Chapter 18 Finance

An American Depositary Receipt is defined as a security:A. that has been deposited in an interest-bearing account at a U.S. bank.B. issued outside the U.S. that represents shares of a U.S. stock.C. issued in the U.S. that represents shares of a foreign stock.D. that has a guarantee of payment from a U.S. bank.E. issued in multiple countries but denominated in U.S. currency issued in the U.S. that represents shares of a foreign stock.
You are given the exchange rate between the U.S. dollar and the Canadian dollar. You are also given the exchange rate between the U.S. dollar and the Mexican peso. What is the name given to the Canadian dollar per Mexican peso exchange rate derived from the information that was provided?A. Swap rateB. Depositary rateC. Forward rateD. London Interbank rateE. Cross-rate Cross-rate
. Eurobonds are best defined as international bonds issued in _____ and denominated in ____.A. a single country; multiple currenciesB. a single country; a single currencyC. multiple countries; multiple currenciesD. multiple countries; a single currencyE. Euroland; euros multiple countries; a single currency
Which one of the following is the best definition of Eurocurrency?A. Any paper money used by a country that has adopted the euro as its common currencyB. Money deposited in a financial institution outside the country whose currency is involvedC. Both paper and coins officially adopted under the euro system of coinageD. U.S. dollars owned by any country that has adopted the euro as its currencyE. Any exchange of funds between two countries that have adopted the euro as their official currency Money deposited in a financial institution outside the country whose currency is involved
Which one of the following terms is used to describe international bonds issued in a single country and generally denominated in that country’s currency?A. EurobondsB. American Depositary ReceiptsC. Foreign bondsD. SwapsE. Gilts Foreign bonds
Which one of the following is the rate that most international banks charge when they loan Eurodollars to other banks?A. ADRB. LIBORC. Cross-rateD. Gilt rateE. Swap rate LIBOR
Which of these is defined as an agreement to exchange two securities or two currencies?A. HedgeB. SwapC. SWIFTD. GiltE. Arbitrage Swap
The market where euros, pesos, dollars, and pounds are traded is referred to as the:A. ADR market.B. LIBOR market.C. gilt market.D. euromarket.E. foreign exchange market. foreign exchange market.
Which one of the following is the best universal definition of an exchange rate?A. Price of one country’s currency expressed in terms of another country’s currencyB. Number of foreign dollars that can be purchased for every one U.S. dollar paidC. Price of a country’s currency expressed in terms of that country’s currency unitD. Number of units of a currency that were originally required to obtain one euro when a country adopted the euro as its official currencyE. Price that must be paid to obtain a good or service from another country Price of one country’s currency expressed in terms of another country’s currency
A trader in Switzerland just agreed to trade Swiss francs for British pounds based on today’s exchange rate. The trade is expected to settle tomorrow. What term best describes this exchange?A. Arbitrage transactionB. Forward tradeC. Spot tradeD. Purchasing power parityE. Interest rate parity Spot trade
The spot exchange rate is the exchange rate that applies to a(n):A. LIBOR transaction.B. ADR transaction.C. spot trade.D. forward trade.E. future transaction. spot trade
An agreement to exchange currencies sometime in the future is referred to as which one of the following?A. Forward tradeB. HedgeC. GiltD. Forward exchange rateE. Spot trade Forward trade
Which one of the following is the agreed-upon exchange rate that is to be used when currencies are exchanged at some point in the future based on an agreement made today?A. Spot rateB. ADR rateC. London Interbank Offer RateD. Forward exchange rateE. Cross-rate Forward exchange rate
Which one of the following terms is used to identify the concept that exchange rates vary to keep purchasing power constant among currencies?A. Exchange rate equilibriumB. Exchange rate parityC. Universal parityD. Market equilibriumE. Purchasing power parity Purchasing power parity
Which of these states that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate?A. Arbitrage equilibriumB. Relative purchasing power parityC. Absolute purchasing power parityD. Interest rate parityE. Cross-rate parity Interest rate party
