38) The euro was introduced as a physical currency in January 2002 at an exchange rate of
$1.16/€. In early 2014, the euro traded as high as $1.40/euro. You would observe that by early
2014, the euro had ________ against the dollar.
A) depreciated
B) appreciated
C) fallen
D) lost its purchasing power
39) The Euro-to-Canadian rate is the reciprocal of the Canadian-to-Euro rate.
40) To determine the exchange rate between British pounds and Brazilian reals, you can convert
pounds into U.S. dollars at the direct rate and then convert dollars into reals at the indirect rate.
You now have a cross rate (pounds to reals) via the U.S. dollar.
41) When cross rates are in line, we have what is known as a triangular arbitrage opportunity.
42) We can write any anticipated forward exchange rate as a function of the difference between
the expected inflation rates of two countries and the current or spot exchange rate.
43) When cross rates are out of line, one path can lead you to riches and another to ruin.
44) The forward indirect rate = current indirect rate × .
45) Purchasing power parity means that the price of similar goods is the same regardless of
which currency one uses to buy the goods.
46) The beginning-of-the-year prices for a pair of boots are $50 in the United States and ¥8,000
in Japan. We know that prices in the United States and Japan will change over the coming year
due to inflation. If we assume that inflation in the United States (our home country, infh) will be
3% and inflation in Japan will be 2% (our foreign country, inff), what will the price of the boots
be at the end of the year? If one U. S. dollar can be exchanged for 160 Japanese yen today and
purchasing power parity holds, what can we say about the future exchange rate one year from
now?
47) The beginning-of-the-year prices for sunglasses are $30 in the United States and ¥5,000 in
Japan. We know that prices in the United States and Japan will change over the coming year due
to inflation. If we assume that inflation in the United States (our home country, infh) will be 3%
and inflation in Japan will be 2% (our foreign country, inff), what will the price of the sunglasses
be at the end of the year? If one U.S. dollar can be exchanged for ¥166.6667 Japanese yen today
and purchasing power parity holds, what can we say about the future exchange rate one year
from now?
48) George Smith has saved up $10,000 for investing purposes. He sees that the CD rate in Japan
is 5% for the coming year and only 4% in the United States. He also sees that the current indirect
exchange rate is 120 yen per dollar. Looking at the forward rates, George sees that the one-year
forward indirect rate is 125 yen per dollar. Can he exploit this situation to his gain? Explain.
49) Gladys Smith has saved up $2,000 for investing purposes. She sees that the CD rate in Japan
is 6% for the coming year and only 4% in the United States. She also sees that the current
indirect exchange rate is 110 yen per dollar. Looking at the forward rates, Gladys sees that the
one-year forward indirect rate is 115 yen per dollar. Can she exploit this situation to her gain?
Explain.
50) Assume the cross rate is off. Explain what you can do to exploit this situation.
1) When accounts receivable involves a foreign operation, you face the added problem of
changing ________.
A) exchange rates
B) forward rates
C) interest rates
D) cash flows
2) Anticipated cash inflows may fall in value if unexpected movements in the exchange rate hurt
your ability to convert the foreign currency into domestic currency. This reduction in the
conversion of future payments is called ________.
A) translation exposure
B) transaction exposure
C) conversion exposure
D) operating exposure
3) Suppose the future anticipated cash flows of a foreign business produce less domestic
currency upon conversion. This problem in the reduction in the value of future cash flow from
operations is called ________.
A) cash flow exposure
B) transaction exposure
C) asset exposure
D) operating exposure
4) ________ deals with possible negative effects of converting financial statements from foreign
operations into domestic currency for consolidated reporting in the home country.
A) Conversion exposure
B) Transaction exposure
C) Operating exposure
D) Translation exposure
5) Assume that you manage a firm that faces transaction exposure. Your company manufactures
and sells scooters around the world. You just completed a large sale of scooters to a chain of
stores in Sweden and received a promised payment of 1,100 krona per scooter. You have already
sold 2,500 scooters and are now awaiting payment. The exchange rate today is 8.5 krona per
dollar. What will be your sales receipt in krona, and what amount of dollars will these kronas
convert to at today’s exchange rate?
