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54) How many euros can you get for $2,500 if the USD equivalent is 1.2195?
A) €2,147.08
B) €2,050.02
C) €2,309.11
D) €3,048.75
E) €2,921.00
55) Lisa is planning a trip to Australia where a hotel will cost A$165 per night for seven nights.
She expects to spend another A$2,200 for meals, tours, souvenirs, and so forth. How much will
this trip cost her in U.S. dollars if the USD equivalent is .7752?
A) $2,600.80
B) $3,599.49
C) $2,782.02
D) $3,969.47
E) $4,327.92
56) You want to import $56,000 worth of rugs from India. How many rupees will you need to
pay for this purchase if one rupee is worth $.01606?
A) Rs3,015,030
B) Rs2,666,667
C) Rs3,486,924
D) Rs3,008,001
E) Rs2,847,319
57) Assume $1 will buy Can$1.2803 while $1.2195 will buy €1. What is the Can$/€ exchange
rate?
A) Can$.9709 = €1
B) Can$.9525 = €1
C) Can$1.0499 = €1
D) Can$1.3624 = €1
E) Can$1.5613 = €1
58) Assume that ¥106.83 equals $1. Also assume that SKr8.2941 equals $1. How many Japanese
yen can you acquire in exchange for 5,000 Swedish krona?
A) ¥388.19
B) ¥314.77
C) ¥41,710.99
D) ¥56,756.67
E) ¥64,401.20
59) You just returned from some extensive traveling. You started your trip with $10,000 in your
pocket. You spent 1.32 million pesos in Chile where Ps1 = $.001642. You spent Ps36,000 in
Uruguay where Ps1 = $.03526. Then on the way home, you spent Ps29,000 in Mexico where $1
= Ps18.8709. How many dollars did you have left by the time you returned to the U.S.?
A) $3,889.07
B) $4,001.84
C) $4,110.27
D) $5,026.44
E) $4,299.03
60) Assume the official USD equivalent of one Canadian dollar is .7813 and the USD equivalent
of the U.K. pound is 1.3699. Further assume you have 100 pounds and have been offered
Can$180 for them. If you use triangle arbitrage and the entire £100, you can earn a profit of:
A) £1.56.
B) £2.66.
C) £.87.
D) £1.09.
E) £2.03.
61) Angie has been offered Can$1.75 for £1. How much profit can she earn on a triangle
arbitrage if the official rate is $1 = Can$1.2834 and the USD equivalent of £1 is $1.3699?
Assume she currently has $100 in cash.
A) $.46
B) $.73
C) $1.09
D) $1.37
E) $.57
62) Assume you can exchange $1 for £.7347 today. Assume that last week, £1 was worth
$1.3613. If you had converted £100 into dollars last week and then exchanged your dollars back
into pounds today, you would now have a:
A) profit of $.048.
B) loss of $. 42.
C) profit of £.101.
D) loss of $.068.
E) profit of £.015.
63) Assume today you can exchange $100 for either Can$128 or Ps1,892. Also assume that last
year, $100 was worth Can$126 or Ps1,847. Which one of the following statements is correct
given this information?
A) $100 invested in Canadian dollars last year would now be worth Ps1,824.09.
B) $100 invested in Mexican pesos last year would now be worth $98.47.
C) $100 invested in Mexican pesos last year would now be worth $101.63.
D) $100 invested in Canadian dollars last year would now be worth $99.52.
E) $100 invested in Canadian dollars last year would now be worth Ps1,862.44.
64) The camera you want to buy costs $399 in the U.S. If absolute purchasing power parity
exists, the identical camera will cost ________ in Australia if the exchange rate is A$1 = $.7752.
A) A$309.30
B) A$393.23
C) A$435.09
D) A$514.71
E) A$506.67
65) A new sweater costs SF67 in Switzerland. Assume SF1 = $1.0563 and €1 = $1.2195. How
much will the identical sweater cost in euros if absolute purchasing power parity exists?
A) €58.03
B) €43.08
C) €77.35
D) €58.25
E) €60.75
66) Assume $1 = ¥106.83 = £.7309. If a TV in London costs £430, what will that identical TV
cost in Tokyo if absolute purchasing power parity exists?