Which term is defined as having international operations in a world where relative currency values change?A. Political riskB. Relative purchasing power parityC. Interest rate parityD. Absolute purchasing power parityE. Exchange rate risk Exchange rate risk
Which one of the following is the risk arising from changes in value caused by political actions?A. Exchange rate riskB. Political riskC. Translation riskD. LIBOR riskE. Cross-rate risk Political risk
You live in the U.S. and want to invest in a Chinese company, which will be referred to as “CC,” because you believe its stock is uniquely positioned to be unusually profitable over the next five years. However, you do not have direct access to the Chinese financial markets. You may be able to indirectly invest in CC by purchasing a(n):A. swap.B. American depository receipt.C. gilt.D. Bulldog bond.E. Samurai bond. American depository receipt
Rembrandt, Samurai, Yankee, and Bulldog are all names associated with which one of the following?A. EurobondsB. CurrenciesC. Cross-rateD. Foreign bondsE. Foreign interest rates Foreign bonds
Which country is correctly matched with its currency?A. Canada—poundB. China—yuanC. Mexico—realD. Japan—liraE. United Kingdom—euro China-yuan
Which statement is correct?A. Exchange rates are adjusted each morning and held constant until the following morning.B. The four most commonly traded currencies in the foreign exchange markets are the U.S. dollar, French franc, European euro, and Brazilian real.C. All South American countries use the peso as their currency.D. New Zealand uses the same currency as Australia and that is the A$.E. The foreign exchange market is the largest financial market in the world. The foreign exchange market is the largest financial market in the world.
Which of the following parties are participants in the foreign exchange market?I. U.S. importersII. U.S. exportersIII. U.S. travelers to EuropeIV. Foreign portfolio managers who purchase American securitiesA. I and III onlyB. II and IV onlyC. I, III, and IV onlyD. II, III, and IV onlyE. I, II, III, and IV I, II, III, and IV
23. Assume the exchange rates for the Canadian dollar versus the U.S. dollar are Which statement is correct given this information?A. Last week, it took C$.8759 to purchase $1.B. This week you can exchange C$1 for $1.1414.C. It is cheaper for an American to travel in Canada this week than it was last week.D. The Canadian dollar depreciated from last week to this week.E. You would have made a profit if you had invested $100 in Canadian dollars last week and then converted your money back to U.S. dollars this week. Ignore any interest earnings. ou would have made a profit if you had invested $100 in Canadian dollars last week and then converted your money back to U.S. dollars this week. Ignore any interest earnings.
The U.S. dollar equivalent is .3897 for the Brazilian real and 1.5649 for the UK pound. Which one of the following statements is correct given this information?A. One U.S. dollar will buy .3897 Brazilian reals.B. If you have .3897 Brazilian reals, they are worth 1.5649 UK pounds.C. One UK pound will buy 1.5649 U.S. dollars.D. One Brazilian real will buy 1.5649 UK pounds.E. One U.S. dollar will buy 1.5649 UK pounds. One UK pound will buy 1.5649 U.S. dollars.
Assume you can exchange $1 for either £1 or ?.50 in the U.S. In the London market, you can exchange £1 for ?.52. This situation creates an opportunity to profit immediatelyfrom which one of the following?A. Futures arbitrageB. Currency hedgeC. Interest rate swapD. Absolute purchasing power parityE. Triangle arbitrage Triangle arbitrage
Later this week, you are traveling from the U.S. to Canada for a week’s vacation. This morning, you exchanged some U.S. dollars for Canadian dollars in preparation for that trip. Which one of the following best describes this exchange?A. Forward tradeB. Spot tradeC. Arbitrage transactionD. Cross-rate exchangeE. Eurocurrency transaction Spot trade
Which one of the following best describes an agreement you make today to exchange U.S. dollars for British pounds three months from now?A. Forward tradeB. Spot tradeC. Arbitrage transactionD. Cross-rate exchangeE. Eurocurrency transaction Forward trade
You have just agreed to a forward trade that will be settled six months from now. When is the exchange rate for this transaction determined?A. TodayB. Three months from today because that is the halfway pointC. Anytime you prefer within the next six monthsD. Whenever the spot rate six months from today is knownE. Six months from now Today
