Chapter 18—International Financial Management
MULTIPLE CHOICE
1. The spot rate for the U.S. dollar relative to the Euro is $1.47/€. The spot rate for the U.S. dollar
relative to the Canadian dollar is $0.765/C$. What is the cross exchange rate for the C$ and €?
a.
C$1.922/€
b.
€1.922/C$
c.
C$0.5204/€
d.
€0.5204/C$
2. Which of the following may prevent purchasing power parity from holding across different countries?
a.
Import taxes
b.
transportation costs
c.
transaction costs
d.
all of the above
3. A 32-inch television sells in the United States for $157. The same television sells in Canada for
C$212. What must the exchange rate be for Purchasing Power Parity to hold in this example?
a.
$1.3503/C$
b.
C$1.3053/$
c.
$0.7406/C$
d.
C$0.7406/$
4. A coffee table in Canada sells for C$134. The same coffee table sells for $92 in the United States. The
expected inflation rate for the next year in Canada is 10% and the expected one year inflation rate for
the United States is 8%. What must the exchange rate be currently for Purchasing Power Parity to hold
now, and what must the exchange rate change to in order for Purchasing Power Parity to hold in one
year.
a.
$0.6866/C$ and $0.6741/C$
b.
C$0.6866/$ and C$0.6741/$
c.
$1.4565/C$ and $1.484/C$
d.
none of the above
5. Purchasing Power Parity implies that if the law of one price holds at all times then
a.
differences in interest rates are associated with expected changes in exchange rates
b.
differences in expected inflation rates between two countries are associated with expected
changes in exchange rates.
c.
Foreign exchange rates are fixed.
d.
neither a or b is correct
6. Suppose that the one-year risk-free interest rate is 5% in the United States. The current spot rate is
$0.7642/C$ and the one-year forward rate is $0.7834/C$. What must the Canadian one-year risk-free
interest rate be in order for interest rate parity to hold?
a.
0.929%
b.
0.783%
c.
2.43%
d.
7.64%
7. The annualized rate of interest on three-month government bonds is 7% in Italy and the annualized
rate on three-month government bonds is 4% in the United States. The current spot rate is $1.12/€.
Using interest rate parity what is the implied three-month forward rate between the U.S. dollar and the
Euro.
a.
$1.112/€
b.
$1.128/€
c.
€0.8865/$
d.
$1.0886/€
8. The inflation rate in London is expected to be 10% over the next year and the inflation rate in Canada
is expected to 6%. Using Purchasing Power Parity you could say that
a.
the £ will appreciate relative to the Canadian dollar
b.
the Canadian dollar will appreciate relative to the £
c.
the risk-free rate of interest in London will rise to compensate for the higher inflation rate.
d.
the risk-free rate of interest in London will fall to compensate for the higher inflation rate.
9. In the United States the expected rate of inflation is 4% and in Canada the expected rate of inflation is
8%. The risk-free rate of interest in the U.S. is 3%. What would the risk-free interest rate have to be in
Canada for real interest rate parity to hold?
a.
9.05%
b.
3.0%
c.
4.0%
d.
6.96%
10. The expected rate of inflation in Japan is 12% and the expected rate of inflation in Italy is 9%. In Italy
the risk-free rate of interest is 6%. What does the risk-free rate of interest have to be in Japan for real
interest rate parity to hold?
a.
3.16%
b.
8.92%
c.
6.0%
d.
12.0%
11. The expected rate of inflation for Japan is 11%. The risk-free rate in Japan is 5% and the risk-free rate
in Italy is 2%. What must the inflation rate in Italy be in order for real interest rate parity to hold?
a.
11.0%
b.
7.83%
c.
-3.51%
d.
14.26%
12. Suppose that J.B. Campbell & Company operates in the United States and sells 10 coffee tables to a
Japanese company. J.B. Campbell & Company delivers the tables now and will receive ¥187,500 in 6
months. If the current spot rate is ¥122/$ and if the exchange rate in 6 months is ¥127/$, how much
will J.B. Campbell & Company have gained / lost from the movements in exchange rates if it does not
hedge this transaction.
a.
