exchange markets
Principles: Principle 3: Cash Flows Are the Source of Value
2) Participants in foreign exchange trading include:
A) importers and exporters.
B) investors and portfolio managers.
C) currency traders.
D) all of the above.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: foreign exchange markets
Principles: Principle 3: Cash Flows Are the Source of Value
3) Suppose International Trading Enterprises purchased 25,000 kilograms of Belgian chocolate
for a price of 100,000 euros. If the current exchange rate is .69368 euros to the U.S. dollar, what
is the purchase price of the chocolate in dollars?
A) $14,416
B) $693,368
C) $69,368
D) $144,159
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
1
Copyright © 2011 Pearson Education, Inc.
4) A spot transaction occurs when one currency is:
A) deposited in a foreign bank.
B) immediately exchanged for another currency.
C) exchanged for another currency at a specified price.
D) traded for another at an agreed-upon future price.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: spot rates
Principles: Principle 3: Cash Flows Are the Source of Value
5) Forward rates are quoted:
A) in direct form.
B) in indirect form.
C) at a premium or discount.
D) all of the above.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: forward rates
Principles: Principle 3: Cash Flows Are the Source of Value
6) If the quote for a forward exchange contract is greater than the computed price, the forward
contract is:
A) overvalued.
B) undervalued.
C) a good buy.
D) at equilibrium.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: forward rates
Principles: Principle 3: Cash Flows Are the Source of Value
7) Buying and selling in more than one market to make a riskless profit is called:
A) profit maximization.
B) arbitrage.
C) international trading.
D) cannot be determined from the above information.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: arbitrage
Principles: Principle 3: Cash Flows Are the Source of Value
2
Copyright © 2011 Pearson Education, Inc.
8) After the U.S. dollar, the most widely traded currency is:
A) the Saudi riyal.
B) the euro.
C) the Swiss franc.
D) the Canadian dollar.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: foreign exchange markets
Principles: Principle 3: Cash Flows Are the Source of Value
9) Which of the following statements about exchange rates is true?
A) Exchange rates are fixed by international agreements.
B) Exchange fluctuate between currencies but are fixed in terms of gold.
C) Exchange rates fluctuate constantly.
D) Are regulated by a special committee of the United Nations.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate risk
Principles: Principle 3: Cash Flows Are the Source of Value
10) What keeps foreign exchange quotes in two different countries in line with each other?
A) Cross rates
B) Forward rates
C) Arbitrage
D) Spot rates
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: arbitrage
Principles: Principle 3: Cash Flows Are the Source of Value
11) An attempt to profit by converting dollars to yen, yen to euros, and euros back to dollars
would be an example of:
A) arbitrage.
B) speculation.
C) hedging.
D) intervention.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: arbitrage
Principles: Principle 3: Cash Flows Are the Source of Value
3
Copyright © 2011 Pearson Education, Inc.
12) An investor purchased 200,000,000 Japanese yen at an exchange rate of 93 yen to the dollar.
the yen cost her ________.
A) $18,600
B) $10,752.70
C) $21,505.30
D) $186,000
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
13) An investor purchased 1,000,000 Canadian dollars at an exchange rate of 1.0309 Canadian
dollars to the U.S. dollar. The Canadian dollars cost her ________.
A) $103,090
B) $970,026
C) $1,030,927
D) $97,000
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
14) An investor purchased Canadian dollars at an exchange rate of $0.97 U.S. to 1 Canadian
dollar. The Canadian dollars cost her $1,000,000 (U.S. dollars). How many Canadian dollars did
she buy?
A) $103,090
B) $970,026
C) $1,030,927
D) $97,000
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
4
Copyright © 2011 Pearson Education, Inc.
15) Assume that an investor purchased 200,000,000 Japanese yen in New York at an exchange
rate of 93 yen to the dollar and simultaneously sold the yen in Tokyo at an exchange rate of 91
Japanese yen to the dollar. Further assume that there was no cost associated with this transaction.
What profit or loss did the investor make?
A) ($43,010) loss
B) $47,272 profit
C) ($47,272) loss
D) $43,956 profit
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: arbitrage
Principles: Principle 3: Cash Flows Are the Source of Value
16) Transactions carried out in the foreign exchange markets include:
A) spot transactions.
B) forward exchange contracts which allow the exchange of one currency for another today.
C) swaps.
D) both A and B.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: foreign exchange markets
Principles: Principle 3: Cash Flows Are the Source of Value
17) Assume that an investor owned 5,000 shares of Anheuser-Busch Corporation common stock
prior to the acquisition by InBev of Belgium. At the time of the acquisition, the dollar was
worth .77 euros. Further assume that the purchase price was equal to 54 euros per share. What
was the sales price of Anheuser Busch common stock per share in U.S. dollars?
A) $41.58
B) $54
C) $77
D) $70.13
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
18) One U.S. dollar buys 92.61 yen and 12.707 Mexican pesos. What is price of pesos in yen?
A) 7.2881
B) .1372
C) .0787
D) 1.0798
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: cross rate
5
Copyright © 2011 Pearson Education, Inc.
Principles: Principle 3: Cash Flows Are the Source of Value
19) Assume that an importer of wine were to purchase 5,000 cases of premium French Bordeaux
for 700,000 euros. Further assume that the quoted exchange rates are as follows: spot rate = .70
euros to the U.S. dollar; 30-day forward rate = .705 euros to the U.S. dollar; and 90-day forward
rate = .710 euros to the U.S. dollar. If the actual currency exchange rate at the time payment is
due in 90 days is equal to the forward rate of .710 euros to the U.S. dollar, how much would the
wine cost the importer in U.S. dollars if payment is made in 90 days? Round to the nearest dollar.