A) 2,750,000 kronas and about 428,571 dollars
B) 3,000,000 kronas and about 323,529 dollars
C) 2,750,000 kronas and about 323,529 dollars
D) 3,000,000 kronas and about 428,571 dollars
6) Assume that you manage a firm that faces transaction exposure. Your company manufactures
and sells scooters around the world. You just completed a large sale of scooters to a chain of
stores in Sweden and received a promised payment of 1,100 krona per scooter. You have already
sold 2500 scooters and are now awaiting payment which you expect to receive in 90 days. The
exchange rate today is 7.5 krona per dollar. Over the next ninety days the indirect exchange rate
unexpectedly moves from 8.4 to 8.7. What will be your sales receipt in krona, and what amount
of dollars will these kronas convert to at the indirect exchange rate?
A) 3,000,000 kronas and about 364,000 dollars
B) 2,750,000 kronas and about 316,092 dollars
C) 3,176,529 kronas and about 389,610 dollars
D) 2,7500,000 kronas and about 300,482 dollars
7) Assume you manage a firm that faces transaction exposure. Your company manufactures and
sells scooters around the world. You have just completed a large sale of scooters to a chain of
stores in Sweden and received a promised payment of 600 krona per scooter. You have already
sold 2,500 scooters and are now awaiting payment which you expect to receive in 90 days. The
exchange rate today is 8.4 krona per dollar. Over the next ninety days, the indirect exchange rate
unexpectedly moves from 8.4 to 8.8. What is the fall in domestic revenue due to this unexpected
move in the exchange rate?
A) $3,915
B) $5,296
C) $6,762
D) $8,116
8) Assume you manage a firm that faces transaction exposure. Your company manufactures and
sells automobile parts around the world. You have just completed a large sale of parts to an auto
manufacturer in France and received a promised payment of €138 per part. You have already
sold 18,000 parts and are now awaiting payment which you expect 90 days from today. The
exchange rate today is $1.17/€. Over the next ninety days, the direct exchange rate unexpectedly
moves from $1.17/€ to $1.25/€. What is the gain in domestic revenue due to this unexpected
move in the exchange rate?
A) $106,000
B) $134,900
C) $148,500
D) $198,720
9) Which of the statements below is FALSE?
A) One way to hedge the future conversion of known sales is to enter into a forward contract at
the time of the sale and lock in an exchange rate for the foreign currency to U.S. dollars.
B) The forward rate is the current spot rate divided by the different anticipated inflation rates
between two countries.
C) Operating exposure reflects the impact on the long-run viability of a foreign business when
unexpected change rates move against the domestic company.
D) The forward rate is the current spot rate times the ratio of the different anticipated inflation
rates between two countries.
10) Which of the statements below is FALSE?
A) With an unexpected increase in exchange rates, the future cash flow of overseas operations
can be less than anticipated, and thus the value of the business falls.
B) A company has one more added risk exposure when dealing with foreign operations even if
forward rates can be used to hedge a falling profit margin caused by unfavorable changes in
exchange rates,
C) Not all products and costs inflate at the same rate as the overall inflation rate of a country.
D) Translation principles in many countries require the use of current exchange rates for certain
equity, fixed asset, and inventory accounts, but historical exchange rates for current assets,
current liabilities, and income accounts.
11) ________ involves issues of translating foreign financial statements into consolidated reports
of financial performance of both foreign and domestic operations.
A) Translation exposure or accounting exposure
B) Business exposure or accounting exposure
C) Translation exposure or business exposure
D) Transaction exposure or financial exposure
12) Assume you manage a firm that faces transaction exposure. Your company manufactures and
sells bicycles around the world. You have just completed a large sale of bicycles to a chain of
stores in Australia and received a promised payment of 300 AUD per bicycle. You have already
sold 5,000 bicycles and are now awaiting payment which you expect to receive in 90 days. The
exchange rate today is 1.30 AUD per USD. Over the next ninety days, the indirect exchange rate
unexpectedly moves from 1.30 AUD to 1.25 AUD. What is the increase in domestic revenue due
to this unexpected move in the exchange rate?
A) $58,239
B) $52,589
C) $46,154
D) $38,496
13) Assume you manage a firm that faces transaction exposure. Your company manufactures and
sells automobile parts around the world. You have just completed a large sale of parts to an auto
manufacturer in Italy and received a promised payment of €108 per part. You have already sold
7,000 parts and are now awaiting payment which you expect to receive 90 days from now. The
exchange rate today is $1.17/€. Over the next ninety days, the direct exchange rate unexpectedly
moves from $1.17/€ to $1.15/€. What is the loss in domestic revenue due to this unexpected
move in the exchange rate?
A) -$15,120
B) -$24,920
C) -$28,520
D) -$36,220
14) Transaction exposure deals with converting financial statements from foreign operations into
consolidated reports of both foreign and domestic operations.