They will not gain or lose anything on this transaction.
b.
They will gain ¥50
c.
They will gain $60.50
d.
They will lose $60.50
13. Gates Auto Inc. manufactures automobile engines in the United States. Gates Auto Inc. sells 200 of its
8 – cylinder Hoste model engines to a company in Canada. The total price for these engines is
C$60,000. Gates Auto Inc. will deliver the engines today and receive payment in 3 months from the
Canadian company. When payment is received Gates Auto will convert the C$60,000 into U.S.
dollars. The spot rate is $0.7865/C$ and if the spot rate in 3 months is $0.7622/C$, how much will
Gates Auto Inc. gain or lose due to exchange rate movements on this transaction if it does not perform
any hedges.
a.
They will lose $1,458.29
b.
They will gain $1,458.29
c.
They will not gain or lose anything on this transaction.
d.
They will gain $31,530
14. Beech Industries is a U.S. company that sells shoes to Japanese retailers. Beech Industries just signed a
contract to sell 1,000 pairs of shoes to Yakata Inc. The total price for these shoes is ¥200,000. The
shoes will be delivered today but Beech Industries won’t receive payment for 6 months. The current
spot rate is ¥127/$ and the 6-month forward rate is ¥128/$. Marcus Duncan, the treasurer at Beech
Industries, expects that in 6 months the spot rate will ¥131/$. Based on the information given Beech
Industries is most likely to
a.
enter into a 6-month forward contract and lock in the rate ¥128/$
b.
remain unhedged on this transaction
c.
demand payment today instead of in 6 months
d.
cancel the transaction with Yakata Inc. because they will lose too much of their profit due
to exchange rate movements.
15. Which of the following is not a strategy that corporations can use to transfer exchange rate risk?
a.
Forward Contracts
b.
Option Contracts
c.
Currency Swaps
d.
operate and sell in only one country
16. The following are all examples of political risk that could affect a multinational corporation, except
a.
increasing taxes on a firm’s activities
b.
employing quotas on the goods or services that a firm sells
c.
Implementing tax incentives to attract new corporations
d.
Implementing barriers that prevent a firm from repatriating profits back to their home
country
17. Which of the following is an example of macro political risk?
a.
the current government is overthrown by a radical militia group
b.
restricting the amount of assets that steel companies may control in their territories
c.
raising the level of taxes for oil firms
d.
removing tax subsidies received by paper manufacturer’s
18. Suppose that a United States firm is considering an investment that will yield cash flows in Canadian
dollars. The projects cash flows will be the following: Initial cost = C$-1,000,000, Year 1 =
C$550,000, Year 2 = C$340,000, Year 3 = C$125,000. The U.S. firm plans to evaluate the project by
discounting the cash flows at the Canadian cost of capital of 7% and then converting the NPV back to
U.S. dollars at the current spot rate which is $0.8213/C$. What is the NPV of the project in U.S.
dollars?
a.
$-71,433
b.
$-86,975
c.
C$-86,975
d.
C$-71,433
19. Mark Duncan owns a furniture manufacturing firm in the United States. He is considering an
investment in Japan which will have the following cash flows: Initial cost = ¥-300,000,000, Year 1 =
¥150,000,000, Year 2 = ¥200,000,000, Year 3 = ¥250,000,000 and Year 4 = ¥100,000,000. The
appropriate discount rate that should be used to discount yen-denominated cash flows is 11%.
Calculate the NPV of the project, if Duncan plans on converting the NPV from Yen into U.S. dollars at
the current spot rate of ¥123/$.
a.
¥246,130,565
b.
$246,130,565
c.
$2,001,062
d.
¥2,001,062
20. Crum Industries is a paper manufacturing company based in the United States. The CEO of the
company Hannah Monstzka is considering an investment in Canada to take advantage of Canadian
government subsidies. The investment will have the following cash flows: Initial cost = C$-2,000,000,
Year 1 = C$1,250,000, Year 2 = C$1,000,000, Year 3 = C$750,000. Monstzka plans on hedging the
cash flows using forward contracts throughout the life of the project. The risk-free rate of interest in
Canada is 5% and the risk-free rate of interest in the U.S. is 4%. Currently the spot rate is $0.7134/C$
and the project should be discounted at a U.S. adjusted rate of 9%. Assume Monstzka will be able to
convert the Canadian dollar cash flows into U.S. dollars at the implied forward rates when they are
received. What is the NPV of the project in U.S. dollars?
a.
