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Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 23 International Corporate Finance
23.1 Foreign Exchange
1) Even though a project may generate foreign currency cash lows, the irm cares about
the home currency value of the project.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) Firms that have a considerable amount of earnings abroad do not face any risk from
changes in exchange rates.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) The ________ rate is a price for a currency denominated in another currency.
A) marginal
B) foreign exchange
C) interest
D) reversion
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) The ________ market is where currencies are traded twenty-four hours a day and with a
large turnover.
A) foreign exchange
B) bond
C) stock
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) ________ are players in the foreign exchange market.
A) Global investment banks
B) Large multinational irms
C) Central banks
D) all of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6) One British pound can be purchased for $1.90. What is the exchange rate in terms of
pounds per dollar?
A) £0.451
B) £0.491
C) £0.526
D) £0.543
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
7) One British pound can be purchased for $1.65. What is the exchange rate in terms of
pounds per dollar?
A) £0.551
B) £0.606
C) £0.626
D) £0.645
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
2
8) One British pound can be purchased for $1.80. What is the exchange rate in terms of
pounds per dollar?
A) £0.451
B) £0.491
C) £0.526
D) £0.556
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
9) You have just landed in Paris with $750 in your wallet. At the foreign exchange booth,
you see that euros are being quoted at $1.34/€. How many euros can you exchange for your
$750?
A) 1,005 euros
B) 559.70 euros
C) 750.00 euros
D) 179.56 euros
AACSB Objective: Analytic Skills
Author: WC
Question Status: Revised
10) You irm needs to pay its British supplier £1,000,000. If the exchange rate is $1.61/ £,
how many dollars will you need to pay the British supplier?
A) $1,610,000
B) $621,118
C) $385,787
D) $1,000,000
AACSB Objective: Analytic Skills
Author: WC
Question Status: Revised
11) Which two currencies account for more than half of all the trading volume in the
foreign exchange market?
A) Euro and Chinese yuan
B) U.S. dollar and the British pound
C) Euro and the British pound
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D) U.S. dollar and the euro
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
12) What is foreign exchange market?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
13) What are the timings of the foreign exchange market?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
14) How are exchange rates quoted in the Wall Street Journal?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
4
23.2 Exchange Rate Risk
1) Multinational irms often use currency forward contracts and currency options to hedge
foreign exchange rate risk.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) The spot exchange rate is the current rate at which one currency can be converted into
another today.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) Hedging with currency options involves a commitment by a irm to buy currency at a
ixed rate.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) A ________ exchange rate means that the rate changes constantly depending on the
quantity supplied and demanded for the currency.
A) ixed
B) loating
C) banded
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5
5) The supply and demand for a currency is driven by ________.
A) irms trading goods
B) investors trading securities
C) actions of central banks in each country
D) all of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6) Suppose a irm imports goods from Europe and the import price is denominated in
euros, then ________.
A) the exporter bears foreign exchange risk
B) Central Bank faces foreign exchange risk
C) the importer bears foreign exchange risk
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
7) A ________ is written between a irm and a bank and it ixes the currency exchange rate
for a transaction that will occur at a future date.
A) currency forward contract
B) currency options contract
C) currency call option
D) currency put option
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6
8) A ________ exchange rate is the rate that a irm can tie in for a future transaction date.
A) ixed
B) forward
C) loating
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
9) Assume IBM enters into a forward contract to purchase 200,000 euros at a rate of
$1.50/euro one year from today. If the spot exchange rate is $2/euro one year later, what is
the dollar amount that IBM must pay to receive the euros?
A) $200,000
B) $225,000
C) $400,000
D) $300,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
10) Assume IBM enters into a forward contract to purchase 100,000 euros at a rate of
$1.60/euro one year from today. If the spot exchange rate is $2/euro one year later, what is
the dollar amount that IBM must pay to receive the euros?
A) $100,000
B) $160,000
C) $200,000
D) $300,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
7
11) Assume IBM enters into a forward contract to purchase 200,000 euros at a rate of
$1.90/euro one year from today. If the spot exchange rate is $2/euro one year later, what is
the dollar amount that IBM must pay to receive the euros?
A) $300,000
B) $325,000
C) $380,000
D) $400,000
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
12) A ________ strategy replicates the forward contract by borrowing in one currency,
converting to the other currency and investing in the new currency.
A) cash-and-carry
B) futures
C) forward
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
13) ________ asserts that because a forward contract and a cash-and-carry strategy
accomplish the same conversion, they must result in the same exchange rate.
A) Covered interest parity
B) Forward premium puzzle
C) Forward discount puzzle
D) None of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
8
14) The spot exchange rate for the British pound is 0.6 pounds/dollar. The one-year interest
rate in the United States is 5% and the one-year interest rate in Britain is 6%. Based on
these rates, what one-year forward exchange rate is consistent with the absence of
arbitrage?
A) 0.606 pounds/dollar
B) 0.612 pounds/dollar
C) 0.617 pounds/dollar
D) 0.624 pounds/dollar
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
15) The spot exchange rate for the British pound is 0.5 pounds/dollar. The one-year interest
rate in the United States is 4% and the one-year interest rate in Britain is 5%. Based on
these rates, what one-year forward exchange rate is consistent with the absence of
arbitrage?
A) 0.606 pounds/dollar
B) 0.612 pounds/dollar
C) 0.617 pounds/dollar
D) 0.505 pounds/dollar
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
16) The spot exchange rate for the British pound is 0.65 pounds/dollar. The one-year
interest rate in the United States is 5% and the one-year interest rate in Britain is 7%.
Based on these rates, what one-year forward exchange rate is consistent with the absence
of arbitrage?
A) 0.646 pounds/dollar
B) 0.652 pounds/dollar
C) 0.662 pounds/dollar
D) 0.674 pounds/dollar
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
17) The one-year forward exchange rate is Rupees 50/$. If the one-year interest rate in the
United States is 5% and in India is 8%, what is the spot exchange rate so as to preclude
arbitrage?
A) Rupees 47.23/$
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B) Rupees 48.61/$
C) Rupees 48.99/$
D) Rupees 49.32/$
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
18) The one-year forward exchange rate is Rupees 40/$. If the one-year interest rate in the
United States is 4% and in India is 7%, what is the spot exchange rate so as to preclude
arbitrage?
A) Rupees 38.88/$
B) Rupees 39.01/$
C) Rupees 39.23/$
D) Rupees 39.32/$
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
19) The one-year forward exchange rate is Rupees 45/$. If the one-year interest rate in the
United States is 5% and in India is 8%, what is the spot exchange rate so as to preclude
arbitrage?
A) Rupees 43.23/$
B) Rupees 43.75/$
C) Rupees 43.99/$
D) Rupees 44.32/$
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
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