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75. Assume nominal rates are 10% in the United States and 25% in Holland, while the
expected rates of inflation are 5% and 19%, respectively. Assuming investments of equal risk, you
should invest in:
76. You have the opportunity to invest in the United States at 6% or invest in an equally risky
Australian investment that offers 20%. This is too good to be true! The current exchange rate is
A$1.65/$. Which one of the following do you suspect about this 1-year investment?
77. Which one of these is probably the best means of reducing or offsetting political risk?
78. Which one of the following appears to be a safe assumption when there is no difference
between the forward and spot exchange rates between two currencies?
79. What is the expected spot rate of ¥/$ one year from now if the current spot rate is
¥106/$ and the yen is selling 1-year forward at ¥114/$?
80. The international Fisher effect is valid in the long run because:
81. The spot exchange rate for the Canadian dollar (C$) is U.S.$0.980/C$. The 6-month
interest rate in the United States is 2.5% and 3.0% in Canada. What is the 6-month forward rate
for the Canadian dollar?
82. One of the drawbacks of using forward contracts to hedge foreign exchange risk from
payables is that the:
83. Your firm, which operates in the United States, has a contractual payment of £1 million
due in 3 months. Which one of the following methods would be considered speculative regarding
your exchange rate risk?
84. Assume the spot exchange rate for the Swiss franc is $0.61/Sfr and the 1-year forward
rate is $0.63/Sfr. If the 1-year interest rate in the U.S. is 5%, what is the 1-year interest rate in
Switzerland?
85. You're hoarse from explaining to your supervisor that the cost, if any, of hedging
exchange rate risk can be thought of as an insurance premium to avoid surprises. What is the
cost of hedging a 2 million euro commitment if the spot rate is €1.6/$, the forward rate is
€1.55/$, and the
expected
spot rate at the end of the hedge is €1.6/$?
86. Which one of the following would you expect to improve the dollar NPV of a foreign
capital budgeting proposal?
87. You have compiled the cash flows of a foreign project denominated in the foreign
currency and also the dollar-based cost of capital for the project. To compute the project NPV
denominated in dollars, you now need to compute the:
88. If managers intend to adjust the projections of foreign investments, it is probably better
to make the adjustments in:
89. If the direct quote for the euro is $1.35/€, then the indirect quote for the euro will be:
90. Assume the current spot price is $1.62/₤ and the 3-month forward rate is $1.64/₤. Which
one of these statements is correct given these rates?
91. The spot exchange rate for the British pound is $1.60/£. The annual inflation rate in the
U.S. is 4% compared to 8% in the U.K. What is the anticipated exchange rate at the end of the
year if PPP is valid?
92. The current 1-year nominal interest in the United States is 7%. If the anticipated inflation
for the coming year in the United States is 2.5%, what is the real interest rate in the U.S.?
93. Assume an exchange rate of R6.8344/$. Also assume the cost of living is the same in the
United States and South Africa, and that the inflation rate is 8.5% in South Africa and 3.5% in the
United States. Calculate the expected exchange rate at the end of one year.
94. How do auto manufacturers in United States, Europe, and Japan hedge their economic
risks?
95. A U.S. firm owes ¥10 million three months from now. The spot exchange rate is ¥95/$
and the forward rate is ¥96/$. Is the yen selling at a forward premium or discount, related to the
dollar? Does the firm face exchange risk? Should the firm buy yen now or later?
96. What is the law of one price? When would you expect it to hold and when would you not
expect it to hold?
97. Assume PPP holds at a time when the exchange rate is €0.75/$ and a market basket of
goods costs €500. How many dollars would you expect to spend on the goods? Germany is
expecting 10% inflation while the United States is expecting 4% inflation. What would you predict
to happen to exchange rates?