Assume a canned soft drink costs $1 in the U.S. and $1.30 in Canada. At the same time, the currency per U.S. dollar is C$1.30. Which one of the following conditions exists in this situation?A. Absolute purchasing power parityB. Interest rate parityC. Relative purchasing power parityD. Translation exposureE. Equal spot and forward rates Absolute purchasing power parity
Assume that PE is the euro price of a product, PUS is the U.S. price of the identical product, and S0 is the spot exchange rate, quoted as the amount of foreign currency per dollar. Given this, which one of the following correctly expresses absolute purchasing power parity?A. PUS = S0/PEB. PUS = S0 ×PEC. PUS = S0 + PED. PE = S0/PUSE. PE = S0 ×PUS E. PE = S0 ×PUS
. Relative purchasing power parity is based on the principle that the expected percentage change in the exchange rate between two countries is equal to which one of the following?A. Difference in the risk-free interest rates in the two countriesB. Average interest rate in the two countriesC. Average inflation rate of the two countriesD. Difference in the inflation rates of the two countriesE. Difference between the two countries’ average inflation and interest rates Difference in the inflation rates of the two countries
Assume you can currently exchange $1 for ¥100. Also assume the inflation rate will be 2.5 percent annually in the U.S. and 2 percent in Japan. Given these assumptions, how many yen should you expect in exchange for $1 next year?A. More than 100B. Either 100 or more than 100C. Exactly 100D. Either 100 or less than 100E. Less than 100 Less than 100
Currently, you can exchange $1 for SF1.14. Assume the average inflation rate in the U.S. over the next two years will be 2.5 percent annually as compared to 3 percent in Switzerland. Based on this information and relative purchasing power parity, which of the following assumptions can you make regarding the next two years?A. The Swiss franc will appreciate against all currencies.B. The Swiss franc will appreciate against the U.S. dollar.C. The U.S. dollar will appreciate against all currencies.D. The U.S. dollar will appreciate against the Swiss franc.E. Both the U.S. dollar and the Swiss franc will appreciate against all other currencies. The U.S. dollar will appreciate against the Swiss franc.
Suppose you could buy 1,115 South Korean won or 100 Pakistani rupees last year for $1. Today, $1 will buy you 1,113 won or 102 rupees. Which one of the following occurred over the past year?A. The dollar appreciated against the won.B. The dollar depreciated against the rupee.C. The dollar appreciated against both the won and the rupee.D. The won depreciated against the dollar.E. The rupee depreciated against the dollar. The rupee depreciated against the dollar
Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the $1 is borrowed and S0 = spot rate; F1 = one-year forward rate; RF = foreign country risk-free rate; and RUS = U.S. risk-free rate.A. $1 × F1 × (1 + RF)/S0- $1 × (1 + RUS)B. $1 × S0 × (1 + RF)/F1- $1 × (1 + RUS)C. $1 × F1 × (1 + RF)/S0 + $1 × (1 + RUS)D. $1 × S0 × (1 + RF) – $1 × (1 + RUS)/F1E. $1 × S0 × (1 + RF)/F1 + $1 × (1 + RUS) $1 × S0 × (1 + RF)/F1- $1 × (1 + RUS)
Which of these must be significantly eliminated if interest rate parity is to exist?A. Absolute purchasing power parityB. Short-run exposure to exchange rate riskC. Covered interest arbitrage opportunitiesD. Relative purchasing power parityE. Translation exposure Covered interest arbitrage opportunities
Interest rate parity defines the relationships among which of the following?A. Spot exchange rates, future exchange rates, interest rates, and inflation ratesB. Real and nominal interest rates across countriesC. Real interest and inflation ratesD. Forward exchange rates, relative interest rates, and spot exchange ratesE. Spot exchange rates, forward exchange rates, nominal interest rates, and real interest rates Forward exchange rates, relative interest rates, and spot exchange rates
Which of these occurs when interest rate parity exists between Countries A and B?A. Country A investors are indifferent between risk-free investments in Countries A and B.B. Forward exchange rates for Countries A and B must be equal for all time periods.C. Risk-free interest rates in Countries A and B must be equal.D. Spot and forward exchange rates between the currencies of the two countries must be equal.E. Significant covered interest arbitrage opportunities between currencies of Countries A and B must exist. Country A investors are indifferent between risk-free investments in Countries A and B.
