Fundamentals of Corporate Finance, 12e (Ross)
Chapter 21 International Corporate Finance
1) Which one of the following securities is used as a means of investing in a foreign stock that
otherwise could not be traded in the United States?
A) American Depository Receipt
B) Yankee bond
C) Yankee stock
D) LxIBOR
E) Gilt
2) Assume that $1 is equal to £.77 and equal to C$1.27. Based on this, you could say that C$1 is
equal to: C$1(£.77/C$1.27) = £.61. The exchange rate of C$1 = £.61 is referred to as the:
A) open exchange rate.
B) cross-rate.
C) backward rate.
D) forward rate.
E) interest rate.
3) International bonds issued in multiple countries but denominated in a single currency are
called:
A) Treasury bonds.
B) Bulldog bonds.
C) Eurobonds.
D) Yankee bonds.
E) Samurai bonds.
4) U.S. dollars deposited in a bank in Switzerland are called:
A) foreign depository receipts.
B) international exchange certificates.
C) francs.
D) Eurocurrency.
E) Eurodollars.
5) International bonds and domestic bonds issued by the same domestic issuer are usually:
A) identical in all respects.
B) issued jointly in unlimited quantities.
C) treated as identical bonds for taxation purposes.
D) issued in different currencies.
E) subject to different regulations.
6) You would like to purchase a foreign bond that is issued by the Netherlands government.
Which one of the following should you purchase?
A) Samurai bond
B) Kronor bond
C) Rembrandt bond
D) Swap
E) Bulldog bond
7) On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following
Monday morning. Which one of the following is most likely the interest rate that will be charged
on this loan?
A) Eurodollar yield to maturity
B) London Interbank Offer Rate
C) Paris Opening Interest Rate
D) United States Treasury bill rate
E) International prime rate
8) Party A has agreed to exchange $1 million U.S. for $1.02 million Canadian. What is this
agreement called?
A) Gilt
B) LIBOR
C) SWIFT
D) Yankee agreements
E) Swap
9) Where does most of the trading in Eurobonds occur?
A) Munich
B) Frankfurt
C) London
D) New York
E) Paris
10) Which one of the following names matches the country where the bond is issued?
A) Empire: United Kingdom
B) Western: United States
C) Samurai: China
D) Bulldog: France
E) Dim sum: Hong Kong
11) The LIBOR is primarily used as the basis for the rate charged on:
A) short-term debt in the Lisbon market.
B) mortgage loans in the Lisbon market.
C) Eurodollar loans in the London market.
D) U.S. federal funds.
E) interbank loans in the U.S.
12) A basic interest rate swap generally involves trading a:
A) short-term rate for a long-term rate.
B) foreign rate for a domestic rate.
C) government rate for a corporate rate.
D) fixed rate for a variable rate.
E) taxable rate for a tax-exempt rate.
13) Which one of the following statements is correct concerning the foreign exchange market?
A) The trading floor of the foreign exchange market is located in London.
B) The foreign exchange market is the world’s second largest financial market.
C) The four primary currencies that are traded in the foreign exchange market are the U.S. dollar,
the British pound, the French franc, and the euro.
D) A cross-rate is the exchange rate of a non-U.S. currency expressed in another non-U.S.
currency.
E) The price in U.S. dollars of a foreign currency is referred to as an indirect quote.
14) Triangle arbitrage:
A) is illegal in the U.S.
B) prevents the currency markets from obtaining equilibrium.
C) is a profitable opportunity involving three separate currency exchange transactions.
D) opportunities can exist only in the forward markets.
E) is based solely on differences in exchange rates between spot and futures markets.
15) Spot trades must be settled:
A) at the time of the trade.
B) on the day following the trade date.
C) within two business days.
D) within three business days.
E) within one week of the trade date.
16) Assume the euro is selling in the spot market for $1.15. Simultaneously, in the three-month
forward market the euro is selling for $1.17. Which one of the following statements correctly
describes this situation?
A) The spot market is out of equilibrium.
B) The forward market is out of equilibrium.
C) The dollar is selling at a premium relative to the euro.
D) The euro is selling at a premium relative to the dollar.
E) The euro is expected to depreciate in value.
17) A large U.S. company has £500,000 in excess cash from its foreign operations. The company
would like to exchange these funds for U.S. dollars. In which of the following markets can this
exchange be arranged?
A) ADR
B) National registry
C) National discount exchange
D) Forex
E) Eurobond market
18) The price of one euro expressed in U.S. dollars is referred to as a(n):
A) ADR rate.
B) cross inflation rate.
C) depository rate.
D) exchange rate.
E) foreign interest rate.
19) Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British pounds
based on today’s exchange rate of $1 = £.78. The traders agree to settle this trade within two
business days. What is this exchange called?
A) Swap
B) Option trade
C) Futures trade
D) Forward trade
E) Spot trade
20) George and Pat just made an agreement to exchange U.S. dollars for Australian dollars based
on today’s exchange rate. Settlement will occur tomorrow. Which one of the following is the
exchange rate that applies to this agreement?
A) Spot exchange rate
B) Forward exchange rate
C) Triangle rate
D) Cross rate
E) Current rate
21) A trader has just agreed to exchange British pounds for French francs three months from
today. This exchange is an example of a:
A) spot trade.
B) forward trade.
C) short sale.
D) floating swap.
E) triangle arbitrage.
22) Assume that on Friday, one South African rand was worth $.0953 and on the following
Monday the value was $.0962. Also assume one Kuwaiti dinar was worth $3.56 on Friday and
$3.54 on the following Monday. Given these rates, which one of the following statements must
be correct?
A) On Thursday, one U.S. dollar was equal to .0944 South African rand.
B) On Friday, one U.S. dollar was worth 10.388 rands.
