978-0132757089 Chapter 19 Part 3

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15) The nominal rate of interest in Russia is 9.5% and the inflation rate is 8%. The nominal rate

of interest in Canada is 2.5% and the inflation rate is zero. We would expect:

A) the ruble to strengthen against the dollar.

B) the exchange rate between the Canadian dollar and the ruble to stay the same because of

interest rate parity.

C) the exchange rate between the Canadian dollar and the ruble to stay the same because of

purchasing price parity.

D) the Canadian dollar to strengthen against the ruble.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

16) Which of the following statements is true?

A) Interest rate parity indicates that the forward premium or discount should be greater than the

differences in the national interest rates for securities of the same maturity.

B) Purchasing power parity indicates that, in the long run, exchange rates adjust to reflect

international differences in inflation so that the purchasing power of each currency tends to

remain the same.

C) The International Fisher Effect indicates that the nominal interest rate should be the same all

over the world at all times if the market is efficient.

D) Both B and C.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Principles: Principle 3: Cash Flows Are the Source of Value

17) Which of the following is a conceptual method for keeping the foreign currency market in

equilibrium?

A) The purchasing power parity mechanisms

B) The balance of trade mechanisms

C) Government intervention through central banks

D) The interest rate parity mechanisms

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

18) Assume that a Toyota sold for 1,476,000 yen in 1990. If the price for this automobile was

$8,200 in 1985, and the car still sells for the same amount of yen today, but the current exchange

rate is 90 yen per dollar, what is the car selling for today in U.S. dollars?

A) $ 14,760

B) $16,400

C) $18,204

D) $12,062

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Principles: Principle 3: Cash Flows Are the Source of Value

19) If a currency’s forward price in U. S. dollars is higher than the spot price, interest rates are

higher in the foreign country than they are in the U.S.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

20) If a currency’s forward price in U. S. dollars is lower than the spot price, interest rates are

higher in the foreign country than they are in the U.S.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

21) Purchasing price parity is more likely to be the case for common commodities than for

personal services.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Principles: Principle 3: Cash Flows Are the Source of Value

22) If a country is has high interest rates because of inflation, the forward price of its currency

will be higher than the spot price.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

23) Prices differences of identical items in different currencies can best be explained by the

international Fisher effect.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: international Fisher effect

Principles: Principle 3: Cash Flows Are the Source of Value

24) The forward price of currencies can be either higher, lower or even the same as the spot

price.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

25) The price of a Big Mac is more or less the same everywhere in the world.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Principles: Principle 3: Cash Flows Are the Source of Value

26) What is meant by interest rate parity?

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

27) Assume that the interest rate in India is 10% while in Europe it is 3% and that the exchange

rate is 65.50 rupees to the euro. What would we expect the 6 month exchange rate to be?

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

28) What is the law of one price? How does it apply to foreign exchange rates?

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Principles: Principle 3: Cash Flows Are the Source of Value

29) Jean-Marc lives in Besançon, a French city near the Swiss border. The exchange rate is 1.47

Swiss francs to the euro. If Jean-Marc’s shopping cart of groceries typically costs him 80 euros,

what should it cost him if he drives across the border to Switzerland? Do you think that purchase

price parity would apply in this situation?

80 x 1.47 =118 Swiss francs. Although some items might be priced differently because of taxes

or brand preferences, it is unlikely that a grocery cart of diverse items would be priced very

differently when it is easily possible for customers to drive from one location to the other. If

groceries were significantly less expensive on one or the other side of the border, local merchants

in the more expensive country would be unable to compete or survive.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

1) Which of the following international business activities constitutes a foreign direct

investment? All firms mentioned are U.S. based.

A) Yanqui Spirits imports a 1000 cases of rum from the Dominican Republic.

B) WMT Inc. opens a big-box retail facility in Nicaragua.

C) Condor University runs training sessions for Indonesian civil servants on its California

Campus.

D) Merkizer Pharmaceuticals licenses an Indian company to manufacture a drug under its

patents.

Topic: 19.3 Capital Budgeting for Direct Foreign Investment

Keywords: direct foreign investment

Principles: Principle 3: Cash Flows Are the Source of Value

2) One reason for international investment is that:

A) the economies of many countries are growing faster than the U.S.

B) price-earnings (P/E) ratios are higher in foreign countries.

C) doing business in foreign countries is simpler than in the U. S.

D) raw materials are typically cheaper in other countries than in the U. S.

Topic: 19.3 Capital Budgeting for Direct Foreign Investment

Keywords: direct foreign investment

Principles: Principle 3: Cash Flows Are the Source of Value

3) In 2010, the U. S. A. comprised ________ of the world’s stock market capitalization.

A) 20%

B) just under 50%

C) 75%

D) 90%

Topic: 19.3 Capital Budgeting for Direct Foreign Investment

Keywords: multinational corporation

Principles: Principle 3: Cash Flows Are the Source of Value

34.175. Ramo Corp. has undertaken a capital project in Bangkok that is expected to produce a

cash flow of 17,087,500 bhat at the end of the first year. The company will discount cash flows at

a rate of 14%. What is the present value of the first year cash flow in U.S. dollars.

A) $14,989,035

B) $500,000

C) $438,596

D) $452,363

Topic: 19.3 Capital Budgeting for Direct Foreign Investment

Keywords: direct foreign investment

Principles: Principle 3: Cash Flows Are the Source of Value

5) The spot exchange rate for the Thai bhat is 33.135 bhat to the dollar or .00318 dollar to the

bhat. For capital budgeting purposes, Ramo Corp needs to estimate the exchange rate 5 years

from now. The U.S. interest rate is 4%; the interest rate in Thailand is 8%. The estimated 5 year

forward rate is:

A) 27.44 bhat to the dollar.

B) 40.02 bhat to the dollar.

C) 31.90 bhat to the dollar.

D) 34.41 bhat to the dollar.

Topic: 19.3 Capital Budgeting for Direct Foreign Investment

Keywords: direct foreign investment

Topic: 19.3 Capital Budgeting for Direct Foreign Investment

Keywords: direct foreign investment

Principles: Principle 3: Cash Flows Are the Source of Value

7) Some complexities of conducting international business include:

A) multiple currencies.

B) differing legal requirements.

C) restrictions on repatriating earnings.

D) all of the above.

Topic: 19.3 Capital Budgeting for Direct Foreign Investment

Keywords: political risk

Principles: Principle 3: Cash Flows Are the Source of Value

8) When multinational companies evaluate capital investments in foreign countries, they

discount:

A) pre-tax earnings of the foreign subsidiary.

B) foreign earnings at home country discount rates.

C) only earnings that are expected to be transferred back to the parent company.

D) all cash flows in the foreign currency at the host country discount rates.

Topic: 19.3 Capital Budgeting for Direct Foreign Investment

Keywords: direct foreign investment

Principles: Principle 3: Cash Flows Are the Source of Value

9) Exchange rate risk:

A) arises from the fact that the spot exchange rate on a future date is a random variable.

B) applies only to certain types of international businesses.

C) has been phased out due to recent international legislation.

D) is not a significant factor in foreign investment decisions.

Topic: 19.3 Capital Budgeting for Direct Foreign Investment

Keywords: exchange rate risk