Which one of the following is an example of long-run exposure to exchange rate risk? Ignore all fees and transaction costs.A. A U.S. firm owns land in Mexico valued at three million pesos. That value has remained constant in Mexican pesos for the past year. However, the firm’s financial statement reflects a 3 percent decrease in the value of that land for last year.B. A U.S. firm sells $250,000 worth of goods to Peru. However, when the payment for those goods arrives and the U.S. firm exchanges the foreign currency, it receives only $248,700.C. A U.S. firm purchases $120,000 worth of goods from Canada. However, by the time the goods arrive and the invoice is payable, the cost of those goods has increased to $120,400.D. A few years ago, a U.S. firm built a factory in Asia to take advantage of the lower labor costs. Today, the Asian labor costs have increased such that the Asian factory no longer provides a cost advantage over a U.S. factory.E. A U.S. traveler withdrew an extra $2,000 in cash from her savings account to take with her as emergency funds when she traveled to Mexico. Before leaving on her trip, she exchanged this money into Mexican pesos. She never used any of this money during her vacation, so exchanged all of it back into U.S. dollars on her return and received $1,960. A few years ago, a U.S. firm built a factory in Asia to take advantage of the lower labor costs. Today, the Asian labor costs have increased such that the Asian factory no longer provides a cost advantage over a U.S. factory.
Short-run exposure to exchange rate risk is best illustrated by which one of the following?A. Change in book value when the market value of an asset remains constantB. Daily fluctuations in the spot rateC. Increases in the forward rate as the time to settlement increasesD. Changes in relative economic conditions between two countriesE. Unrealized foreign exchange gains Daily fluctuations in the spot rate
Suppose a U.S. firm builds a factory in China, staffs it with Chinese workers, uses materials supplied by Chinese companies, and finances the entire operation with a loan from a Chinese bank located in the same town as the factory. This firm is most likely trying to greatly reduce, or eliminate, which one of the following?A. Interest rate disparitiesB. Short-run exposure to exchange rate riskC. Long-run exposure to exchange rate riskD. Political risk associated with the foreign operationsE. Translation exposure to exchange rate risk Long-run exposure to exchange rate risk
The foreign subsidiary of a U.S. firm is profitable when profits are measured in the foreign currency but those profits become losses when measured in U.S. dollars. This is an example of which one of the following?A. Interest rate disparitiesB. Short-run exposure to exchange rate riskC. Long-run exposure to exchange rate riskD. Political risk associated with the foreign operationsE. Translation exposure to exchange rate risk Translation exposure to exchange rate risk
Which one of the following is the suggested method of handling exchange rate risk for a large, multinational firm headquartered in the U.S.? Assume the operations in each country represent a different division of the firm.A. At the division levelB. At a level that combines all divisions representing a separate geographic continentC. At a level that combines divisions based on the currency used by each divisionD. By segregating U.S. operations and foreign operationsE. On a centralized basis for all divisions On a centralized basis for all divisions
