Corporate Finance: Core Principles & Apps, 5e (Ross)
Chapter 20 International Corporate Finance
1) Up-Town Markets exchanged their floating-rate payments with Downtown Markets’ fixed-rate
payments. This exchange is referred to as a
A) gilt exchange.
B) forward rate.
C) cross-rate.
D) spot exchange.
E) swap.
2) Which one of these is a U.S. company-sponsored security that trades on an exchange and has
an underlying value based on foreign securities?
A) Yankee bond
B) Foreign bond
C) American Depository Receipt
D) Gilt
E) Eurobond
3) A bond issued in multiple countries but generally denominated in the single home currency of
the issuer is called a
A) Treasury bond.
B) Eurobond.
C) Bulldog bond.
D) Samurai bond.
E) Yankee bond.
4) International bonds issued in a single country and denominated in that country’s currency are
called
A) Treasury bonds.
B) Eurobonds.
C) foreign bonds.
D) Brady bonds.
E) gilts.
5) A foreign bond issued in the United States and denominated in U.S. dollars is called a(n)
A) American Depository Receipt.
B) gilt.
C) Eurobond.
D) Yankee bond.
E) swap bond.
6) What does LIBOR stand for?
A) London Interest Bearing Orderly Rate
B) Lisbon Interest Bearing Organization Rate
C) Liberal Interest Bearing Offer Rate
D) Lisbon International Bank Offering Rate
E) London Interbank Offered Rate
7) The cross rate is the
A) exchange rate between the U.S. dollar and another currency.
B) implicit exchange rate between two currencies when both are quoted in a third currency.
C) rate converting the direct rate into the indirect rate.
D) difference between the official exchange rate and the rate that can be received locally.
E) difference between the spot rate and the forward rate.
8) Which one of these best expresses the value of one currency in terms of a second currency?
A) LIBOR
B) Exchange rate
C) Depository Rate
D) Arbitrage rate
E) Real rate
9) An agreement to trade currencies based on the exchange rate today for settlement within two
business days is called a(n) ________ trade.
A) spot
B) forward
C) futures
D) option
E) swap
10) An agreement made today that sets both the exchange rate and the quantity of currency that
will be traded at some point in the future is called a ________ trade.
A) spot
B) floating
C) swap
D) triangle
E) forward
11) Which one of these statements related to the foreign exchange market is correct?
A) Currency trading floors are operated by the central bank of each country.
B) The primary currency trading floor is located in London.
C) The foreign exchange market is second in size as a financial market only to the New York
Stock Exchange.
D) Currency trading floors are located in all the major financial centers of the world and operated
by commercial banks.
E) SWIFT is a means of handling foreign currency transactions that is sponsored by a Belgian
cooperative.
12) Which one of these combinations of country, currency, and currency symbol is incorrect?
A) Mexico, peso, Ps
B) Japan, yen, ¥
C) United Kingdom, pound,£
D) Saudi Arabia, riyal, Ry
E) EMU, euro, €
13) Which two countries use the krone as their home currency?
A) Singapore and India
B) Switzerland and Sweden
C) Denmark and Norway
D) South Africa and Saudi Arabia
E) Kuwait and Iran
14) Triangle arbitrage:
A) no longer exists as all currencies have obtained equilibrium on an ongoing basis.
B) prevents exchange markets from obtaining equilibrium.
C) opportunities can exist in either the spot or the forward market.
D) requires three currencies that are correctly priced plus one incorrectly priced currency.
E) is rarely profitable.
15) Assume the euro is selling in the spot market for $1.10. Simultaneously, in the 3-month
forward market the euro is selling for $1.12. Which one of the following statements correctly
describes this situation?
I. The euro is selling at a premium relative to the dollar.
II. The dollar is selling at a premium relative to the euro.
III. The dollar is selling at a discount relative to the euro.
IV. The euro is selling at a discount relative to the dollar.
A) I and II only
B) I and III only
C) II and IV only
D) III and IV only
E) I and IV only
16) Assume a currency is less expensive in the forward market than in the spot market relative to
the U.S. dollar. When this occurs, the currency is said to be selling at
A) the spot price.
B) an arbitrage price.
C) a premium relative to the dollar.
D) its true relative value.
E) a discount relative to the dollar.
17) Suppose the spot exchange rate between U.S. dollars and the U.K. pound is $2/£ while the
forward rate is $1.90/£. Which one of the following is true?
A) The value of the U.K. pound is expected to remain constant.
B) The U.K. pound is selling at a premium.
C) The U.K. pound is selling at a discount.
D) The U.K. pound is expected to appreciate.
E) The U.S. dollar is expected to depreciate.
18) A direct quote is
A) is equal to (1 – Indirect quote).
