41) 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 equaling current forward rates, on average, over time.
D) forward rates equaling the actual future spot rates on average over time.
E) current spot rates equaling the actual future spot rates on average over time.
42) Uncovered interest parity is defined as:
A) E(St) = S0[1 + (hFC − hUS)]t.
B) E(St) = S0[1 + (RFC − RUS)]t.
C) E(St) = S0[1 − (RFC − RUS)]t.
D) E(St) = S0[1 + (RUS − RFC)]t.
E) E(St) = S0[1 + (hFC + hUS)]t.
43) The international Fisher effect states that ________ rates are equal across countries.
A) spot
B) one-year future
C) nominal interest
D) inflation
E) real interest
44) The home currency approach:
A) discounts all of a project’s foreign cash flows using the current spot rate.
B) employs the uncovered interest parity relationship 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 required future exchange rates.
45) The home currency approach:
A) generally produces more reliable results than those found using the foreign currency
approach.
B) requires an applicable exchange rate for every time period for which there is a cash flow.
C) uses the current risk-free nominal rate to discount all cash flows related to a project.
D) stresses the use of the real rate of return to compute the net present value (NPV) of a project.
E) converts a foreign denominated NPV into a dollar denominated NPV.
46) The foreign currency approach to capital budgeting analysis:
A) produces different results than the home currency approach.
B) is computationally harder to use than the home currency approach.
C) computes the NPV of a project in both the foreign and the domestic currency.
D) requires an exchange rate for each time period for which there is a cash flow.
E) converts all foreign cash flows into dollar cash flows.
47) Which one of the following is a suggested method of reducing a U.S. importer’s short-run
exposure to exchange rate risk?
A) Entering a forward exchange agreement timed to match the invoice date
B) Investing U.S. dollars when an order is placed and using the investment proceeds to pay the
invoice
C) Exchanging funds on the spot market at the time an order is placed with a foreign supplier
D) Exchanging funds on the spot market at the time an order is received
E) Exchanging funds on the spot market at the time an invoice is payable
48) Long-run exposure to exchange rate risk relates to:
A) daily variations in exchange rates.
B) variances between spot and future rates.
C) unexpected changes in relative economic conditions.
D) differences between future spot rates and related forward rates.
E) accounting gains and losses created by fluctuating exchange rates.
49) The type of exchange rate risk known as translation exposure is best described as the:
A) risk that a positive net present value (NPV) project could turn into a negative NPV project
because of changes in the exchange rate between two countries.
B) problem encountered by an accountant of an international firm who is trying to record balance
sheet account values.
C) fluctuation in prices faced by importers of foreign goods.
D) variance in relative pay rates based on the currency used to pay an employee.
E) variance between the revenue of an exporter who uses forward rates and an equivalent
exporter who does not use forward rates.
50) Which one of the following statements is correct?
A) The use of forward rates increases the short-run exposure to exchange rate risk.
B) Accounting translation gains and losses are recorded in the equity section of the balance
sheet.
C) There is no known method of reducing long-run exchange rate risk.
D) A firm can record a profit on its income statement from a foreign subsidiary even when that
subsidiary has no profit thanks to exchange rate risk.
E) Unexpected changes in economic conditions are classified as short-run exposure to exchange
rate risk.
51) Which one of the following is the risk that a firm faces when it opens a facility in a foreign
country, given that the exchange rate between the firm’s home country and this foreign country
fluctuates over time?
A) International risk
B) Diversifiable risk
C) Purchasing power risk
D) Exchange rate risk
E) Political risk
52) The market value of the Blackwell Corporation just declined by 5 percent. Analysts believe
this decrease in value was caused by recent legislation passed by Congress. Which type of risk
does this illustrate?
A) International risk
B) Diversifiable risk
C) Purchasing power risk
D) Exchange rate risk
E) Political risk
53) Which one of the following types of operations would be subject to the most political risk if
the operation were conducted outside of a firm’s home country?
A) Accounting and payroll functions
B) Partial assembly of components unique to the finished product
C) Raw materials production
D) Packing materials manufacturing
E) Production of minor parts such as nuts and bolts
54) A U.S. firm has significant profits that were earned overseas. When U.S. taxes are paid on
these profits, the profits are considered to be:
A) abrogated.
B) blocked.
C) repatriated.
D) confiscated.
E) taken over.
55) Assume a firm has $5 million of overseas profits that are invested in U.S. financial assets.
These profits have not been repatriated. Given this, the firm is prohibited from using any of the
$5 million to:
A) build a new factory in Europe.
B) pay bonuses to its foreign managers.
C) acquire new equipment for installation in its Asian plant.
D) pay dividends.
E) invest in euros.
56) One goal of the Tax Cuts and Jobs Act of 2017 is to encourage corporations to:
A) claim all overseas profits as U.S. profits to avoid paying taxes to foreign governments.
B) bring their overseas cash back to the U.S. at a one-time tax rate of 8 percent.
C) distribute all of their overseas profits as dividends to avoid all U.S. taxes.
D) bring all of their foreign assets back to the U.S. by paying a one-time tax rate of 15.5 percent
on those assets.
