LOC: acquire knowledge of financial markets and interest rates
46. You just bought a pair of shoes for $129. If an identical pair of shoes sells for €105 in France, what
should be the $/€ exchange rate if the purchasing power parity holds?
a.
.8140
b.
1.2286
c.
1.2905
d.
.5968
47. You just bought a pair of shoes for $129. If an identical pair of shoes sells for €105 in France, what
should be the €/$ exchange rate if the purchasing power parity holds?
a.
1.2286
b.
1.2905
c.
.8140
d.
.5968
NARRBEGIN: Smith Int’l Investment
Smith Enterprises International Investment
Smith Enterprises is considering opening a new manufacturing plant in France. The cost of the new
plant will be €25 million and the plant is expected to generate after tax cash flows of €10 million at the
end of each year for the next 4 years. After that the plant will be worthless. The current €/$ exchange
rate is €0.8166/$. The expected rate of inflation for the U.S is 2.5% per year. The risk free rate in the
U.S. is 4% and the risk free rate in France is 6%.
NARREND
48. Refer to Smith Enterprises International Investment. What is the expected rate of inflation in France?
a.
4.47%
b.
5.00%
c.
6.52%
d.
3.56%
49. Refer to Smith Enterprises International Investment. What is the cost of the manufacturing plant in
U.S. dollars?
a.
$20,415,000
b.
$25,760,000
c.
$30,615,000
d.
$32,340,000
50. Refer to Smith Enterprises International Investment. If the required return of the project is 15% in
Euro terms, what should be the required return in dollar terms?
a.
15.00%
b.
12.83%
c.
17.21%
d.
9.65%
51. Refer to Smith Enterprises International Investment. What is the 2-year $/€ forward exchange rate?
a.
.8012
b.
.7861
c.
.8263
d.
.8521
52. Refer to Smith Enterprises International Investment. What is the 3-year $/€ forward exchange rate?
a.
.7861
b.
.7719
c.
1.2955
d.
1.2721
53. Refer to Smith Enterprises International Investment. What is the NPV of the investment in US dollars
when evaluating the € denominated cash-flows? Assume a required return of 15%.
a.
$4.347 million
b.
$2.899 million
c.
$7.852 million
d.
$9.514 million
54. Refer to Smith Enterprises International Investment. What is the NPV of the investment in €-terms, if
the required rate of return is 15%.
a.
€28.5498 million
b.
€18.3267 million
c.
€3.5498 million
d.
€12.5682 million
55. Refer to Smith Enterprises International Investment. What is the expected $ value of the after tax cash
flow received at the end of year 2?
a.
$7.86 million
b.
$10.45 million
c.
$14,72 million
d.
$12.72 million
56. If you are a U.S. based company making sales in Europe, you would benefit from
a.
a strengthening U.S. dollar.
b.
a weakening U.S. dollar.
c.
a weakening Euro.
d.
none of the above.
57. The system where a country pegs its currency to that of another currency is called
a.
a floating exchange rate system.
b.
a fixed exchange rate system.
c.
a managed floating rate system.
d.
none of the above.
58. In a fixed exchange rate system, if the demand for a currency increases
a.
then the government of that country must stand ready to sell its currency.
b.
then the government of that country must stand ready to purchase its currency.
c.
then the government of that country must stand ready to sell foreign currencies.
d.
then the government must prepare the citizens of that country for the economic shock that
will come in the future.
59. If you are looking at an indirect quote for a U.S. Dollar -foreign currency exchange rate and the
number has increased from yesterday to today, then
a.
the U.S Dollar has increased in value.
b.
the U.S Dollar has decreased in value.
c.
the foreign currency has decreased in value.
d.
both a and c are correct.
60. If you are looking for the exchange rate to convert U.S. Dollars to Euros today, then you would need
to be looking at
a.
the spot exchange rate.
b.
the forward exchange rate.
c.
the future exchange rate.
d.
the dot exchange rate.
61. When one currency buys less of another currency in the forward market than it does in the spot market,
we say that it is trading at
a.
a forward discount.
b.
a forward premium.
c.
a spot discount.
d.
a spot premium.
62. If the spot rate for the yen/ dollar is ¥110.00 and the forward rate is ¥111.00 then the yen trades at
a.
a forward discount of .009091 to the dollar.
b.
a forward premium of .009091 to the dollar.
c.
a forward discount of .009009 to the dollar.
d.
a forward premium of .009009 to the dollar.
63. If the spot rate for the yen/ dollar is ¥110.00 and the one-month forward rate is ¥111.00 then the yen
trades at an annual
a.
forward discount of .009091 to the dollar.
b.
forward premium of .009091 to the dollar.
c.
forward discount of .109091 to the dollar.
d.
forward premium of .109091 to the dollar.
64. If the Canadian Dollar is worth $1.50, and the Swiss Franc is worth $1.30, then how many Canadian
Dollars does it take to purchase a Swiss Franc?
a.
1.1538
b.
0.8667
c.
