Corporate Finance, 12e (Ross)
1) A security issued in the United States that represents shares of a foreign stock and allows that
stock to be traded in the United States is called a(n):
A) American Depository Receipt.
B) Yankee bond.
C) Yankee stock.
D) Eurostock.
E) foreign obligation trust certificate.
2) The implicit exchange rate between two currencies when both are quoted in some third
currency is called a(n):
A) open exchange rate.
B) cross-rate.
C) backward rate.
D) forward rate.
E) interest rate.
3) Money deposited in a financial center outside the country whose currency is involved is
called:
A) a foreign depository receipt.
B) an international exchange certificate.
C) an American Depository Receipt.
D) Eurocurrency.
E) Eurodollars.
4) The rate most international banks charge one another for overnight Eurodollar loans is called
the:
A) Eurodollar yield to maturity.
B) London Interbank Offered Rate.
C) Paris Opening Interest Rate.
D) United States Treasury bill rate.
E) international prime rate.
5) The cross rate is:
A) the inverse of the direct rate.
B) an implicit rate based on two currencies and their individual relationships with a third
currency.
C) the rate converting the direct rate into the indirect rate.
D) the average of the spot and forward rates.
E) the link between the spot and forward rates.
6) A major network for foreign transactions is operated by a Belgian non-profit cooperative
known as:
A) EURX.
B) BELX.
C) SWIFT.
D) LIBOR.
E) GLOBEX.
7) Triangle arbitrage can occur when the ________ rate between two currencies is not ________
to the ratio of the two direct rates.
A) cross; equal
B) spot; equal
C) cross; less than
D) spot; less than
E) cross; greater than
8) When the Canadian dollar is quoted as $.87, this quote is a(n):
A) triangle rate.
B) indirect rate.
C) direct rate.
D) cross rate.
E) inverse rate.
9) When the Mexican peso is quoted as Ps13.93, this quote is a(n):
A) indirect rate.
B) direct rate.
C) cross rate.
D) triangle rate.
E) linear rate.
10) What kind of trade involves agreeing today on an exchange rate for settlement in 90 days?
A) Spot trade
B) Market trade
C) Forward trade
D) Triangle trade
E) Complex trade
11) The foreign exchange market is where:
A) one country’s stocks are exchanged for another’s.
B) one country’s bonds are exchanged for another’s.
C) one country’s currency is traded for another’s.
D) international banks make loans to one another.
E) international businesses finalize import/export relationships with one another.
12) The price of one country’s currency expressed in terms of another country’s currency is called
the:
A) absolute currency rate.
B) cross inflation rate.
C) depository rate.
D) exchange rate.
E) foreign interest rate.
13) An agreement to trade currencies based on the exchange rate set today for settlement within
two business days is called a(n) ________ trade.
A) swap
B) option
C) futures
D) forward
E) spot
14) Currencies that are exchanged today without any prior arrangement are exchanged at the:
A) spot rate.
B) forward rate.
C) triangle rate.
D) LIBOR.
E) discounted rate.
15) An agreement to exchange currencies at some point in the future using an exchange rate
agreed upon today is called a ________ trade.
A) spot
B) forward
C) swap
D) floating
E) triangle
16) Which one of these statements is true?
A) The exchange markets are limited to the currencies of highly developed countries.
B) Importers and exporters are key players in the foreign exchange market.
C) The trading floor of the foreign exchange market is located in London, England.
D) Foreign exchange rates are set by the governments of each country issuing a currency.
E) The foreign exchange market is the world’s smallest financial market.
17) Triangle arbitrage:
A) no longer exists due to the advanced electronic communications used in today’s markets.
B) only applies to forward exchange rates.
C) helps keep the currency market in equilibrium.
D) opportunities can only be found in the spot market.
E) only involves currencies other than the U.S. dollar.
18) Assume the euro is selling in the spot market for $1.22. Simultaneously, in the 3-month
forward market the euro is selling for $1.24. Which one of these statements correctly describes
this situation?
A) The spot market is out of equilibrium.
B) The forward market is out of equilibrium.
C) The dollar is selling at a premium relative to the euro.
D) The euro is selling at a premium relative to the dollar.
E) The euro is less expensive in the forward market.
19) Suppose the spot exchange rate is $1 = £.7304 and the 1-month forward rate is $1 = £.7303.
Given this, you know the:
A) U.S. inflation rate is higher than the U.K.’s.
B) U.S. nominal interest rate is higher than the U.K.’s.
C) pound is selling at a discount.
D) U.S. real risk-free interest rate is higher than the U.K.’s.
E) pound is selling at a premium.
20) Which one of following statements is false?
A) Importers are participants in the foreign exchange market.
B) The foreign exchange market is an over-the-counter market.