A) $704,225
B) $355,000
C) $497,000
D) $985,915
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: forward rates
Principles: Principle 3: Cash Flows Are the Source of Value
10.2 pesos to the dollar. How many dollars will you receive?
A) You will receive 30,600 US$.
B) You will receive 294.12 US$.
C) You will lose money converting back into dollars.
D) This is not enough information to find the number of dollars.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
21) You are on your way to a beautiful Mexican resort. The current exchange rate is 12 pesos to
the dollar. When you arrive, you convert 1,000 US$ for how many pesos?
A) 12,000 pesos
B) 1,200 pesos
C) 8,333 pesos
D) 83.33 pesos
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
6
Copyright © 2011 Pearson Education, Inc.
22) Assume that a buyer of Italian wine saw the following quotes: spot rate of .75 euros to the
U.S. dollar; 30-day forward rate of .747 euros to the U.S. dollar; 90-day forward rate of .744
euros to the U.S. dollar. What does this information imply?
A) The forward euro is selling at a premium as compared with the spot euro.
B) The dollar is expected to maintain the same value in the near future relative to the euro.
C) The forward euro is selling at a discount as compared with the spot euro.
D) None of the above.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
Use the following information to answer the following question(s).
Below is an excerpt from Table 19.1, Foreign Exchange Ratrd (January 8, 2010) that appears in
your text. (Sources The Wall Street Journal and Reuters)
U.S. $ equivalent Currency per U.S. $
Country Mon. Mon.
India (Rupee) 0.02199 45.4752
Britain (Pound) 1.6028 .6239
180-day Forward 1.6008 .6247
180-day Forward 0.9698 1.30311
23) To buy one Indian Rupee you would need:
A) 2.199 cents.
B) 45.4752 dollars.
C) 21.99 cents.
D) 4.54752 dollars.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
7
Copyright © 2011 Pearson Education, Inc.
24) The number of pounds you can purchase per U.S. dollar is:
A) 1.6008.
B) 6.239.
C) 0.6239.
D) 1.6028.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
25) Assume that your firm must pay 10,000,000 rupees to an Indian firm. How much will you
have to pay in U.S. dollars.
A) $2,199,000
B) $219,900
C) $454,752,000
D) $$454,752
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
26) Assume that your firm must pay $4,000 to a Swiss firm. In Swiss francs Swiss firm will
receive:
A) 3,908.80 Swiss francs.
B) 3,913 Swiss francs.
C) 39,088 Swiss francs.
D) 4,093.20 Swiss francs.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: exchange rate
Principles: Principle 3: Cash Flows Are the Source of Value
27) The Swiss franc to British pound exchange rate is:
A) 1.64 Swiss francs to the pound.
B) 1.5663 Swiss francs to the pound.
C) .6097 Swiss francs to the pound.
D) .9772 Swiss francs to the pound.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: cross rate
Principles: Principle 3: Cash Flows Are the Source of Value
8
Copyright © 2011 Pearson Education, Inc.
28) The British pound to Swiss franc exchange rate is:
A) 1.64 British pounds to the Swiss franc.
B) 1.5663 British pounds to the Swiss franc.
C) .6097 British pounds to the Swiss franc.
D) .9772 British pounds to the Swiss franc.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: cross rate
Principles: Principle 3: Cash Flows Are the Source of Value
29) The 90-day forward rate for Canadian dollars is:
A) 10.309.
B) 9.7000.
C) 0.9700.
D) 01.0309.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: forward rates
Principles: Principle 3: Cash Flows Are the Source of Value
30) Based on the forward rates in table 19.1, the British pound is expected to:
A) stay the same against the dollar.
B) weaken against the dollar.
C) fluctuate randomly against the dollar.
D) strengthen against the dollar.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: forward rates
Principles: Principle 3: Cash Flows Are the Source of Value
31) The following are the prices in the foreign exchange market between the U.S. dollar and a
foreign currency (fc). Spot 0.6335US$/fc; three-month forward 0.6375US$/fc. What was the
discount or premium on three-month forward for the foreign currency?
A) 0.63% premium
B) 0.40% premium
C) 0.63% discount
D) 0.40% discount
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: forward rates
Principles: Principle 3: Cash Flows Are the Source of Value
9
Copyright © 2011 Pearson Education, Inc.
32) Assume that a firm purchases foreign currency in order to complete the purchase of raw
material from an overseas supplier. The currency is purchased today at an exchange rate that is
good only for today. This transaction is referred to as a(n) ________ transaction.
A) forward
B) arbitrage
C) spot
D) hedge
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: spot rates
Principles: Principle 3: Cash Flows Are the Source of Value
33) Forward exchange rates:
A) reduce uncertainty about future value of currencies.
B) are always slightly lower than the spot rate.
C) reflect expectations about the future value of currencies.
D) both A and C.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: forward rates
Principles: Principle 3: Cash Flows Are the Source of Value
34) A trader who simultaneously bought Swiss francs in New York for .9772 and sold them in
Zurich for .9774 would be practicing:
A) simple arbitrage.
B) inside trading.
C) compound arbitrage.
D) parity exploitation.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: arbitrage
Principles: Principle 3: Cash Flows Are the Source of Value
35) A dealer in New York offers to buy U.K. pounds for $1.60 and sell them for $1.605. The
different prices are due to:
A) arbitrage.
B) a tax on currency transactions.
C) the bid-ask spread.
D) supply and demand.
Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates
Keywords: bid-ask
Principles: Principle 3: Cash Flows Are the Source of Value
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