1.5000
d.
none of the above
65. If the Canadian Dollar is worth $1.50, and the Swiss Franc is worth $1.30, then how many Swiss
Francs does it take to purchase a Canadian Dollar?
a.
1.1538
b.
0.8667
c.
1.300
d.
none of the above
66. Which of the following accounts for the largest portion of trading volume in the foreign exchange
markets?
a.
exporters
b.
importers
c.
investors
d.
governments
67. Forward-spot parity suggests that
a.
the forward rate will overestimate the spot rate at a set point in the future.
b.
the forward rate is an unbiased predictor of the spot rate at a set point in the future.
c.
the forward rate will underestimate the spot rate a set point in the future.
d.
none of the above.
68. If the law of one price holds and the price of an apple in the U.S. is $1.50 while the price of an apple in
Japan is ¥174.00, then what should the spot exchange rate for ¥/$ be?
a.
.0086
b.
.5747
c.
116.00
d.
none of the above
69. If the law of one price holds and the price of a Big Mac in the U.S. is $1.99 while the price of a Big
Mac in Britain is £1.50, then what should the spot exchange rate for $/£ be?
a.
1.3267
b.
1.0000
c.
.7538
d.
none of the above
70. If the spot rate for Marsian Spotlets (MRS) is 4 per U.S. Dollar (USD) and the risk-free rates of return
are 10% and 2%, respectively for the Marsian and U.S. economy, then what should the 1-year forward
rate be for MRS/USD?
a.
4.3137
b.
4.0000
c.
0.2318
d.
none of the above
71. If the spot rate for Jupiter Ringlets (JPR) is 3 USD per Ringlet and the risk-free rates of return are 1%
and 2%, respectively for the Jupiter and U.S. economy, then what should the 1-year forward rate be for
JPR/USD? Round to the nearest 4th decimal place.
a.
3.0297
b.
3.0000
c.
.3301
d.
none of the above
72. If the spot rate for Marsian Spotlets (MRS) is 4 per U.S. Dollar (USD) and the one-year risk-free rate
of return is 30%, for the Marsian economy, then what should the risk free rate for the U.S. economy if
the 1-year forward rate be for MRS/USD is 5?
a.
.04
b.
.038
c.
.625
d.
none of the above
73. If the spot rate for Marsian Spotlets (MRS) is 4 per U.S. Dollar (USD) and the one-year risk-free rate
of return in the U.S. is 4%, then what should the risk free rate on Mars be if the 1-year forward rate be
for MRS/USD is 5?
a.
30.00%
b.
20.19%
c.
20.00%
d.
none of the above
74. The 1-year risk-free rate of return in Hobbiton is 10% and the 1-year risk-free rate of return in Gondor
is 20%. If the expected rate of inflation in Hobbiton is 5%, the what should be the expected rate of
inflation in Gondor? Round to the nearest .01%
a.
14.54%
b.
12.70%
c.
3.89%
d.
none of the above
75. The 1-year risk-free rate of return in Hobbiton is 10% and the 1-year risk-free rate of return in Gondor
is 20%. If the real rate of return on a 1-year risk-free investment in Hobbiton is 0%, the what should be
the expected rate of inflation in Gondor?
a.
5.00%
b.
20.00%
c.
30.00%
d.
none of the above
76. You are a French wine producer who has a contract to sell $10,000,000 worth of wine in the U.S. for
dollars 6 months in the future. If you would like to hedge this position, what could you do to hedge the
currency risk involved in transaction?
a.
buy dollars and sell euros in the forward market
b.
sell dollars and buy euros in the forward market
c.
buy euros and sell dollars in the spot market
d.
sell dollars and buy euros in the spot market
77. The type of risk primarily concerned with converting revenues and costs denominated in foreign
currencies into a firm’s domestic currency is
a.
economic exposure.
b.
transaction exposure.
c.
translation exposure.
d.
none of the above.
78. You are a U.S. dollar based corporation with a project in Great Britain that will cost you £1,000,000.
The project will provide free cash flow of £500,000 for the next 3 years. If the pound denominated
discount rate for this project is 12% and the spot rate is .5600£/$, then what is the dollar denominated
NPV for the project? Round to the nearest $10.
a.
$358,780
b.
$200,920
c.
$112,510
d.
none of the above
79. You are trying to determine the appropriate risk-adjusted rate, in U.S. dollars for a project in Britain.
You know that the correct risk-adjusted discount rate in pounds is 15% and the risk-free rate in pounds
is 9%. If the risk-free rate in dollars is 5%, then what is the correct risk-adjusted discount rate in
dollars? Round to the nearest .01%
a.
10.80%
b.
5.50%
c.
0.48%
d.
none of the above
80. You are trying to determine the appropriate risk-adjusted rate, in Venus sun-dollars for a project on
Venus. You know that the correct risk-adjusted discount rate in U.S. dollars is 15% and the risk-free
rate in dollars is 8%. If the risk-free rate in sun-dollars is 5%, then what is the correct risk-adjusted
discount rate in dollars? Round to the nearest .01%
a.
