Foundations of Finance, 7e (Keown/Martin/Petty)
Chapter 17 International Business Finance
17.1 Learning Objective 1
1) Compared with other developed countries, the U.S. is particularly reliant on foreign trade for
self-subsistence.
2) Investments in capital markets in foreign countries are motivated by the desire to earn higher
returns and reduce risk through international diversification.
3) Problems of multinationals include
A) cash management and positioning of funds.
B) managing receivables.
C) global control.
D) all of the above.
17.2 Learning Objective 2
1) The Eurodollar market is larger than any financial market in the United States.
2) Most major countries in the world have agreed on fixed exchange rates in order to facilitate
international trade.
3) The bid-asked spread is much lower for currencies that are infrequently traded in order to
compensate banks for providing the service.
4) A cross rate is the computation of an exchange rate for a currency from the exchange rates of
two other currencies.
5) The forward exchange rate quoted today should be equal to the spot rate in the future.
6) Short-term daily fluctuations in exchange rates are caused by supply and demand conditions in
the foreign exchange market.
7) An indirect quote indicates the number of units of foreign currency that can be bought for one
unit of the home currency.
8) Arbitrage is the process of buying in one market and selling in another market in order to
make a riskless profit.
9) Spot exchange markets provide the potential for arbitrage opportunities.
10) The difference between the asked price and the bid price is known as the spread.
11) A narrow spread indicates efficiency in the spot exchange market.
12) Forward contracts are usually quoted for periods greater than 1 year.
13) Forward rates, like spot rates, are quoted in both direct and indirect form.
14) Forward contracts benefit only the customer due to a reduction in uncertainty.
15) The efficiency of foreign currency markets is assured, in large measure, by the process of
arbitrageurs.
16) A quote of .7645 euros per dollar in New York is an example of a direct quote.
17) The bid rate is the rate at which the bank buys the foreign currency from the customer by
paying in home currency.
18) Foreign currency forward rates aid traders by reducing uncertainty regarding future market
fluctuations.
19) In order to profit from an expected near-term increase in the relative value of the British
pound versus the U.S. dollar, an investor would be wise to maintain a short position in pounds,
then sell when the pound rises in relative value.
20) Covered interest arbitrage can be taken advantage of when premiums in forward rates are not
exactly equal to the interest rate differential between two countries.
21) The value of the Euro floats against other major international currencies, but has a fixed
value when compared to the currencies of the countries in the European Union, such as the
French Franc and the German Mark.
22) A direct quote of $1.9887 dollars to buy one U.K. pound corresponds to an indirect quote of
.9887 pounds per one dollar.
23) Triangular arbitrage eliminates exchange rate differentials across three markets for three
currencies.
24) The asked rate is also known as the selling rate or the offer rate.
25) The existence of a forward-spot differential creates an arbitrage opportunity that will
eliminate the differential almost immediately.
26) A direct quote of $1.6255 dollars to buy one U.K. pound corresponds to an indirect quote of
.6152 pounds per one dollar.
27) International expansion often occurs because it is generally easier for firms to expand the
market for their products rather than to develop new products.
28) A U.S. corporation investing in a foreign corporation by purchasing stock on a foreign stock
exchange is an example of direct foreign investment.
29) Commercial centers for foreign exchange exist only in New York and London in order to
make it possible for arbitrage to work.
30) A direct quote is always denominated in U.S. dollars, since the dollar is the medium of
exchange in international business.
31) An exchange rate of $1.6 per British Pound is an example of a direct quote in the United
States.
32) A direct quote of $1.6 per British Pound in the United States is equivalent to a direct quote of
.625 British Pounds per U.S. dollar in Great Britain.
33) Three types of arbitrage are simple arbitrage, rectangular arbitrage, and covered-expense
arbitrage.
34) The forward-spot differential is the difference between the forward rate and the expected
future spot rate.
35) Due to the dominance of Chinese companies in international trade, the Chinese yuan is the
most frequently traded currency.
36) The U.S. dollar is the most frequently traded currency in foreign currency markets,
accounting for over 40% of total trading.
37) Exchange rate risk exists in international trade contracts denominated in a foreign currency,
but not in foreign portfolio investments, because the returns on investment securities are adjusted
automatically for differences in exchange rates.
38) If a U.S. company enters into a purchase agreement with a European company and the
contract is denominated in euros, then direct exchange rate risk exists for both companies.
