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Exam 21: International Corporate Finance

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Question 21

Multiple Choice

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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

F) B) and C)
G) A) and E)

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Question 22

Multiple Choice

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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.

F) B) and E)
G) D) and E)

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Question 23

Multiple Choice

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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.

One goal of the Tax Cuts and Jobs Act of 2017 is to encourage corporations to:

You want to invest in a riskless project in Sweden. The project has an initial cost of SKr3.86 million and is expected to produce cash inflows of SKr1.76 million a year for three years. The project will be worthless after three years. The expected inflation rate in Sweden is 3.2 percent while it is 2.8 percent in the U.S. A risk-free security is paying 4.1 percent in the U.S. The current spot rate is SKr7.7274. What is the net present value of this project in Swedish krona if the international Fisher effect applies?

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?

Assume a risk-free asset in the U.S. is currently yielding 4.1 percent, a Canadian risk-free asset is yielding 3.7 percent, and the current spot rate is C$1.2633. What is the approximate three-year forward rate if interest rate parity holds?

The home currency approach:

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?

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?

Suppose the spot and six-month forward rates on the Norwegian krone are NKr5.94 and NKr6.05 respectively. The annual risk-free rate in the United States is 4.5 percent, and the annual risk-free rate in Norway is 7 percent. What would the six-month forward rate have to be on the Norwegian krone to prevent arbitrage?

You are expecting a payment of NKr450,000 three years from now. The risk-free rate of return is 3 percent in the U.S. and 4 percent in Norway. The inflation rate is 2.5 percent in the U.S. and 3 percent in Norway. Currently, you can buy NKr5.94 for $1. How much will the payment three years from now be worth in U.S. dollars?

Assume the expected inflation rate in Finland is 3.3 percent compared to 2.4 percent in the U.S. A risk-free asset in the U.S. is yielding 4.3 percent. What approximate real rate of return should you expect on a risk-free Finnish security?

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?

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:

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.

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?

Uncovered interest parity is defined as:

Assume $1 is currently equal to £.7741 in the spot market. Assume the expected inflation rate in the U.S. is 2.6 percent while it is 2.3 percent in the U.K. What is the expected exchange rate one year from now if relative purchasing power parity exists?

Assume the current spot rate is C$1.0875 and the one-year forward rate is C$1.0724. Also assume the nominal risk-free rate in Canada is 3.9 percent while it is 4.1 percent in the U.S. How much additional income can you earn by using covered interest arbitrage as compared to investing $1 in the U.S for one year?