C) Both the South African rand and the Kuwaiti dinar appreciated against the U.S. dollar from
Friday to Monday.
D) The South African rand appreciated from Friday to Monday against the U.S. dollar.
E) The U.S. dollar depreciated from Friday to Monday against the Kuwaiti dinar.
23) Mr. Black and Mr. White have agreed to exchange C$12,500 for $10,000 with the exchange
occurring four months from now. This agreed-upon exchange rate is called the:
A) spot rate.
B) swap rate.
C) forward rate.
D) parity rate.
E) triangle rate.
24) Suppose the spot exchange rate is C$1.273 and the six-month forward rate is C$1.275. The
U.S. dollar is selling at a ________ relative to the Canadian dollar and the U.S. dollar is expected
to ________ relative to the Canadian dollar.
A) discount; appreciate
B) discount; depreciate
C) premium; appreciate
D) premium; depreciate
E) premium; remain constant
25) Assume the spot rate on the Japanese yen is ¥110.05 while it is C$1.1379 on the Canadian
dollar. The respective three-month forward rates are ¥111.75 and C$1.1339. The value of the
U.S. dollar will ________ with respect to the yen and will ________ with respect to the
Canadian dollar.
A) appreciate; appreciate
B) appreciate; depreciate
C) depreciate; appreciate
D) depreciate; depreciate
E) depreciate; remain constant
26) Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and
Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that
sells for $100 in the U.S. is currently selling in Canada for $127?
A) Unbiased forward rates condition
B) Uncovered interest rate parity
C) International fisher effect
D) Purchasing power parity
E) Interest rate parity
27) Which one of the following formulas expresses the absolute purchasing power parity
relationship between the U.S. dollar and the British pound?
A) S0 = PUK(PUS)
B) PUS = Ft(PUK)
C) PUK = S0(PUS)
D) Ft = PUS(PUK)
E) S0(Ft) = PUK(PUS)
28) Which one of the following conditions is not required for absolute purchasing power parity
to exist?
A) No trade barriers can exist.
B) Goods must be identical.
C) Transaction costs must be zero.
D) There can be no spoilage.
E) Spot and forward rates must be equal.
29) Absolute purchasing power parity is most apt to exist for which one of the following items?
A) A pound of beef
B) A computer
C) An ounce of silver
D) An automobile
E) A cell phone
30) Relative purchasing power parity:
A) states that identical items should cost the same regardless of the currency used to make the
purchase.
B) relates differences in inflation rates to differences in exchange rates.
C) compares the real rate of return to the nominal rate of return.
D) explains the differences in real rates across national boundaries.
E) relates changes in exchange rates to changes in interest rates.
31) Which one of the following formulas correctly describes the relative purchasing power parity
relationship?
A) E(St) = S0[1 + (hFC − hUS)]t
B) E(St) = S0[1 – (hFC − hUS)]t
C) E(St) = S0[1 + (hUS + hFC)]t
D) E(St) = S0[1 − (hUS − hFC)]t
E) E(St) = S0[1 + (hUS – hFC)]t
32) Assume quotes are based on units of foreign currency per dollar and the U.S. dollar
appreciated against the euro today. This means that:
A) it now takes more euros to buy one dollar.
B) the exchange rate between the dollar and euro weakened.
C) the U.S. inflation rate exceeds the inflation rate in Euroland.
D) it now takes more dollars to buy one euro.
E) the U.S. interest rate is less than the interest rate in Euroland.
33) The condition stating that the interest rate differential between two countries is equal to the
percentage difference between the forward exchange rate and the spot exchange rate is called:
A) the unbiased forward rates condition.
B) uncovered interest rate parity.
C) the international Fisher effect.
D) purchasing power parity.
E) interest rate parity.
34) Which one of the following states that the current forward rate is an unbiased predictor of the
future spot exchange rate?
A) Unbiased forward rates
B) Uncovered interest rate parity
C) International Fisher effect
D) Purchasing power parity
E) Interest rate parity
35) Which one of the following states that the expected percentage change in the exchange rate
between two countries is equal to the difference in the countries’ interest rates?
A) Unbiased forward rates condition
B) Uncovered interest parity
C) International Fisher effect
D) Purchasing power parity
E) Interest rate parity
36) Which one of the following supports the idea that real interest rates are equal across
countries?
A) Unbiased forward rates condition
B) Uncovered interest rate parity
C) International Fisher effect
D) Purchasing power parity
E) Interest rate parity
37) Which of the following variables used in the covered interest arbitrage formula is correctly
defined?
A) S0: Current spot rate expressed in dollars per unit of foreign currency.
B) Ft: Future inflation rate at Time t.
C) F1: 360-day forward rate.
D) RUS: U.S. real risk-free interest rate.
E) RFC: Foreign country real interest rate.
38) Interest rate parity:
A) eliminates covered interest arbitrage opportunities.
B) exists when spot rates are equal for multiple countries.
C) means the nominal risk-free rate must be equal across countries.
D) exists when the spot rate is equal to the forward rate.
E) eliminates exchange rate fluctuations.
39) The interest rate parity approximation formula is:
A) Ft = S0[1 + (RFC + RUS)]t.
B) Ft = S0[1 − (RFC − RUS)]t.
C) Ft = S0[1 + (RFC – RUS)]t.
D) Ft = S0[1 + RFC(RUS)]t.
E) Ft = S0(1 − RFC/RUS)t.
40) The unbiased forward rate condition supports the idea that the current forward rate is a:
A) condition where a future spot rate is equal to the current spot rate.
B) guarantee of a future spot rate at one point in time.
C) condition where the spot rate is expected to remain constant over a period of time.
D) relationship between the future spot rates of two currencies at an equivalent point in time.
E) predictor of the future spot rate at the equivalent point in time.