39) A wide bid/ask spread could indicate which of the following?
A) the presence of arbitrageurs
B) large volume transactions are taking place
C) frequent trading of a currency
D) an inefficient market
40) The Euro increased dramatically in value against the U.S. dollar between 2000 and 2009.
The result has been that
A) U.S. exports are more competitive in Europe.
B) U.S. goods cost more in Europe.
C) U.S. travelers are finding it less expensive to travel in Europe.
D) European exports to the United States are more competitive.
41) A British-made component costs 45 U.K. pounds. A company in the United States needs to
buy these components and the current indirect quote indicates that one dollar will buy .6250
pounds. Ignoring transactions costs, how much will one component cost in U.S. dollars?
A) $28.13
B) $45.63
C) $57.14
D) $72.00
42) The direct quote in New York is .015 dollar per Pakistani Rupee. The direct quote in
Pakistan is 60 rupees per dollar. This imbalance in rates can be correct by arbitrage. A trader will
________ rupees in New York and ________ rupees in Pakistan, causing the direct quote in New
York to ________.
A) buy, sell, increase
B) buy, sell, decrease
C) sell, buy, decrease
D) sell, buy, increase
43) Suppose the current exchange rates are 1.52 dollars per euro, and 99.8 yen per dollar. What
is the current exchange rate between yen and euros?
A) 65.658 yen per euro
B) 133.371 yen per euro
C) 151.696 yen per euro
D) 179.357 yen per euro
44) Alpha Corp. enters into a 30-day forward exchange contract to buy 113,540,000 yen for
$100,000. Which of the following statements is true concerning this transaction?
A) Alpha will pay $100,000 and receive 113,540,000 yen 30 days from now.
B) Alpha will pay $100,000 today and receive 113,540,000 yen 30 days from now.
C) The spot exchange rate in 30 days will be 113.54 yen per dollar.
D) Alpha will receive 113,540,000 yen today and pay $100,000 30 days from now.
45) The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate is .6211
pounds per dollar. Therefore, pounds in the forward market are selling at a ________ to the
current spot rate.
A) .958 discount
B) .958 premium
C) .04 discount
D) .04 premium
46) The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate is .6211
pounds per dollar. The percent-per-year discount on the 30-day pound is
A) 32.77%.
B) 30.57%.
C) 48.00%.
D) 45.93%.
47) The 30-day forward exchange rate is .01073033 dollars per yen. If this forward rate
represents a per year discount of 2.5% from the current spot rate, what is the current spot
exchange rate?
A) .01073033 dollars per yen
B) .01257754 dollars per yen
C) .01329684 dollars per yen
D) .01093833 dollars per yen
48) A Spot transaction occurs when
A) one currency is deposited in a foreign bank.
B) one currency is immediately exchanged for another currency.
C) one currency is exchanged for another currency at a specified price.
D) one currency is exchanged for another currency in 30, 60, or 90 days.
49) Buying and selling in more than one market to make a riskless profit is called
A) profit-maximization.
B) arbitrage.
C) international trading.
D) Cannot be determined from the above information.
50) Which of the following is true?
A) The forward rate is the same as the spot rate that will prevail in the future.
B) The future spot rate is equal to the forward rate less the current spot rate.
C) The actual spot rate that will prevail in the future is not known today.
D) The future spot rate is the current spot rate increased by the inflation rate.
51) Forward rates are all of the following except:
A) quoted in both direct and indirect form.
B) quoted at a premium or discount.
C) beneficial to risk-reduction.
D) equal to future spot rates.
52) Which of the following is true regarding the correct price of the forward contract?
A) If the quote is less than the computed price, the forward contract is undervalued.
B) If the quote is greater than the computed price, the forward contract is overvalued.
C) Both A and B.
D) Neither A nor B.
53) Prior to 1973 the exchange rates between the major currencies of the world were
A) on a floating exchange rate system.
B) on an arbitrage exchange rate system.
C) on a fixed exchange rate system.
D) on a spot exchange rate system.
54) Since 1973 the exchange rates between the major currencies of the world are
A) on a floating exchange rate system.
B) on an arbitrage exchange rate system.
C) on a fixed exchange rate system.
D) on a spot exchange rate system.
55) If you are an importer of goods and you need to make payment for the purchase of inventory
before the close of business today, which of the below is the correct term for the exchange rate
that you will use?