E) repatriate their untaxed overseas profits.
57) Assume the direct quote on the euro is 1.23 and the indirect quote on the Swiss franc is .88.
What is the cross-rate for euros in terms of Swiss francs?
A) €.1.0824/SF1
B) €.1.3977/SF1
C) €.9239/SF1
D) €1/SF1
E) €.7154/SF1
58) Suppose the spot exchange rates are ¥102 = $1 and £1 = $1.57. Also suppose the cross-rate is
¥159 = £1. What is the arbitrage profit per one U.S. dollar?
A) $.0164
B) $.0106
C) $.0057
D) $.0072
E) $.0148
59) How many euros can you get for $3,800 if one euro is worth $1.2987?
A) €2,638
B) €2,926
C) €3,677
D) €4,935
E) €5,201
60) You are planning a trip to Australia. Your hotel will cost you A$135 per night for six nights.
You expect to spend another A$2,400 for meals, tours, souvenirs, and so forth. How much will
this trip cost you in U.S. dollars if $1 = A$1.2904?
A) $2,488
B) $3,498
C) $2,631
D) $4,452
E) $4,142
61) You want to import $225,000 worth of rugs from India. How many rupees will you need to
pay for this purchase if one rupee is worth $.01552?
A) Rs14,887,424
B) Rs15,238,911
C) Rs14,497,423
D) Rs13,367,594
E) Rs13,415,096
62) Currently, $1 will buy C$1.1028 while $1.2334 will buy €1. What is the exchange rate
between the Canadian dollar and the euro?
A) C$1 = €.8941
B) C$1 = €.6539
C) C$1 = €1.3602
D) C$1.3602 = €1
E) C$.8941 = €1
63) Assume ¥102.36 equal $1. Also assume that SKr6.5103 equal $1. How many Japanese yen
can you acquire in exchange for 5,000 Swedish kronor?
A) ¥318
B) ¥261
C) ¥78,614
D) ¥33,320
E) ¥49,520
64) Assume you just returned from some extensive traveling throughout the Americas. You
started your trip with $20,000 in your pocket. You spent 3.1 million pesos while in Chile and
548,200 pesos in Colombia. Then on the way home, you spent 47,500 pesos in Mexico. Assume
the exchanges rates you encountered were $1 = Ps562 in Chile; $1 = Ps1,928 in Colombia; and
$.0767 = Ps in Mexico. How many dollars did you have left by the time you returned to the
U.S.?
A) $11,113
B) $10,556
C) $4,117
D) $4,244
E) $8,575
65) You have £100. A friend of yours wants to exchange C$175 for your £100. What will be
your profit or loss in pounds if you accept your friend’s offer assuming you can exchange C$1
for $.9134 and exchange £1 for $1.7240?
A) £7.28 loss
B) £3.29 loss
C) £2.51 loss
D) £1.20 profit
E) £2.51 profit
66) Assume $1 = C$1.1098 and $1 = £.6018. Also assume you can buy £55 for C$100. How
much profit can you earn using triangle arbitrage if you start out with $100?
A) $.78
B) $1.04
C) $1.43
D) $1.56
E) $1.54
67) Assume you can exchange $100 today for C$109.58 or for 1,304 Mexican pesos. Assume
that last year, $100 was equivalent to C$105.48 or 1,310 Mexican pesos. One hundred dollars
converted into ________ last year can now be converted into ________.
A) Canadian dollars; $103.89.
B) Mexican pesos; $99.54.
C) Mexican pesos; $100.38.
D) Canadian dollars; $96.26.
E) Canadian dollars; $101.20.
68) The camera you want to buy costs $495 in the U.S. How much will the identical camera cost
in Canada if the exchange rate is C$1 = $.9128? Assume absolute purchasing power parity
exists.
A) C$452
B) C$468
C) C$491
D) C$527
E) C$542
69) Assume that today you can exchange $1 for £.5926 and that last week, £1 was worth
$1.6729. How much profit or loss would you now have in pounds if you had converted £100 into
dollars last week and then converted the dollars back into pounds this week?
A) £.86 loss
B) £.39 loss
C) £.07 loss
D) £1.03 profit
E) £1.59 profit
70) Assume €1 = $1.1364 and $1 = S$1.2408. A new coat costs S$213 in Singapore. How much
will the identical coat cost in euros if absolute purchasing power parity exists?
A) €300
B) €151
C) €119
D) €195
E) €233
71) Assume $1 can buy you either ¥113.25 or £.7708. If a TV in London costs £995, what will
that identical TV cost in Tokyo if absolute purchasing power parity exists?
A) ¥86,857
B) ¥60,554
C) ¥146,191
D) ¥161,855
E) ¥163,542
72) Assume $1 is currently equal to A$1.2924 in the spot market. Also assume the expected
inflation rate in Australia is 2.8 percent as compared to 2.4 percent in the U.S. What is the
expected exchange rate one year from now if relative purchasing power parity exists?
A) A$1.2952
B) A$1.2976
C) A$1.2872
D) A$1.2853
E) A$1.3005