Which one of these most likely represents the greatest political risk for a U.S.-based firm?A. A product assembly plant located in a foreign countryB. A foreign sales officeC. Accounting office that handles all payroll functions and is located in a foreign countryD. Natural ore mine in a foreign countryE. Subassembly plant in a foreign country that uses U.S.-made components Natural ore mine in a foreign country
Which one of the following is an example of the political risks associated with foreign operations?A. Technological changesB. Exchange rate fluctuationsC. Translation exposure to exchange rate riskD. Changes in foreign tax lawsE. Changes in relative wage rates between the home country and the foreign country Changes in foreign tax laws
Assume the exchange rate is .96 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 1,500 Swiss francs?A. $1,521.21B. $1,562.50C. $1,528.80D. $1,440.00E. $1,418.46 $1,562.50SF1,500×($1/SF.96) = $1,562.50
You are going to London and plan on spending £4,500. How many dollars will this trip cost you if the currency per $1 is £.6391?A. $2,875.95B. $2,892.16C. $7,041.15D. $6,890.01E. $3,044.04 $7,041.15£4,500 ×($1/£.6391) = $7,041.15
You just returned from a trip to Germany and have 356euros in your pocket. How many dollars will you receive when you exchange this money if the U.S. dollar equivalent of the euro is 1.2452?A. $402.08B. $443.29C. $411.40D. $397.18E. $462.05 $443.29€356×($1.2452/€1) = $443.29
You are planning an extended trip to India and have located some housing that you can lease for 37,250 rupees per month. What is the cost per month in U.S. dollars if the exchange rate is Rs1 = $.01606?A. $1,208.15B. $598.24C. $1,311.27D. $695.35E. $709.30 $598.24Rs37,250($.01606 / Rs1) = $598.24
You are debating between spending a week in Brazil or a week in Chile. You’ve estimated the cost of the Brazilian trip at 56,300 reals and the Chilean trip at 13.6 million pesos. The currency per U.S. dollar is 2.5658 reals and 609.10 pesos. If you prefer the less expensive trip, as measured in U.S. dollars, you should travel to _____ because you can save ____.A. Brazil; you can save $460.45B. Brazil; you can save $518.74C. Chile; you can save $384.29D. Chile; you can save $613.33E. Brazil; you can save $385.55 Brazil; you can save $385.55R$56,300 ($1/R$2.5658) = $21,942.47 13,600,000CLP (1USD/609.10CLP) = $22,328.02 Difference = $22,328.02-21,942.47 = $385.55
Your German friend has decided to come and visit you in the U.S. You estimate the cost of her trip at $2,200. What is the cost to her in euros if the U.S. dollar equivalent of the euro is 1.2452?A. €1,566.67B. €1,766.78C. €908.50D. €2,739.44E. €2,806.16 €1,766.78$2,200 ×(€1/$1.2452) = €1,766.78
. Assume you can exchange $1 for either €.8031 euro or £.6390. What is the cross-rate between the pound and the euro?A. £.7519/€1B. £.8356/€1C. £.7957/€1D. £1.0852/€1E. £1.5577/€1 £.7957/€1£.6390 = €.8031 £.7957 = €1
Assume you can exchange $1 for either C$1.1417 or ¥118.62. What is the cross-rate between the Canadian dollar and the Japanese yen?A. C$.009625/¥1B. C$.003723/¥1C. C$.004582/¥1D. C$138.2191/¥1E. C$135.43/¥1 C$.009625/¥1C$1.1417 = ¥118.62 C$.009625 = ¥1
Assume you can purchase either 114 Canadian dollars or 11,865 Japanese yen for $100. What is the ¥/C$ cross-rate?A. ¥104.08/C$1B. ¥99.94/C$1C. ¥101.23/C$1D. ¥106.27/C$1E. ¥107.08/C$1 ¥104.08/C$1¥11,865 = C$114 ¥104.08 = C$1
Assume the spot rate for the pound is £.6390 = $1 and for the Canadian dollar is C$1.1417 = $1. What is the £/C$ cross-rate?A. £.5597/C$1B. £.6027/C$1C. £.7295/C$1D. £.7594/C$1E. £.7608/C$1 £.5597/C$1£.6390 = C$1.1417 £.5597 = C$1