A) indirect rate
B) spot rate
C) direct rate
D) forward rate
56) If you are an importer of goods and you will make payment for the purchase of inventory on
90-day terms, which of the below is the correct term for the exchange rate that you will use?
A) indirect rate
B) spot rate
C) direct rate
D) forward rate
57) U.S. Wineries purchased 75,000 cases of French wine at a cost of 6,500,000 Euros. If the
current exchange rate is 0.6712 Euros to the U.S. dollar, what is the purchase price of the wine in
U.S. dollars?
A) $9,684,148
B) $9,328,651
C) $8,350,012
D) $ 7,707,685
58) Assume that the British pound is worth 1.6750 U.S. dollars. If a new Jaguar costs $120,000,
what is the cost in British pounds?
A) 201,000
B) 60,633
C) 71,642
D) 119,998
59) If the exchange rate quotes in two different countries were out of line with each other, an
enterprising trader could make a profit by buying in the market where the currency was cheaper
and simultaneously selling it in the market where the currency was more expensive. Such a
person would be known as a:
A) spot trader.
B) arbitrageur.
C) cross trader.
D) capitalist.
60) Why do currency exchange rates throughout the world trade within a very narrow range on
any given day?
A) because of purchasing power parity
B) because of the international translation effect
C) because of arbitrage
D) because of the law of one price
61) You purchased 500,000 Swiss Francs in London at an exchange rate of 0.6705 to the dollar
and simultaneously sold the francs in New York at an exchange rate of 0.6692 to the dollar.
What is the name for such a transaction?
A) trend trading
B) arbitrage
C) currency swapping
D) exchange rate hedging
62) A forward exchange contract
A) gives the owner the right, but not the obligation, to buy a foreign currency at a fixed exchange
rate for a fixed period of time.
B) gives the owner the right to purchase a foreign currency at some point in the future and any
gains or losses are credited/debited to the account at the close of business each day.
C) requires delivery, at a specified future date, of one currency for a specified amount of another
currency.
D) requires delivery, within two working days, of one currency for a specified amount of another
currency.
63) The current direct quote in New York is .01075 dollars per yen. Suppose the current direct
quote in Tokyo is 91 yen per dollar. What is the appropriate indirect quote in New York? What
will arbitrageurs do to eliminate the differential rates in these markets?
64) What is arbitrage? Assume that the dollar is quoted $1 = £0.625 in New York and the pound
sterling is quoted as £1 = $1.63 in London. Is there an arbitrage opportunity? If so, what would
an astute trader do? What will happen to the quotes as trades are made at current prices?
17.3 Learning Objective 3
1) Interest rate parity theory states that the forward premium or discount should be equal and
opposite in sign to the difference in the national interest rates for securities of the same maturity.
2) Interest Rate Parity theory states that interest rates must be the same in all countries using
floating exchange rates or else international markets will not be in equilibrium.
3) Suppose the 360-day forward exchange rate is 1.936 dollars per British Pound, and the current
spot rate is 1.900 dollars per British Pound. If the 360-day interest rate in the United States is 5%
and the 360-day interest rate in Great Britain is 3%, is the market in equilibrium according to the
interest rate parity theory?
A) Yes, because the forward premium on the pound (2%) is exactly offset by the lower interest
rate in Great Britain.
B) No, because the higher interest rate in the United States (2%) implies that the forward
exchange rate should be 2% lower than the current spot rate.
C) No, because the forward premium on the pound is 2% while the interest rate in the U.S is
67% higher than the interest rate in Great Britain.
D) Cannot be determined without knowing the amount of money being exchanged.
4) Money-market hedges and forward market hedges rely on the
A) interest rate parity theory.
B) purchasing power parity theory.
C) law of large numbers.
D) capital asset pricing model.
5) One theory that is useful states that the forward premium or discount should be equal and
opposite in sign to the difference in the national interest rates for securities of the same maturity.
This theory is known as
A) the forward rate theory.
B) the interest rate parity theory.
C) the exchange rate theory.
D) the covered interest arbitrage theory.
6) Except for the effects of small transaction costs, the forward premium or discount should be
equal and opposite in size to the difference in the national interest rates for securities of the same
maturity. What is the name of this theory?
A) the purchasing power parity theory
B) the Bobby Fisher effect
C) interest rate parity theory
D) the law of one price