15) One way to hedge the future conversion of known sales is to enter into a forward currency
contract at the time of the sale and lock in the anticipated conversion rate of the foreign currency
to the home currency.
16) Operating exposure reflects the impact on the short-run viability of a foreign business when
unexpected exchange rates move against the domestic company.
17) Translation principles in many countries require the use of historical exchange rates for
certain equity, fixed asset, and inventory accounts.
18) Translation principles in many countries require the use of historical exchange rates for
current assets, current liabilities, and income accounts.
19) Assume that you manage a firm that faces transaction exposure. Your company manufactures
and sells scooters around the world. You just completed a large sale of scooters to a chain of
stores in Sweden and received a promised payment of 1,000 krona per scooter. You have already
sold 4,000 scooters and are now awaiting payment which you expect to receive in 90 days. The
exchange rate today is 7.3 krona per dollar. Over the next ninety days, the indirect exchange rate
unexpectedly moves from 7.3 to 7.6. What is the fall in domestic revenue due to this unexpected
move in the exchange rate?
20) Describe transaction, operating, and translation exposure.
1) Multinational ________ is a straightforward application of the NPV model with one twist: we
can do the analysis in either domestic currency or foreign currency.
A) capital budgeting
B) dividend policy
C) derivative budgeting
D) agency conflicts
2) Which of the statements below is TRUE?
A) Multinational capital budgeting is a complicated application of the NPV model because we
can only do the analysis in foreign currency.
B) The application of the NPV model to multinational firms is different from any other project in
that we must always find the appropriate discount rate for the project in the foreign country rate.
C) When performing multinational capital budgeting, the appropriate discount rate varies based
on the currency that you choose to analyze the project.
D) It is impossible to tell the actual NPV in the home currency because foreign cash flows are
from different time periods.
3) Which of the equations below represents an appropriate discount rate for a project?
A) Discount Rate = Real Rate – Default Premium + Risk Premium of Project
B) Discount Rate = Real Rate + Inflation + Risk Premium of Project
C) Discount Rate = Real Rate + Inflation – Risk Premium of Project
D) Discount Rate = Risk-free Rate + Inflation + Risk Premium of Project
4) If we were to select the appropriate discount rate for a project, this rate would reflect
________.
A) the risk-free rate for the currency picked for the project
B) the inflation rate for the currency not picked for the project
C) the default premium for the currency picked for the project
D) the inflation rate for the currency picked for the project
5) Which of the statements below is FALSE?
A) Multinational capital budgeting is a straightforward application of the NPV model with one
twist: we can do the analysis in either domestic currency or foreign currency.
B) If we are using foreign currency for the NPV decision, all we have to do is restate all the
foreign incremental cash flow in terms of future value and use the current exchange rate.
C) In calculating a multinational NPV, one must be careful to avoid differences with rounding of
exchange rates, discount rates, and cash flow to produce the correct value.
D) With the foreign currency approach in NPV analysis, if we know the appropriate discount rate
in the home country and the expected inflation rates in the two countries, we can determine the
appropriate foreign discount rate.
6) If we are using foreign currency for the NPV decision, all we have to do is restate all the
________ in terms of present value and use the current exchange rate.
A) domestic incremental cash flow
B) foreign incremental cash flow
C) salvage value
D) None of these
7) The current indirect exchange rate is 19 pesos per dollar. The anticipated annual inflation rate
is 2% in the United States and 4% in Mexico. What is the forward exchange rate?
A) Ps19.3725/$
B) Ps19.5541/$
C) Ps19.6821/$
D) Ps19.7336/$
8) The current indirect exchange rate is 18 pesos per dollar. The anticipated annual inflation rate
is 1% in the United States and 4% in Mexico. If the cash inflow in pesos is 100,000 in one year,
what are the 100,000 pesos worth in U.S. dollars after conversion from pesos to dollars using the
forward exchange rate?
A) $5,480.78
B) $5,395.30
C) $4,882.13
D) $4,273.78
9) The current indirect exchange rate is 20 pesos per dollar. The anticipated annual inflation rate
is 2% in the United States and 5% in Mexico. If the cash inflow in pesos is 250,000 in one year
and the discount rate is 8%, what is the present value of the 250,000 pesos in U.S. dollars after
conversion from pesos to dollars using the forward exchange rate?