C) There are no speculators in the foreign exchange market.
D) Exporters are participants in the foreign exchange market.
E) Portfolio managers are participants in the foreign exchange market.
21) Suppose the one-year forward rate is £.6390. Given no arbitrage opportunities, this implies
that traders expect the spot rate to be:
A) £.6390 in one year.
B) greater than £.6390 in one year.
C) less than £.6390 in one year.
D) greater than or equal to £.6390 in one year.
E) less than or equal to £.6390 in one year.
22) If a foreign currency is selling at a discount relative to the dollar then the:
A) foreign currency is cheaper in the spot market than it is in the forward market.
B) cross rate is cheaper than the direct rate.
C) foreign currency is cheaper in the forward market than it is in the spot market.
D) direct rate is cheaper than the indirect rate.
E) settled rate is less than the spot rate.
23) Spot trades must be settled:
A) on the trade date.
B) within one business day.
C) within two business days.
D) within three business days.
E) within one week of the trade date.
24) Which one of these statements is correct assuming exchange rates are quoted as units of
foreign currency per dollar?
A) When the dollar strengthens, it takes more dollars to obtain one unit of a foreign currency.
B) If the U.S. inflation rate is lower than the inflation rate in Canada, then the U.S. dollar will
depreciate relative to the Canadian dollar.
C) When a foreign currency appreciates in value it strengthens relative to the dollar.
D) As the U.S. dollar strengthens, one British pound will purchase more U.S. dollars.
E) The exchange rate is unaffected by differences in the inflation rates of the two countries.
25) The idea that a specific hamburger should cost the same regardless of where purchased or the
currency used to pay for the purchase is referred to as:
A) the unbiased forward rates condition.
B) uncovered interest rate parity.
C) the international Fisher effect.
D) absolute purchasing power parity.
E) interest rate parity.
26) “The change in exchange rates is determined by the difference in the inflation rates of the
two countries.” This statement expresses the concept of:
A) absolute purchasing power parity.
B) relative purchasing power parity.
C) the international Fisher effect.
D) unbiased forward rates.
E) interest rate parity.
27) For absolute purchasing power parity to hold:
A) transaction costs must be observable.
B) interest rates must be uniform on a nominal basis.
C) inflation rates must be uniform in all markets.
D) tariffs must be imposed on all imported goods.
E) products must be identical in all markets.
28) The symbol “S0” represents the:
A) spot exchange rate expressed in dollars per unit of foreign currency.
B) forward rate expressed in foreign currency units per dollar.
C) profit that can be realized on a triangle arbitrage.
D) spot rate in foreign currency units per dollar.
E) forward rate expressed in dollars per unit of foreign currency.
29) Absolute purchasing power parity is most apt to exist for:
A) a 4-door Ford vehicle.
B) a loaf of white bread.
C) a 2-bedroom home.
D) a new watch.
E) an ounce of silver.
30) The forward rate is most apt to equal the spot rate when:
A) the real rate of interest is declining.
B) the inflation rates in the two countries are equal.
C) purchasing power parity exists.
D) the real rates of interest in the two countries are equal.
E) inflation rates are historically high.
31) Which concept states that real rates are equal across countries?
A) Uncovered interest parity
B) Relative purchasing power parity
C) Unbiased forward rates
D) Absolute purchasing power parity
E) International Fisher effect
32) The symbol “RFC” represents the foreign country’s:
A) forward nominal market interest rate.
B) real risk-free interest rate.
C) real market interest rate.
D) forward real market interest rate.
E) nominal risk-free interest rate.
33) Covered interest arbitrage involves:
A) two spot rates.
B) two forward rates.
C) both a spot rate and a forward rate.
D) a single exchange at the current exchange rate.
E) a single exchange at a spot rate that exists in the future.
34) ________ holds because of the possibility of covered interest arbitrage.
A) Uncovered interest parity
B) Interest rate parity
C) The international Fisher effect
D) Unbiased forward rates
E) Purchasing power parity
35) The condition stating that the interest rate differential between two countries is
approximately equal to the percentage forward premium or discount is called:
A) the unbiased forward rates condition.
B) uncovered interest rate parity.
C) the international Fisher effect.
D) purchasing power parity.
E) interest rate parity.
36) The condition stating that the current forward rate is an unbiased predictor of the future spot
exchange rate is called:
A) the unbiased forward rates condition.
B) uncovered interest rate parity.
C) the international Fisher effect.
D) purchasing power parity.
E) interest rate parity.
37) The condition stating that the expected percentage change in the exchange rate is equal to the
difference in interest rates between the countries is called:
A) the unbiased forward rates condition.
B) uncovered interest parity.
C) the international Fisher effect.
D) purchasing power parity.
E) interest rate parity.