A) ¥32,411.02
B) ¥34,666.67
C) ¥62,849.77
D) ¥58,001.28
E) ¥82,880.09
67) Assume the spot market exchange rate for $1 is currently A$1.2902. Also assume the
expected inflation rate is 3.3 percent in Australia compared to the U.S. rate of 2.8 percent. What
is the expected exchange rate one year from now if relative purchasing power parity exists?
A) A$1.2837
B) A$1.2062
C) A$1.2286
D) A$1.2967
E) A$1.1484
68) Assume the spot rate of $1 is £.7347. Also assume the expected inflation rate in the U.K. is
2.1 percent while the U.S. inflation rate is 3.6 percent. What is the expected exchange rate three
years from now if relative purchasing power parity exists?
A) £.7237
B) £.6306
C) £.7683
D) £.7021
E) £.7667
69) Assume the current spot rate is Can$1.2803 and the one-year forward rate is Can$1.2745.
Also assume the nominal risk-free rate in Canada is 4.8 percent while it is 4.2 percent in the U.S.
Using covered interest arbitrage, you can earn a profit of ________ for every $1 invested over
the next year.
A) $.0163
B) $.0108
C) −$.0040
D) −$.0088
E) −$.0840
70) Assume the current spot rate is Can$1.2811 and the one-year forward rate is Can$1.2767.
Also assume the nominal risk-free rate in Canada is 3.2 percent while the U.S. rate is 3.5 percent.
Using covered interest arbitrage you can earn an extra profit of ________ for every $1 invested
over the next year.
A) $.0018
B) $.0015
C) $.0011
D) $.0006
E) $.0002
71) Assume the spot rate for the Japanese yen currently is ¥106.83 per dollar while the one-year
forward rate is ¥107.20. Also assume a risk-free asset in Japan is currently earning 4.6 percent. If
interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S.
security?
A) 4.24 percent
B) 5.08 percent
C) 4.62 percent
D) 4.78 percent
E) 4.96 percent
72) Assume the spot rate for the British pound currently is £.7287 per dollar and the one-year
forward rate is £.7304. A risk-free asset in the U.S. is currently earning 3 percent. If interest rate
parity holds, approximately what rate can you earn on a one-year risk-free British security?
A) 3.16 percent
B) 3.03 percent
C) 2.92 percent
D) 2.84 percent
E) 3.24 percent
73) Assume a risk-free asset in the U.S. is currently yielding 2.7 percent while a Canadian risk-
free asset is yielding 2.8 percent and the current spot rate is Can$1.2849 = $1. What is the
approximate 6-month forward rate if interest rate parity holds?
A) Can$1.2855
B) Can$1.2838
C) Can$1.2843
D) Can$1.2862
E) Can$1.2836
74) Suppose the spot rate on the Indian rupee is Rs65.2203, the risk-free nominal rate in the U.S.
is 4.6 percent, and the Indian risk-free nominal rate is 6.2 percent. Which one of the following
one-year forward rates best establishes the approximate interest rate parity condition?
A) Rs64.1768
B) Rs66.2638
C) Rs62.8840
D) Rs63.0733
E) Rs67.8420
75) Suppose the spot rate on the Canadian dollar is C$1.2797. Also assume the risk-free nominal
rate in the U.S. is 3.8 percent while it is only 3.3 percent in Canada. Which one of the following
three-year forward rates best establishes the approximate interest rate parity condition?
A) C$1.2733
B) C$1.2606
C) C$1.2861
D) C$1.2990
E) C$1.1918
76) You are considering a project in Norway with an initial cost of NKr135,000. The project is
expected to return a one-time payment of NKr200,000 at the end of Year 5. Assume the risk-free
rate of return is 2.6 percent in the U.S. and 3.1 percent in Norway. Assume the inflation rate is
1.6 percent in the U.S. and 2.3 percent in Norway. Lastly, assume the current exchange rate is $1
= NKr7.9271. Approximately how much will the payment at the end of 5 Years be worth in U.S.
dollars?
A) $24,609
B) $24,108
C) $26,472
D) $25,870
E) $26,006
77) You are expecting a payment of Can$138,000 two years from now. Assume the risk-free rate
of return is 2.7 percent in Canada and 3.1 percent in the U.S. Also assume the current exchange
rate is Can$1.2903 = $1. Approximately how much will the payment two years from now be
worth in U.S. dollars?