B) also called the European quote.
C) is shown as the Currency per USD in the Wall Street Journal.
D) the number of U.S. dollars required to purchase one unit of a foreign currency.
E) generally set at the beginning of each calendar day and held constant during that day.
19) Which one of these expresses the concept that a commodity will cost the same regardless of
where the commodity is located or the currency used to pay for it?
A) Interest rate parity
B) Uncovered interest rate parity
C) Absolute purchasing power parity
D) International Fisher effect
E) Relative purchasing power parity
20) Which one of these must be true if absolute purchasing power parity is to absolutely hold?
A) Customer preferences for an item must be identical across markets.
B) There must be greater demand for the item in one area as compared to another area.
C) Forward rates must equal spot rates.
D) The goods traded must have a feature unique to each individual market.
E) Transaction costs must be imposed on both ends of a trade.
21) Which one of the following conditions does not exist if absolute purchasing power parity
exists?
A) Goods are identical.
B) Trade barriers are nonexistent.
C) Transaction costs are equal to zero.
D) Goods have equal economic values.
E) Goods differ based on geographic location.
22) Assume the spot exchange rate is 6.22 Chinese yuan per U.S. dollar. If the inflation rate in
China is expected to be double that in the U.S. for the next 2 years, then the
A) exchange rate will be unaffected as inflation is irrelevant to exchange rates.
B) dollar will weaken against the yuan.
C) yuan will appreciate relative to all other currencies.
D) dollar will remain constant against the yuan.
E) dollar will strengthen against the yuan.
23) Relative purchasing power parity states that exchange rates vary in response to
A) differences in interest rates between countries.
B) changes in the trade barriers between countries.
C) changes in the tax rates imposed by a country.
D) differences in the inflation rates between countries.
E) arbitrage trades involving the exchanged currencies.
24) The theory that real interest rates are equal across countries is called
A) purchasing power parity.
B) the international Fisher effect.
C) the unbiased forward rates condition.
D) uncovered interest parity.
E) interest rate parity.
25) The international Fisher effect may not hold if
A) risk tolerance levels vary among countries.
B) interest rates vary among countries.
C) currencies can move freely among countries.
D) nominal interest rates vary among countries.
E) inflation rates vary among countries.
26) Which one of these statements is correct?
A) Relative purchasing power parity says that the expected spot rate 1 year from now is equal to
the current spot rate multiplied by (1 + U.S. inflation rate – Foreign inflation rate).
B) The interest rate parity formula is based on real rates of interest.
C) An indirect quote is the number of dollars required to purchase one unit of a foreign currency.
D) Uncovered interest parity is a combination of the unbiased forward rate and interest rate
parity.
E) If the euro per dollar is more expensive in the forward market than in the spot market, the
euro is selling at a discount.
27) Which one of these presents the idea that forward rates are equal to expected future spot
rates?
A) International Fisher effect
B) Interest rate parity
C) Uncovered interest rate parity
D) Triangle arbitrage
E) Unbiased forward rate condition
28) Interest rate parity
A) eliminates exchange rate fluctuations.
B) exists when spot rates are equal for multiple countries.
C) exists when the spot rate is equal to the forward rate.
D) means that the nominal risk-free rate of return must be the same across countries.
E) eliminates covered interest arbitrage opportunities.
29) According to the unbiased forward rate theory, the current 90-day forward rate should fairly
accurately predict the
A) interest rate differential between two countries 90 days from now.
B) difference in the inflation rate between two countries 90 days from now.
C) forward rate 90 days from now.
D) real rate 90 days from now.
E) spot rate 90 days from now.
30) The forward rate market is dependent upon
A) current forward rates exceeding current spot rates.
B) current spot rates exceeding current forward rates over time.
C) current spot rates equalling current forward rates on average over time.
D) current spot rates equalling the actual future spot rates on average over time.
E) forward rates equalling the actual future spot rates on average over time.
31) Assume the international Fisher effect exists and the inflation rate in the U.S. exceeds the
inflation rate in Canada. What can we state for certain given this information?
A) Nominal rates in the United States exceed nominal rates in Canada.
B) Real rates in Canada exceed real rates in the United States.
C) The inflation rate in Canada will increase so it equals the U.S. inflation rate.
D) Nominal rates in Canada exceed nominal rates in the United States.
E) Nominal rates will be the same in both countries.
32) The home currency approach
A) discounts all of 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 determine the
NPV of foreign cash flows in U.S. dollars.
33) The home currency approach
A) requires an applicable exchange rate for every time period for which there is a cash flow.
B) stresses the use of the real rate of return to compute the net present value (NPV) of a project.