Assume you can exchange $1 for ¥119.39 or €.7989 in New York. In Tokyo, the exchange rate is ¥1 = €.0068. If you have $1,200, how much profit can you earn using trianglearbitrage?A. $18.08B. $18.27C. $19.45D. $20.11E. $23.14 $19.45[$1,200(¥119.39/$1)(€.0068 /¥1)($1/€.7989)] – $1,200 = $19.45
Assume that in New York, you can exchange $1 for ?.8026 or £.6400 In Berlin, £1 costs ?1.2539. How much profit can you earn on $1,000 using triangle arbitrage?A. $.59B. $1.17C. $.13D. $1.08E. $.42 $.13[$1,000(€.8026 /$1)(£1/€1.2539)($1/£.6400)] – $1,000 = $.13
Assume the exchange rates in New York for $1 are C$1.1382 and £.6387 while in Toronto, C$1 will buy £.5612. How much profit can you earn on $10,000 using triangle arbitrage?A. $.91B. $1.08C. $.97D. $1.03E. $1.11 $.91[$10,000(C$1.1382 /$1)(£.5612/C$1)($1/£.6387)] -$10,000 = $.91
Assume your favorite running shoes cost $119 in the U.S. while the identical shoes cost C$139.50 in Canada. According to purchasing power parity, what is the C$/$ exchange rate?A. C$.8530/$1B. C$.8426/$1C. C$1.0918/$1D. C$1.1723/$1E. C$1.2305/$1 C$1.1723/$1C$139.50/$119 = C$1.1723 /$1
A good steak dinner in the U.S. costs 59USDwhile the exact meal costs 825MXN across the border in Mexico. Based on purchasing power parity, what is the implied MXN/USD exchange rate?A. 13.76MXN/1USDB. 13.98MXN/1USDC. 14.04MXN/1USDD. 14.23MXN/1USDE. 14.11MXN/1USD 13.98MXN/1USD825MXN/59USD = 13.98MXN/1USD
Assume the spot rate is SF.9652 = $1. A hotel room in a resort area of Switzerland costs SF375. Based on absolute purchasing power parity, what should an identical room in the U.S. cost?A. $374.24B. $388.52C. $387.05D. $361.95E. $339.90 $388.52SF375 × ($1/SF.9652) = $388.52
A particular set of golf clubs in the U.S. costs $879. According to absolute purchasing power parity, what should the identical set of clubs cost in the UK if the spot rate is £.6421= $1?A. £1,368.95B. £1,428.08C. £533.80D. £547.50E. £564.41 £564.41$879 ×(£.6421/$1) = £564.41
Assume the current spot rate between the UK and the U.S. is £.6379 per $1, the expected inflation rate in the U.S. is 1.9 percent, and the expected inflation rate in the UK is 2.8 percent. If relative purchasing power parity exists, what will the exchange rate be next year?A. £.6389/$1B. £.6436/$1C. £.6823/$1D. £.6322/$1E. £.6336/$1 £.6436/$1£.6379 ×[1 + (.028 -.019)]1 = £.6436
Assume the current spot rate between the UK and the U.S. is £.6402 per $1. The expected inflation rate in the U.S. is 2.8 percent. The expected inflation rate in the UK is 2.4 percent. If relative purchasing power parity exists, what will the exchange rate be two years from now?A. £.6549/$1B. £.6432/$1C. £.6351/$1D. £.6382/$1E. £.6453/$1 £.6351/$1£.6402 ×[1 + (.024 -.028)]2 = £.6351
. Assume you can currently exchange $100 for ?80.25. The inflation rate in Europe is expected to be 1.8 percent as compared to 2.4 percent in the U.S. Based on relative purchasing power parity, what should the exchange rate be four years from now?A. €.8219/$1B. €.8014/$1C. €.7970/$1D. €.8073/$1E. €.7834/$1 E. €.7834/$1€.8025 ×[1 + (.018 -.024)]4 = €.7834
Currently, you can exchange €100 for $124.15. The inflation rate in Europe is expected to be 3.3 percent as compared to 3.1 percent in the U.S. Assuming that relative purchasing power parity exists, what should the exchange rate be five years from now?A. €.8098/$1B. €.8136/$1C. €.8071/$1D. €.8039/$1E. €.7975/$1 €.8136/$1€100 = $124.15 €.8055 = $1 €.8055 ×[1 + (.033 -.031)]5 = €.8136
Currently, you can exchange €100 for $125. The inflation rate in Europe is expected to be 2.5 percent. In one year, it is expected that €100 can be exchanged for $125.88. Assume relative purchasing power parity exists. What is the expected inflation rate in the U.S.?A. 3.84 percentB. 4.26 percentC. 3.20 percentD. 5.21 percentE. 5.68 percent 3.20 percent€100 = $125 €.80 = $1 €100 = $125.88 €.7944 = $1 €.80 ×[1 + (.025-x)]1 = €.7944 x = .032, or 3.20 percent