A) $108,319
B) $106,101
C) $107,813
D) $107,381
E) $108,169
78) Assume the current spot rate for the Norwegian krone is $1 = NKr7.9323, the expected
inflation rate in Norway is 2.1 percent and 1.2 percent in the U.S. Also assume a risk-free asset
in the U.S. is yielding 3.7 percent. What nominal risk-free rate of return should you expect on a
Norwegian security?
A) 2.9 percent
B) 4.6 percent
C) 4.2 percent
D) 3.1 percent
E) 3.8 percent
79) Assume the current spot rate for the Norwegian krone is $1 = NKr7.93, the expected
inflation rate in Norway is 2.4 percent while it is 2.6 percent in the U.S. Also assume a risk-free
asset in the U.S. is yielding 4.5 percent. What real rate of return should you expect on a risk-free
Norwegian security?
A) 4.3 percent
B) 4.7 percent
C) 1.9 percent
D) 2.1 percent
E) 2.4 percent
80) Assume the expected inflation rate in Finland is 2 percent while it is 4 percent in the U.S.
Also assume a risk-free asset in the U.S. is yielding 4.5 percent. What nominal rate of return
should you expect on a risk-free Finnish security?
A) 2.0 percent
B) 1.5 percent
C) 3.0 percent
D) 2.5 percent
E) 4.0 percent
81) Assume the expected inflation rate in Switzerland is 2.2 percent while it is 1.6 percent in the
U.S. Also assume a risk-free asset in the U.S. is yielding 3.7 percent. What real rate of return
should you expect on a risk-free Swiss security?
A) 2.0 percent
B) 2.1 percent
C) 3.0 percent
D) 3.5 percent
E) 3.1 percent
82) A Canadian project has an initial cost of Can$1.8 million and is expected to produce cash
inflows of Can$710,000 a year for 3 years after which time it will be worthless. Assume the
expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S. The applicable
interest rate in Canada is 8 percent. Assume the current spot rate is C$1 = $.78. What is the net
present value of this project in Canadian dollars using the foreign currency approach?
A) Can$33,974.02
B) Can$32,790.05
C) Can$29,738.86
D) Can$28,721.40
E) Can$30,751.18
83) Global Markets wants to invest in a riskless project in Sweden. The project has an initial cost
of SKr2.3 million and is expected to produce cash inflows of SKr850,000 a year for 3 years. The
project will be worthless after the first 3 years. Assume the expected inflation rate in Sweden is
2.6 percent while it is 3.2 percent in the U.S. Also assume a risk-free security is paying 5.9
percent in the U.S. and the current spot rate is $1 = SKr8.31. What is the net present value of this
project in Swedish krona using the foreign currency approach? Assume the international Fisher
effect applies.
A) SKr1,856.07
B) SKr1,809.85
C) SKr1,969.10
D) SKr1,978.67
E) SKr2,028.18
84) A project has an initial cost of £1.2 million and expected cash inflows of £400,000,
£500,000, and £600,000 for Years 1 to 3, respectively. Assume the current spot rate is £.73 and
the nominal risk-free returns are 4 percent in the U.K. and 3 percent in the U.S. If uncovered
interest rate parity exists, what is the net present value of this project in U.S. dollars using the
home currency approach? Assume the project's U.S. discount rate is 12 percent.
A) −$56,359
B) −$104,040
C) −$71,067
D) $26,422
E) $92,009
85) A project has an initial cost of £80,000 and is expected to return £10,000 the first year,
£40,000 the second year, and £50,000 the third and final year. Assume the current spot rate is
£.75. Also assume the nominal risk-free return is 3 percent in the U.K. and 5 percent in the U.S.
The return relevant to the project is 7.8 percent in the U.K. and 8.1 percent in the U.S. Assume
uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars
using the home currency approach?
A) $9,787
B) $11,002
C) $10,312
D) $10,511
E) $9,514
86) Explain the difference between a spot trade and a forward trade as they relate to currencies.
87) What is triangle arbitrage?
88) How well do you think relative purchasing power parity and uncovered interest parity
behave? That is, do you think it's possible to forecast the expected future spot exchange rate
accurately? What complications might you run into?
89) What is required for absolute purchasing power parity to hold? Do you think absolute PPP
would hold in the case where a shoe retailer in the U.S. sits directly across the border from a
shoe retailer in Canada? How about Houston, Texas, and London, England?
90) Describe the foreign currency and home currency approaches to capital budgeting. Which is
better? Which approach would you recommend a U.S. firm use? Justify your answer.