$374,071
b.
$567,606
c.
$404,930
d.
$393,465
21. Calculate the required return for a project undertaken in Italy given the following information. The
appropriate risk free rate is 5%, the project has a calculated beta of 1.35 relative to the Italian stock
market, and the market risk premium for the Italian stock market is 7%.
a.
4.45%
b.
5.0%
c.
14.45%
d.
9.45%
22. The spot rate for Canadian and U.S. dollars is $0.7213/C$. The annualized interest rate on a six-month
government bond in Canada is 6% and the same rate in the United States is 5%. Calculate the 6-month
forward rate that is needed for interest rate parity to hold.
a.
$0.7281/C$
b.
$0.7248/C$
c.
$0.7353/C$
d.
$0.7178/C$
23. The annualized rate of interest on a three-month government bond in Japan is 8% and the rate on a
similar instrument in the United States is 6%. The current spot rate is $0.0079/¥. Calculate the 3-month
forward needed for interest rate parity to hold.
a.
$0.00821/¥
b.
$0.00786/¥
c.
$0.00794/¥
d.
$0.00805/¥
24. In Italy the annualized rate on a three-month government bond is 4% and in Canada the rate is 5%.
The current spot rate is €0.6542/C$. Calculate the 3-month forward rate needed for interest rate parity
to hold.
a.
€0.6526/C$
b.
€0.6480/C$
c.
€0.6558/C$
d.
€0.6605/C$
25. In a floating exchange rate environment the price of a currency is determined by
a.
the country’s national government
b.
the supply and demand for that currency
c.
the International Monetary Fund
d.
the World Bank
26. Yesterday, in the Wall Street Journal, the exchange rate between Canadian and U.S. dollars was
$0.7347/C$. Today the rate is $0.7432/C$. From yesterday to today the Canadian dollar ____ and the
U.S. dollar ____ relative to one another.
a.
Depreciated; appreciated
b.
was unchanged; was unchanged
c.
appreciated; appreciated
d.
appreciated; depreciated
27. The quote for a Euro in terms of U.S. dollars is $1.1232/€. How many Euros equals one U.S.
dollar($)?
a.
€1 equals $1 since there exchange rates are fixed to one another
b.
€0.8903 is equal to $1
c.
€1.1232 is equal to $1
d.
You can not figure this out since both the U.S. dollar and the Euro are floating exchange
rates
28. The exchange rate between the U.S. dollar and the Japanese Yen is $.008072/¥. If the exchange rate
changes to $0.0080069/¥ then you could say
a.
the U.S. dollar is appreciating against the Japanese Yen and the Japanese Yen is
depreciating against the U.S. dollar.
b.
the U.S. dollar is depreciating against the Japanese Yen and the Japanese Yen is
appreciating against the U.S. dollar.
c.
the U.S. dollar is depreciating.
d.
nothing, because the exchange rates can not be compared to one another.
29. The spot rate for U.S. dollars and Euros is $1.232/€. The 90 day forward rate for the two currencies is
$1.254/€. The U.S. dollar
a.
trades at a 1.79% 90 day forward premium.
b.
trades at a 7.14% annual forward premium.
c.
trades at a 1.79% 90 day forward discount.
d.
trades at a 7.14% annual forward discount.
30. If the exchange rate quote for the U.S. dollar and the Euro is $1.1234/€ and the exchange rate quote for
the U.S. dollar and the Canadian dollar (C$) is $0.7258/C$ then the cross exchange rate between Euros
and Canadian dollars is
a.
C$1.5478/€
b.
€0.5478/C$
c.
C$0.6461/€
d.