The spot rate on the Canadian dollar is 1.15. Interest rates in Canada are expected to average 3.2 percent while they are anticipated to be 3.6 percent in the U.S. What is the expected exchange rate three years from now?A. C$1.1960B. C$1.1363C. C$1.2613D. C$1.1108E. C$1.1071 C$1.1363C$1.15 ×[1 + (.032 -.036)]3 = C$1.1363
The spot rate on the Norwegian kroner is 7.0305. The exchange rate one year from now is expected to be 7.0614 assuming that relative interest rate parity exists. Interest rates in Norway are 3.3 percent. What is the interest rate in the U.S.?A. 2.86 percentB. 3.02 percentC. 3.59 percentD. 4.54 percentE. 4.68 percent 2.86 percentNKr7.0305 ×[1 + (.033 -x)]1 = NKr7.0614x = .0286, or 2.86 percent
The spot rate on the Hong Kong dollar is 7.75. Interest rates in Hong Kong are expected to be 6 percent while they are anticipated to be 3 percent in the U.S. What is the expected exchange rate two years from now?A. HK$7.9825B. HK$8.1808C. HK$8.2220D. HK$8.3778E. HK$8.4141 HK$8.2220HK$7.75 ×[1 + (.06 -.03)]2 = HK$8.2220
The spot rate between Canada and the U.S. is C$1.1381 = $1, while the one-year forward rate is Can$1.1407 = $1. The risk-free rate in Canada is 2.4 percent. The risk-free rate in the U.S. is 2.1 percent. How much profit can you earn on a loan of $1,000 by utilizing covered interest arbitrage?A. $.81B. $.67C. $.36D. $.49E. $.57 $.67$1,000(Can$1.1381 /$1)(1.024)($1/Can$1.1407) -$1,000(1.021) = $.67
Assume the spot rate between the UK and the U.S. is £.6789 = $1, while the one-year forward rate is £.6782 = $1. The risk-free rate in the UK is 3.1 percent. The risk-free rate in the U.S. is 2.9 percent. How much profit can you earn for the year on a loan of $1,500 by utilizing covered interest arbitrage?A. $4.09B. $2.78C. $3.15D. $4.60E. $3.55 $4.60$1,500(£.6789/$1)(1.031)($1/£.6782) – $1,500(1.029) = $4.60
Assume the one-year forward rate for the British pound is £.6381 = $1. The spot rate is £.6392 = $1. The interest rate on a risk-free asset in the UK is 4.4 percent. If interest rate parity exists, what is the one-year risk-free rate in the U.S.?A. 4.68 percentB. 4.58 percentC. 4.77 percentD. 4.63 percentE. 4.67 percent 4.58 percent.6381 /.6392 = 1.044 /(1 + x) x = .0458, or 4.58 percent
Assume the one-year forward rate for the Swiss franc is SF.9655 = $1. The spot rate is SF .9702 = $1. The interest rate on a risk-free asset in Switzerland is 3.8 percent. If interest rate parity exists, a one-year risk-free security in the U.S. is yielding _____ percent.A. 4.21B. 4.51C. 3.98D. 4.40E. 4.31 4.31.9655 /.9702 = 1.038 /(1 + x) x = .0431, or 4.31 percent
Assume the spot rate between Japan and the U.S. is ¥119.37 = $1, while the one-year forward rate is ¥119.07 = $1. A one-year risk-free security in the U.S. is yielding 4.2 percent. What is the rate of return on a one-year risk-free security in Japan assuming that interest rate parity exists?A. 3.82 percentB. 3.94 percentC. 3.44 percentD. 3.49 percentE. 4.46 percent 3.94 percent119.07/119.37 = (1 + x)/1.042 x = .0394, or 3.94 percent
Assume the one-year forward rate between the U.S. and Japan is ¥120.38 = $1. A one-year risk-free security in Japan is yielding 4.3 percent while it is 3.8 percent in the U.S. Assume interest rate parity exists. What is the spot rate between the U.S. and Japan?A. ¥120.41B. ¥121.08C. ¥119.80D. ¥120.94E. ¥119.03 ¥119.80¥120.38 /x = 1.043 /1.038x = ¥119.80