A) $9,675.34
B) $10,328.21
C) $11,243.39
D) $12,142.86
10) The current indirect exchange rate is 21 pesos per dollar. The cash inflow in pesos is 100,000
in two years and the discount rate is 9%. During this time, the anticipated annual inflation rate is
6% in the United States and 14% in Mexico. What is the present value of the 100,000 pesos in
U.S. dollars after conversion from pesos to dollars if you are using current and forward exchange
rates?
A) $3,419.02
B) $3,465.21
C) $4,062.14
D) $4,427.74
11) The current indirect exchange rate is 12 pesos per dollar. The anticipated annual inflation
rate is 5% in the United States and 5% in Mexico. If the cash inflow in pesos is 50,000 in one
year, what are the 50,000 pesos worth in U.S. dollars after conversion from pesos to dollars using
the forward exchange rate?
A) $4,165.67
B) $4,166.67
C) $4,168.67
D) $4,169.67
12) The current indirect exchange rate is €0.8511/$. The anticipated annual inflation rate is 2%
in the United States and 3% in the Euro zone. What is the forward exchange rate?
A) €0.8511/$
B) €08428/$
C) €0.8594/$
D) €0.8625/$
13) The current direct exchange rate is $1.1750/ €. The anticipated annual inflation rate is 2% in
the United States and 3% in the Euro zone. What is the forward exchange rate?
A) $1.1636/€
B) $1.1865/€
C) $1.1944/€
D) $1.2017/€
14) Say that the current direct exchange rate is $1.3382/£. The cash inflow in pounds is £75,000
in two years and the discount rate is 5%. During this time, the anticipated annual inflation rate is
2% per year in the United States and 5% per year in the United Kingdom. What is the present
value (in U.S. dollars) of the £75,000 after conversion from pounds to dollars if you are using
current and forward exchange rates?
A) $94,711.79
B) $90,201.70
C) $85,906.38
D) $81,815.60
15) The current indirect exchange rate is 0.777 CAD per USD. The anticipated annual inflation
rate is 2% in the United States and 4% in Canada. What is the forward exchange rate?
A) 0.762 CAD per USD
B) 0.777 CAD per USD
C) 0.781 CAD per USD
D) 0.792 CAD per USD
16) The current indirect exchange rate is 0.750 GBP per USD. The anticipated annual inflation
rate is 3% in the United States and 2% in the UK. If the cash inflow in pounds is 35,000 in one
year, what are the 35,000 GBP worth in U.S. dollars after conversion from pounds to dollars
using the forward exchange rate?
A) $45,140.78
B) $46,213.59
C) $47,124.18
D) $47,591.36
17) The current indirect exchange rate is 1.43 NZD per USD. The anticipated annual inflation
rate is 1% in the United States and 3% in New Zealand. If the cash inflow in NZD is 150,000 in
one year and the discount rate is 7%, what is the present value of the 150,000 NZD in U.S.
dollars after conversion from NZD to dollars using the forward exchange rate? Round your
answer to the nearest whole dollar.
A) $103,413
B) $99,974
C) $96,129
D) $92,357
18) Your author suggests that multinational capital budgeting is a straightforward application of
the NPV model with one twist: we can do the analysis in either domestic currency or foreign
currency.
19) Financial managers are not well served if they continue to apply basic financial tools such as
NPV when evaluating international operations.
20) To find the appropriate discount rate for capital budgeting in a multinational setting, we
would build it as follows: discount rate = real rate + inflation + risk premium of project, where
the risk premium includes political risk.
21) With the foreign currency approach, if we know the appropriate discount rate in the home
country and the expected inflation rates in the two countries, we can determine the appropriate
foreign discount rate.
22) You are considering a project that will cost $5,900,000. The current indirect exchange rate is
12 pesos per dollar. The cash inflow in pesos is 100,000,000 in two years, and the discount rate
is 10%. During this time, the anticipated annual inflation rate is 6% in the United States and 14%
in Mexico. Should you accept this project?
23) You are CEO of Acme, Inc. located in the United States. You use the discounted payback
period method and accept all projects that pay back in three years. You are considering a project
that will cost $5,500,000 and will produce one cash flow that occurs in three years. However, the
cash flow is in pesos since the project is an overseas project. The current indirect exchange rate
is 13.5 pesos per dollar. The cash inflow in pesos is 100,000,000 in three years, and the discount
rate is 11.5%. During this time, the anticipated annual inflation rate is 5% in the United States
and 4% in Mexico. Should you accept this project, using the discounted payback period method?
Is this a good decision?