€0.6461/C$
31. A system in which a country’s currency is pegged to the value of another currency like the U.S. dollar,
is called a
a.
floating exchange rate system
b.
fixed exchange rate system
c.
managed floating rate system
d.
currency board arrangement
32. The current foreign exchange rate is also called the
a.
spot rate
b.
forward rate
c.
main rate
d.
none of the above
33. The idea that identical goods trading in different markets should have the same price is called
a.
the interest rate parity
b.
the Big Mac index
c.
the law of one price
d.
none of the above
34. The risk that arises from the fact that MNCs have to report foreign revenues and costs in their
domestic financial statements is called
a.
transactions risk
b.
economic risk
c.
translation risk
d.
political risk
35. The European Union adopted a continent-wide medium of exchange, the Euro, as their common
currency. How many of the member countries of the EU are using the Euro as their current currency?
a.
10
b.
11
c.
12
d.
13
36. You checked the $/€ exchange rate a week ago and you found that one Euro cost you $1.2432. When
you checked the $/€ exchange rate again yesterday one Euro was trading at $1.2343. By how much did
the value of the U.S Dollar appreciate (depreciate)?
a.
depreciated by 0.72%
b.
appreciated by 0.72%
c.
depreciated by 1.24%
d.
appreciated by 1.24%
37. You checked the $/€ exchange rate a week ago and you found that one Euro cost you $1.2432. When
you checked the $/€ exchange rate again yesterday one Euro was trading at $1.2343. By how much did
the value of the Euro appreciate (depreciate)?
a.
depreciated by 0.72%
b.
appreciated by 0.72%
c.
depreciated by 1.24%
d.
appreciated by 1.24%
38. You checked the €/$ exchange rate a week ago and you found that one Dollar cost you €0.8214. When
you checked the €/$ exchange rate again yesterday one dollar was trading at €0.8026. By how much
did the value of the Euro appreciate (depreciate)?
a.
depreciated by 3.56%
b.
appreciated by 3.56%
c.
appreciated by 2.29%
d.
depreciated by 2.29%
39. You checked the €/$ exchange rate a week ago and you found that one Dollar cost you €0.8214. When
you checked the €/$ exchange rate again yesterday one dollar was trading at €0.8026. By how much
did the value of the Dollar appreciate (depreciate)?
a.
appreciated by 3.56%
b.
depreciated by 3.56%
c.
appreciated by 2.35%
d.
depreciated by 2.35%
40. You checked the €/$ exchange rate today and you found that one Dollar cost you €0.8214. When you
checked the one year €/$ forward exchange rate one dollar was trading at €0.8026. What is the forward
premium (discount) for the dollar?
a.
2.29%
b.
-2.29%
c.
3.67%
d.
-3.67%
41. You checked the €/$ exchange rate today and you found that one Dollar cost you €0.8214. When you
checked the one year €/$ forward exchange rate one dollar was trading at €0.8026. What is the forward
premium (discount) for the Euro?
a.
2.35%
b.
-2.35%
c.
3.67%
d.
-3.67%
42. You checked the €/$ exchange rate today and you found that one Dollar cost you €0.8214. When you
checked the three months (90 day) €/$ forward exchange rate one dollar was trading at €0.8026. What
is the annualized forward premium (discount) for the dollar?
a.
2.29%
b.
-2.29%
c.
9.16%
d.
-9.16%
43. You checked the €/$ exchange rate today and you found that one Dollar cost you €0.8214. When you
checked the three months (90 day) €/$ forward exchange rate one dollar was trading at €0.8026. What
is the annualized forward premium (discount) for the Euro?
a.
9.4%
b.
-9.4%
c.
2.35%
d.
-2.35%
44. If the €/$ exchange rate is $1.2267/€ and the $/£ exchange rate is $1.7894/£, what is the €/£ exchange
rate?
a.
2.1951
b.
1.4587
c.
0.6855
d.
2.9564
45. You just bought a pair of shoes for $129. If the $/€ exchange rate is $1.2275/€, what should be the
price of the identical pair of shoes in France, if the purchasing power parity holds?
a.
€105.09
b.
€154.35
c.
€129.00
d.
€95.63