A U.S. firm has total assets valued at ?918,000 located in Germany. This valuation did not change from last year. Last year, the exchange rate was ?.92 = $1. Today, the exchange rate is ?.80 = $1. By what amount did these assets change in value for the year on the firm’s U.S. financial statements?A. -$149,673.91B. -$162,311.19C. $162,311.19D. $149,673.91E. $0 $149,673.91€918,000($1/€.92) – €918,000($1/€.80) = $149,673.91
A U.S. firm has total assets valued at £318,000 located in London. This valuation did not change from last year. Last year, the exchange rate was £.61 = $1. Today, the exchange rate is £.63 = $1. By what amount did these assets change in value on the firm’s U.S. financial statements?A. -$16,549.57B. -$13,511.03C. -$12,248.91D. $13,511.03E. $0 -$16,549.57£318,000 ($1/£.61) – £318,000($1/£.63) = -$16,549.57
Assume the USD equivalent of the Norwegian krone is .1425. If you have NKr5,500, how much do you have in US dollars?A. $861.42B. $42,608.14C. $38,596.49D. $783.75E. $16,216.50 $783.75NKr5,500 ($.1425/NKr1) = $783.75
Assume $1 = €.8036 = A$1.1757. What is the cross-rate for Australian dollars in terms of euros?A. A$1.1066/€1B. A$1.2908/€1C. A$1.3929/€1D. A$1.4630/€1E. A$1.5042/€1 D. A$1.4630/€1A$1.1757 = €.8036 A$1.4630= €1
81. Given the following exchange rates, which of the following currencies are selling at a premium against the dollar? A. Japanese yen onlyB. Swiss franc and Australian dollar onlyC. UK pound onlyD. Australian dollar, Swiss franc, and UK pound onlyE. Japanese yen and Swiss franc only Japanese yen and Swiss franc onlySince the Japanese yen and Swiss franc are more expensive in terms of dollars in the future than they are now, they are selling at a premium
Suppose the spot exchange rate for the Canadian dollar is C$1.09 and the six-month forward rate is C$1.12. Assuming absolute PPP holds, what is the current cost in the United States of a hamburger if the price in Canada of an equivalent burgerin Canada is C$4.75?A. $5.39B. $5.18C. $4.36D. $5.02E. $4.51 $4.36C$4.75 ($1/Can$1.09) = $4.36
Suppose the Swiss franc exchange rate is SF.9703 = $1, and the euro exchange rate is €.8024 = $1. What is the cross-rate in terms of Swiss francs per euro?A. SF.7692/€1B. SF.7786/€1C. SF1.1054/€1D. SF1.1832/€1E. SF1.2092/€1 SF1.2092/€1SF.9703 = €.8024 SF1.2092 = €1
The treasurer of a major U.S. firm has $8.2 million to invest for three months. The interest rate in the U.S. is .53 percent per month. The interest rate in the UK is .54 percent per month. The spot exchange rate is €64, and the three-month forward rate is €65. Ignore transaction costs. The treasurer should invest the funds in the ____ because he can earn an additional ____.A. US; $131,072.23B. US;$125,722.20C. UK; $9,418.02D. UK; $38,522.47E. UK; $121,510.67 US;$125,722.20Earnings in U.S. $ from U.S. investment: [$8.2m (1.0053)3] – $8.2m = $131,072.23 Earnings in U.S. $ from UK investment: [$8.2m (£.64/$1)(1.0054)3 ($1/£.65)] – $8.2m = $5,350.03 Difference in earnings = $131,072.23 – 5,350.03 = $125,722.20
Suppose the spot exchange rate for the Hungarian forint is HUF246. Interest rates in the United States are 4.3 percent per year. They are 3.4 percent in Hungary. What do you predict the exchange rate will be in four years?A. HUF237.26B. HUF236.90C. HUF241.59D. HUF254.98E. HUF261.19 A. HUF237.26HUF246 ×[1 + (.034 -.043)]4 = HUF237.26
Assume a Big Mac sells for $4.39 in the United States and Ps62.5 in Mexico, what is the Ps/$ exchange rate according to the purchasing power parity theory?A. Ps.0702/$1B. Ps.0752/$1C. Ps13.29/$1D. Ps14.24/$1E. Ps14.32/$1 Ps14.24/$1Ps62.5= $4.39 Ps14.24 = $1

Leave a Reply

Your email address will not be published. Required fields are marked *