C) uses the current risk-free nominal rate to discount all of the cash flows related to a project.
D) generally produces more reliable results than those found using the foreign currency
approach.
E) provides a net project value in both the home and the foreign currency.
34) The foreign currency approach to capital budgeting analysis
A) is computationally harder to use than the home currency approach.
B) produces different results than the home currency approach.
C) computes the NPV of a project in both the foreign and the domestic currency.
D) relies on the international Fisher effect for the exchange rate.
E) relies on the uncovered interest rate parity to project multiple exchange rates.
35) Which of the following are means of repatriating funds from a foreign operation?
A) Nationalization, confiscation, and exploitation
B) Blocked funds, home office fees, and dividend payments
C) Interest payments on foreign debt, dividend payments, and management fees
D) Royalties, management fees, and dividend payments
E) Wages to foreign employees, interest payments on foreign debt, and sales fees to foreign
agents
36) Assume you borrow $5,000 today, exchange the $5,000 into yen, and then invest the yen for
30 days, at which time you need to pay an invoice to a Japanese supplier. In essence, you have
A) eliminated your long-term exposure to exchange rate risk.
B) achieved an equilibrium known as the international Fisher effect.
C) offset any potential translation exposure to exchange rate risk.
D) entered into a forward contract.
E) generated a profit from triangle arbitrage.
37) The changes in the relative economic conditions between countries are referred to as the
A) international Fisher effect.
B) international exchange rate effect.
C) long-run exposure to exchange rate risk.
D) translation exposure to exchange rate risk.
E) the interest rate parity risk.
38) Which one of the following statements is correct?
A) A firm’s long-run exchange rate risk can be reduced by borrowing money in the foreign
country where it has operations.
B) FASB requires that all translation gains and losses be recorded annually on the firm’s income
statement.
C) Unexpected changes in economic conditions are classified as short-run exposure to exchange
rate risk.
D) Foreign assets are recorded on the parent firm’s balance sheet based on the exchange rate at
the time each asset is acquired.
E) The usage of forward rates primarily addresses the long-run exposure to exchange rate risk.
39) Which one of these is a suggested means of reducing long-run exposure to exchange rate
risk?
A) Compiling financial statements only in foreign currency terms
B) Using foreign resources to produce products sold in that foreign region
C) Borrowing domestic currency, exchanging it for foreign currency, and investing it in foreign
investments
D) Ensuring any foreign operation requires significant parent company involvement
E) Using current spot rates to fund long-term assets
40) For accounting purposes, the translation gains and losses that affect a firm’s balance sheet are
A) recorded as an intangible asset.
B) treated as either current income or a current expense as they are incurred.
C) treated as an unsecured debt of the firm.
D) recorded as stockholders’ equity.
E) recorded as a deferred liability.
41) Political risk
A) can be greatly reduced by minimizing parent company involvement.
B) varies by industry as well as by country.
C) is solely dependent upon the country in which operations are located.
D) is only faced by firms that have international operations.
E) applies only to those risks associated with a firm’s domestic laws and regulations.
42) You want to import $327,000 of merchandise from New Zealand. How many New Zealand
dollars will you need to pay for this purchase if the indirect quote is 1.1136?
A) NZ$364,147.20
B) NZ$308,000.00
C) NZ$330,018.02
D) NZ$299,607.50
E) NZ$293,642.24
43) How many euros can you get for $864 if the direct quote is 1.2452?
A) €728.72
B) €693.86
C) €847.06
D) €1,092.96
E) €1,075.85
44) You are planning a trip to Australia. The hotel will cost you A$182 per night for 7 nights.
You expect to spend another A$4,100 for meals, tours, and other expenses. How much will this
trip cost you in U.S. dollars if the direct quote is 0.8507?
A) $6,317.15
B) $5,961.85
C) $5,532.61
D) $4,668.14
E) $4,571.66
45) You want to import $62,000 worth of rugs from India. How many rupees will you need to
pay for this purchase if one rupee is worth $.01606?
A) 3,860,523RS
B) 2,803,006RS
C) 821,048RS
D) 996RS
E) 909RS
46) Assume $1 will buy Can$1.1417 while $1.2452 will buy €1. What is the Canadian
dollar/euro exchange rate?
A) Can$.9169 = €1
B) Can$1.0907 = €1
C) Can$1.2619 = €1
D) Can$1.4216 = €1
E) Can$1.1358 = €1
47) Assume that ¥118.62 equal $1. Also assume that 7.4518Skr equal $1. How many Japanese
yen can you acquire in exchange for 2,500 Swedish krona?
A) ¥157.05
B) ¥39,795.75
C) ¥618,309.90
D) ¥1,054,901.88
E) ¥2,209,831.29