11.81%
b.
6.48%
c.
1.39%
d.
none of the above
81. Which of the following statements is true?
a.
The foreign exchange market is a physical marketplace located in New York.
b.
The foreign exchange market is the world’s largest financial market.
c.
Prices for floating currencies are set by global supply and demand.
d.
Both (b) and (c) are true.
e.
all of the above are true.
82. Which of the following is the practice of trading an asset for the purpose of reducing or eliminating the
risk associated with some other asset?
a.
Speculating
b.
Hedging
c.
Put-call parity
d.
Insurance
e.
Fixed exchange rate
83. Which of the following describes taking a position in a currency to increase risk?
a.
Speculating
b.
Hedging
c.
Put-call parity
d.
Insurance
e.
Fixed exchange rate
84. Which of the following statements is true?
a.
Speculators do irreparable harm in general to the foreign exchange market.
b.
Speculators help make the foreign currency market more liquid and more efficient.
c.
Speculators help make the foreign currency market less liquid and less efficient.
d.
Governments that attempt to maintain a fixed exchange rate must generally intervene less
frequently than those that have floating exchange rates.
85. The equilibrium relationship that predicts that the real interest rate will be the same in every country is:
a.
The Fisher Effect
b.
Real Interest Rate Parity
c.
Forward-Spot Parity
d.
Interest Rate Parity
e.
Both (a) and (b)
86. If a firm operates strictly in one country and has cash flows in only one currency then:
a.
it can easily avoid any sort of exchange rate risk.
b.
it will still face exchange rate risk if it produces a good or service that competes with
imports in the home market.
c.
it will still face exchange rate risk if it uses an imported product or service in production.
d.
All of the above
e.
Both (b) and (c)
87. Which type of institution is in a unique position to bear exchange rate risk by creating a natural hedge?
a.
National banks
b.
Multinational corporations
c.
Large corporations
d.
International banks
88. Yen-denominated bonds issues by non-Japanese corporations are known as:
a.
Yankee bonds
b.
Samurai bonds
c.
Eurobonds
d.
Japanese bonds
e.
Tokyo bonds
89. The adoption of the euro was a result of the ____ Treaty.
a.
Versailles
b.
Maastricht
c.
GATT
d.
NAFTA
e.
Mercosur
90. The risk that movements in exchange rates will adversely affect the value of a particular transaction.
a.
Transactions exposure
b.
Translation exposure
c.
Economic exposure
d.
Political Risk
91. This risk that exchange rate movements will adversely impact reported financial results on a firm’s
financial statements
a.
Transactions exposure
b.
Translation exposure
c.
Economic exposure
d.
Political Risk
92. The risk that a firm’s value will fluctuate due to exchange price movements
a.
Transactions exposure
b.
Translation exposure
c.
Economic exposure
d.
Political Risk
93. The risk that a government will take an action that negatively affects the values of firms operating in
that country
a.
Transactions exposure
b.
Translation exposure
c.
Economic exposure
d.
Political Risk
94. Assuming that current currencies are currently in equilibrium and the exchange rate is €/$ = 0.721 and
that the U.S. expects inflation over the next year to be 4% while in Europe there is an expectation of
2.3%; what must the exchange rate be in one year? (€/$)
a.
0.709
b.
0.750
c.
0.738
d.
0.705
95. Assuming that current currencies are currently in equilibrium and the exchange rate for the Brazilian
Real is R/$ = 1.753 and that the U.S. expects inflation over the next year to be 4% While in Brazil
there is an expectation of 7.3%; what must the exchange rate be in one year? (R/$)
a.
1.634
b.
1.881
c.
1.809
d.
1.823
96. Assuming that current currencies are currently in equilibrium and the exchange rate for the Costa
Rican Colon is CRC/$ = 511.53 and that the U.S. expects inflation over the next year to be 4% While
in Costa Rican there is an expectation of 7.8%; what must the exchange rate be in one year?
(CRC/$)
a.
531.991
b.
551.429
c.
474.518
d.
530.221
97. Let the expected inflation in the United Sates be 4% and the expected inflation in Europe is 2.3 %;
Also suppose that the United States one-year, risk-free rate is 5% what must the risk-free rate in
Europe be to maintain interest rate parity?
a.
3.28%
b.
2.42%
c.
5.12%
d.
7.30%
98. Let the expected inflation in the United Sates be 4% and the expected inflation in Brazil is 7.3 %; Also
suppose that the United States one-year, risk-free rate is 5% what must the risk-free rate in Brazil be to
maintain interest rate parity?
a.
12.30%
b.
7.67%
c.
5.37%
d.
8.33%
99. Let the expected inflation in the United Sates be 4% and the expected inflation in Costa Rica is 7.8 %;
Also suppose that the United States one-year, risk-free rate is 5% what must the risk-free rate in Costa
Rica be to maintain interest rate parity?
a.
8.84%
b.
8.19%
c.
5.39%
d.
12.80%