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20) Firms use forward foreign exchange contracts rather than a cash-and-carry strategy
because ________.
A) of lower transaction costs
B) of inability to borrow in diferent currencies
C) of higher interest costs if credit quality is poor
D) all of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
21) ________ give a irm a right, but not an obligation, to exchange currency at a given rate.
A) Currency forwards
B) Currency options
C) Currency futures
D) Currency exchanges
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
22) If a irm hedges a future purchase of euros by purchasing a call option, the irm
________ the potential cost but will beneit if the euro ________.
A) ixes, depreciates
B) ixes, appreciates
C) caps, depreciates
D) caps, appreciates
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
11
23) A irm wants to hedge a potential transaction but is also concerned about a possibility
that it may not take place. In this case it is better to hedge potential risks using ________.
A) options
B) forwards
C) futures
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
24) A Brazilian irm owes you $2,000,000, payable in three months, however, they insist on
paying in Brazilian Reals. The current spot exchange rate is $0.59305/Real. The three-
month forward exchange rate is $0.61255/Real. How many Real should you demand in a
forward contract to receive $2,000,000 in three months to hedge the exchange rate risk?
A) 1,186,100 Real
B) 3,372,397 Real
C) 3,265,040 Real
D) 1,225,100 Real
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
25) The importer-exporter dilemma is caused by ________.
A) changing interest rates
B) increases in inlation
C) luctuating exchange rates
D) delation
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
12
26) Assuming Covered Interest Parity holds, a(n) ________ in the domestic interest rate will
________ the forward rate, all other things held constant.
A) increase, increase
B) increase, decrease
C) decrease, decrease
D) decrease, have no efect on
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
27) What is loating rate?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
28) What is a currency forward contract?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
29) What is cash-and-carry strategy?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
13
30) What is a currency timeline?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
31) What is covered interest parity?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
23.3 Internationally Integrated Capital Markets
1) With internationally integrated capital markets the value of an investment depends on
the currency used in the analysis.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) A(n) ________ market is one where an investor can exchange any currency in any amount
at the spot rate or forward rate and is free to purchase or sell any security in any amount in
any country at their current market prices.
A) inancial
B) limit order
C) internationally integrated capital
D) over-the-counter
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
14
3) A U.S.-based irm is planning to make an investment in Europe. The irm estimates that
the project will generate cash lows of 100,000 euros after one year. If the one-year forward
exchange rate is $1.50/euro and the dollar cost of capital is 8%, what is the present value
(PV) of the project cash lows?
A) $132,675
B) $145,349
C) $137,287
D) $138,889
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) A U.S.-based irm is planning to make an investment in Europe. The irm estimates that
the project will generate cash lows of 200,000 euros after one year. If the one-year forward
exchange rate is $1.40/euro and the dollar cost of capital is 9%, what is the present value
(PV) of the project cash lows?
A) $232,981
B) $245,198
C) $256,881
D) $268,880
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
5) A U.S.-based irm is planning to make an investment in Europe. The irm estimates that
the project will generate cash lows of 100,000 euros after one year. If the one-year forward
exchange rate is $1.35/euro and the dollar cost of capital is 10%, what is the present value
(PV) of the project cash lows?
A) $122,675
B) $122,727
C) $127,150
D) $128,209
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6) Which of the following statements regarding international projects is FALSE?
A) Interest rates and costs of capital will likely be diferent in the foreign country as a
result of the macroeconomic environment.
B) The project will most likely generate foreign currency cash lows, although the
managers and shareholders care about the foreign currency value of the project.
15
C) Under internationally integrated capital markets, the value of an investment does not
depend on the currency we use in the analysis.
D) The irm will probably face a diferent tax rate in the foreign country and will be subject
to both foreign and domestic tax codes.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
7) Consider the following equation:
Spot Rate × [(Foreign Cash Flow) / (1 + rFC] = (F × Foreign Cash Flow) / (1 + r$)
The term F in this equation is ________.
A) the future spot exchange rate
B) the current spot exchange rate
C) the amount of foreign currency
D) the forward exchange rate
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
8) Consider the following equation:
S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$)
The term S in this equation is ________.
A) the forward exchange rate
B) the amount of foreign currency
C) the future spot exchange rate
D) the current spot exchange rate
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
16
9) Consider the following equation:
S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$)
The term r$ in this equation is ________.
A) the dollar discount rate
B) the risk-free rate for a foreign investor
C) the risk-free rate for a U.S. investor
D) the foreign currency discount rate
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
10) Consider the following equation:
S × [(Foreign Cash Flow) / (1 + rFC] = (Forward Rate × Foreign Cash Flow) / (1 + r$)
The term rFC in this equation is ________.
A) the risk-free rate for a foreign investor
B) the risk-free rate for a U.S. investor
C) the foreign currency discount rate
D) the dollar discount rate
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
17
Use the information for the question(s) below.
You are a U.S. investor who is trying to calculate the present value (PV) of £5 million cash
inlow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and
the forward rate is F1 = $1.8862/£. The appropriate dollar discount rate for this cash low
is 5.32% and the appropriate £ discount rate is 5.24%.
11) The present value (PV) of the £5 million cash inlow computed by irst discounting the
£s and then converting into dollars is closest to ________.
A) $8,961,420
B) $8,950,495
C) $8,954,615
D) $8,943,695
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
12) The present value (PV) of the £5 million cash inlow computed by irst converting into
dollars and then discounting is closest to ________.
A) $8,950,495
B) $8,954,615
C) $8,943,695
D) $8,961,420
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
18
13) You are a U.S. investor who is trying to calculate the present value (PV) of £15 million
cash inlow that will occur one year from now. The spot exchange rate is $1.5742/£ and the
forward rate is F1 = $1.5682/£. The appropriate dollar discount rate for this cash low is
1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the dollar
cash inlow computed by irst converting the £ into dollars and then discounting the
dollars?
A) $23,275,505
B) $23,186,792
C) $23,278,575
D) $23,367,640
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
14) You are a U.S. investor who is trying to calculate the present value (PV) of £15 million
cash inlow that will occur one year from now. The spot exchange rate is $1.5742/£ and the
forward rate is F1 = $1.5682/£. The appropriate dollar discount rate for this cash low is
1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the £ cash
inlow computed by irst discounting the £ and converting them into dollars?
A) $23,275,505
B) $23,186,792
C) $23,367,640
D) $23,278,575
AACSB Objective: Analytic Skills
Author: WC
Question Status: Previous Edition
15) What are internationally integrated capital markets?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
23.4 Valuation of Foreign Currency Cash Flows
1) If a foreign project is owned by a domestic corporation, managers and shareholders
need to determine the home currency value of the foreign currency cash lows.
Dif: 1 Var: 1
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) The Law of One Price asserts that we will obtain the same valuation of a project whether
(a) we use the domestic cost of capital of the domestic currency equivalent cash lows at
the forward exchange rates or
(b) we use the corresponding foreign cost of capital and then convert the present value
(PV) of the foreign currency value of the cash lows at the spot rate.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) Suppose the domestic cost of capital for a U.S.-based company is 8%. Also, the U.S.
interest rate is 4% and the European interest rate is 7%. What is the foreign denominated
cost of capital for the company?
A) 9.58%
B) 11.12%
C) 10.51%
D) 10.98%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
20
