Financial Management, 12e (Titman/Keown/Martin)
Chapter 19 International Business Finance
19.1 Foreign Exchange Markets and Currency Exchange Rates
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, Saudi ryals, pesos of various Latin American countries.
D) U. S. dollars, the British pound, the euro and the yen.
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
2) Participants in foreign exchange trading include
A) importers and exporters.
B) investors and portfolio managers.
C) currency traders.
D) all of the above.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
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 .77000 euros to the
U.S. dollar, what is the purchase price of the chocolate in dollars?
A) $19,250
B) $770,000
C) $77,000
D) $129,870
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
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 speciied price.
D) traded for another at an agreed-upon future price.
Question Status: Previous edition
1
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
5) Forward rates are quoted
A) in direct form.
B) in indirect form.
C) at a premium or discount.
D) all of the above.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
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.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
2
7) Buying and selling in more than one market to make a riskless proit is called
A) proit maximization.
B) arbitrage.
C) international trading.
D) cannot be determined from the above information.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
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.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
9) Which of the following statements about exchange rates is true?
A) Exchange rates are ixed by international agreements.
B) Exchange luctuate between currencies but are ixed in terms of gold.
C) Exchange rates luctuate constantly.
D) Are regulated by a special committee of the United Nations.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
3
10) What keeps foreign exchange quotes in two diferent countries in line with each other?
A) Cross rates
B) Forward rates
C) Arbitrage
D) Spot rates
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
11) An attempt to proit 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.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
12) An investor purchased 20,000,000 Japanese yen at an exchange rate of 101.31 yen to
the dollar. The yen cost her ________. Round answer to the nearest dollar.
A) $202,620
B) $19,741
C) $197,414
D) $20,262,000
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
4
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.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
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
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
15) Assume that an investor purchased 200,000,000 Japanese yen in New York at an
exchange rate of 101 yen to the dollar and simultaneously sold the yen in Tokyo at an
exchange rate of 99 Japanese yen to the dollar. Further assume that there was no cost
associated with this transaction. What proit or loss did the investor make? Round your
answer to the nearest dollar.
A) ($400,040) loss
B) $40,004
C) ($40,004) loss
D) $400,040 proit
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
5
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.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
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
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
18) One U.S. dollar buys 101.31 yen and 12.536 Mexican pesos. What is price of pesos in
yen?
A) 8.0815
B) .12374
C) .08082
D) 12.3740
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
6
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 = .770 euros to the U.S. dollar; 30-day forward rate = .775 euros to the U.S.
dollar; and 90-day forward rate = .778 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 .778
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) $89,743
B) $909,091
C) $544,600
D) $899,743
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
20) You are leaving Mexico and have 3,200 pesos to change into dollars. The exchange rate
is 12.5 pesos to the dollar. How many dollars will you receive?
A) $256
B) $400
C) $2,560
D) $40
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
21) You are on your way to a beautiful Mexican resort. The current exchange rate is 12
pesos to the dollar. When you arrive, you convert 1,000 US$ for how many pesos?
A) 12,000 pesos
B) 1,200 pesos
C) 8,333 pesos
D) 83.33 pesos
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
7
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.
Question Status: Previous edition
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
Use the following information to answer the following question(s).
Below is an excerpt from Table 19.1, Foreign Exchange Rates (December 26, 2012) that
appears in your text. (Sources The Wall Street Journal, Reuters)
Country/Currency In US$ Per US$
India (Rupee) .01818 55.0155
Britain (Pound) 1.6133 .6198
1-mos forward 1.6133 .6198
3-mos forward 1.6130 .6200
6-mos forward 1.6128 .6200
Canada (Dollar) 1.0074 .9927
Switzerland franc 1.0917 .9160
1-mos forward 1.0928 .9151
3-mos forward 1.0939 .9141
6-mos forward 1.0961 .9123
23) To buy one Indian Rupee you would need
A) 1.818 cents.
B) 55.0155 cents.
C) 18.18 cents.
D) .01818 cents.
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
8
24) The number of pounds you can purchase per U.S. dollar is
A) 1.6133.
B) 6.198.
C) 0.6198.
D) 16.133.
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
25) Assume that your irm must pay 10,000,000 rupees to an Indian irm. How much will
you have to pay in U.S. dollars?
A) $1,817,670
B) $181,767
C) $550,155
D) $5,502
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
26) Assume that your irm must pay $4,000 to a Swiss irm. In Swiss francs, the Swiss irm
will receive
A) 3,908.80 Swiss francs.
B) 3,913 Swiss francs.
C) 39,088 Swiss francs.
D) 4,093.20 Swiss francs.
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
9
27) The Swiss franc to British pound exchange rate is
A) 1.4719 Swiss francs to the pound.
B) 14.7185 Swiss francs to the pound.
C) .6198 Swiss francs to the pound.
D) 1.0917 Swiss francs to the pound.
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
28) The British pound to Swiss franc exchange rate is
A) 1.4719 British pounds to the Swiss franc.
B) 14.719 British pounds to the Swiss franc.
C) .6794 British pounds to the Swiss franc.
D) 1.0917 British pounds to the Swiss franc.
Question Status: Revised
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
29) The direct 3 month forward rate for UK pounds is
A) .16130
B) 6.2000
C) 1.6130
D) .6200
Question Status: New question
Objective: 19.1 Understand the nature and importance of the foreign exchange market and learn to
read currency exchange rates.
Keywords: foreign exchange markets
Principles: Principle 4: Market Prices Relect Information
10