38) Interest rate parity:
A) eliminates covered interest arbitrage opportunities.
B) exists when spot rates are equal for multiple countries.
C) means that the nominal risk-free rate of return must be the same across countries.
D) exists when the spot rate is equal to the futures rate.
E) eliminates exchange rate fluctuations.
39) The unbiased forward rate is a:
A) condition where a future spot rate is equal to the current spot rate.
B) guarantee of a future spot rate at one point in time.
C) condition where the spot rate is expected to remain constant over a period of time.
D) relationship between the future spot rate of two currencies at an equivalent point in time.
E) predictor of the future spot rate at the equivalent point in time.
40) The international Fisher effect says that ________ rates are equal across countries.
A) spot
B) one-year future
C) nominal
D) inflation
E) real
41) The home currency approach:
A) discounts all a project’s foreign cash flows using the current spot rate.
B) employs uncovered interest parity to project future exchange rates.
C) computes the net present value (NPV) of a project in the foreign currency and then converts
that NPV into U.S. dollars.
D) utilizes the international Fisher effect to compute the NPV of foreign cash flows in the
foreign currency.
E) utilizes the international Fisher effect to compute the relevant exchange rates needed to
compute the NPV of foreign cash flows in U.S. dollars.
42) The home currency approach:
A) generally produces more reliable results than those found using the foreign currency
approach.
B) requires an applicable exchange rate for every time period for which there is a cash flow.
C) uses the current risk-free nominal rate to discount all the cash flows related to a project.
D) stresses the use of the real rate of return to compute the net present value (NPV) of a project.
E) converts the foreign-denominated NPV into the dollar-denominated NPV.
43) The foreign currency approach to capital budgeting analysis:
A) is computationally harder to use than the home currency approach.
B) utilizes the uncovered interest parity relationship.
C) computes the NPV in both the foreign and the domestic currency.
D) is solely dependent upon purchasing power parity.
E) produces superior results as compared to the home currency approach.
44) Remitting funds to a parent firm from a foreign subsidiary is referred to as:
A) recommitting.
B) reshipping.
C) repatriating.
D) returning.
E) reshaping.
45) All the following, except one, tend to hinder funds from foreign subsidiaries being remitted
to their home country parent firm. Which one of these is the exception?
A) Foreign exchange remittance controls
B) Repatriation taxes
C) Active exchange rate market
D) Blocking controls
E) Expropriation taxes
46) An international firm which imports raw materials can reduce its ________ exposure to
________ rate risk by entering into a forward contract.
A) long-term; inflation
B) short-term; inflation
C) short-run; exchange
D) long-run; exchange
E) total; interest
47) The changes in the relative economic conditions between countries are referred to as the:
A) international Fisher effect.
B) international exchange rate effect.
C) translation exposure to exchange rate risk.
D) long-run exposure to exchange rate risk.
E) the interest rate parity risk.
48) Which one of these statements is correct?
A) Borrowing money in the country in which operations are located reduces long-run exchange
rate risk.
B) Accounting translation gains are recorded on the income statement as other income.
C) In multidivisional firms, exchange rate risk should be managed at the division level.
D) The usage of forward rates can help reduce the long-run exposure to exchange rate risk.
E) Unexpected changes in economic conditions are classified as short-run exposure to exchange
rate risk.
49) Financial Accounting Standards Board Statement No. 52 requires that most assets and
liabilities be translated at the current exchange rate. Translation gains and losses are recorded:
A) in the shareholder’s equity section of the balance sheet.
B) as a normal income item on the income statement.
C) as an extraordinary item on the income statement.
D) as a footnote to the financial statements.
E) only on income tax returns.
50) A foreign subsidiary can remit funds to the parent firm in the all the following ways except
by means of:
A) dividends.
B) management fees for central services.
C) royalties on the use of trade names.
D) royalties on the use of patents.
E) nationalization.
51) All the following are political risks associated with international investing except:
A) nationalization.
B) decreasing consumer demand.
C) blocking of funds.
D) tax law changes.
E) contract abrogation.
52) Monies earned by foreign subsidiaries that have not yet been taxed under U.S. law can be
used to:
A) purchase U.S. government bonds.
B) purchase U.S. stocks.
C) pay dividends.
D) invest in new capital overseas.
E) invest in new U.S. plants and equipment.
53) The Tax Cut and Jobs Act of 2017 allows untaxed foreign profits held as cash or as securities
to be:
A) used to purchase U.S. fixed assets after a one-time tax of 8 percent.
B) repatriated at a one-time tax rate of 15.5 percent.
C) returned to the U.S. at the new corporate tax rate of 15 percent.
D) repatriated at a one-time tax rate of 8 percent.
E) returned to the U.S. as tax-free income.