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Exam 30: International Corporate Finance

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Question 41

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The expected inflation rate in Finland is 2 percent while it is 4 percent in the U.S.A risk-free asset in the U.S.is yielding 5.5 percent.What real rate of return should you expect on a risk-free Norwegian Security?

A) 2.0%
B) 2.5%
C) 3.0%
D) 3.5%
E) 4.0%

F) A) and E)
G) C) and D)

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Question 42

Multiple Choice

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In the spot market, $1 is currently equal to £.55.The expected inflation rate in the U.K.is 4 percent and in the U.S.3 percent.What is the expected exchange rate two years from now if relative purchasing power parity exists?

A) £.5391
B) £.5445
C) £.5555
D) £.5611
E) £.5667

F) A) and E)
G) A) and D)

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Question 43

Multiple Choice

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Which of the following is/are the basic kinds of swaps?

Triangle arbitrage: I. is a profitable situation involving three separate currency exchange transactions. II.helps keep the currency market in equilibrium. III.opportunities can exist in either the spot or the forward market. IV.only involves currencies other than the U.S.dollar.

The implicit exchange rate between two currencies when both are quoted in some third currency is called a(n) :

The foreign currency approach to capital budgeting analysis: I. is computationally easier to use than the home currency approach. II.produces the same results as the home currency approach. III.utilizes the uncovered interest parity relationship. IV.computes the net present value of a project in both the foreign and in the domestic currency.

The international Fisher effect says that _____ rates are equal across countries.

The unbiased forward rate is a:

$\begin{array} { | l | l | l | } \hline \text { Country } & \text { U.S. \$ Equivalent } & \text { Currency per U.S. \$ } \\\hline \text { Canada } & 1.3500 \\\hline \text { U.K. } & 1.8305 & ? \\\hline\end{array}$ Assume that you can buy 245 Canadian dollars with 100 British pounds. How much profit can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars?

Gilts are government securities issued by:

The current spot rate for the Norwegian krone is $1 = NKr6.83.The expected inflation rate in Norway is 2 percent and in the U.S.4 percent.A risk-free asset in the U.S.is yielding 5 percent. What risk-free rate of return should you expect on a Norwegian security?

You want to invest in a project in Canada.The project has an initial cost of C$1.2 million and is expected to produce cash inflows of C$600,000 a year for 3 years.The project will be worthless After the first 3 years.The expected inflation rate in Canada is 4 percent while it is only 3 percent in The U.S.The applicable interest rate in Canada is 8 percent.The current spot rate is C$1 = $.69. What is the net present value of this project in Canadian dollars using the foreign currency Approach?

Today, you can get either 140 Canadian dollars or 1,140 Mexican pesos for 100 U.S.dollars.Last year, 100 U.S.dollars was worth 139 Canadian dollars and 1,160 Mexican pesos.Which one of the following statements is correct given this information?

The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates between the countries is called:

The current spot rate is C$1.400 and the one-year forward rate is C$1.344.The nominal risk-free rate in Canada is 4 percent while it is 8 percent in the U.S.Using covered interest arbitrage, you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

How well do you think relative purchasing power parity and uncovered interest parity behave? That is, do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?

The rate most international banks charge one another for overnight Eurodollar loans is called the:

The most important complication of international finance is the:

An agreement to trade currencies based on the exchange rate today for settlement within two business days is called a(n) _____ trade.

A swap can be an agreement between two parties to: