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Exam 18: International Aspects of Financial Management

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Question 41

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The current spot rate between the UK and the U.S.is £0.6528 per $1.The expected inflation rate in the U.S.is 1.8 percent.The expected inflation rate in the UK is 3.4 percent.If relative purchasing power parity exists,what will the exchange rate be two years from now?

A) £0.6549/$1
B) £.0.6632/$1
C) £.0.6739/$1
D) £0.6982/$1
E) £0.5331/$1

F) A) and B)
G) A) and D)

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Question 42

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Which one of the following is the rate that most international banks charge when they loan Eurodollars to other banks?

A) ADR
B) LIBOR
C) Cross-rate
D) Gilt rate
E) Swap rate

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

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Question 43

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Which one of the following terms is used to identify the concept that exchange rates vary to keep purchasing power constant among currencies?

A U.S.firm has total assets valued at €687,000 located in Germany.This valuation did not change from last year.Last year,the exchange rate was €0.94 = $1.Today,the exchange rate is €.0.75 = $1.By what amount did these assets change in value on the firm's U.S.financial statements?

The treasurer of a major U.S.firm has $12 million to invest for three months.The interest rate in the U.S.is 0.42 percent per month.The interest rate in the UK is 0.52 percent per month.The spot exchange rate is £0.70,and the three-month forward rate is £0.71.Ignoring transaction costs,in which country would the treasurer want to invest the company's funds? Why?

An agreement to exchange currencies sometime in the future is referred to as which one of the following?

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?

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?

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; R_F = foreign country risk-free rate; and R_US = U.S.risk-free rate.

You are planning a trip to the UK and plan on spending 3,800 pounds.How many dollars will this trip cost you if the currency per U.S.dollar is 0.6789 pound?

The exchange rate is 1.14 Swiss francs per U.S.dollar.How many U.S.dollars are needed to purchase 2,000 Swiss francs?

Which one of the following correctly matches a country with its currency?

The U.S.dollar equivalent is 0.4502 for the Brazilian real and 1.4729 for the UK pound.Which one of the following statements is correct given this information?

Currently,you can exchange €100 for $134.15.The inflation rate in Euroland is expected to be 3.1 percent as compared to 3.6 percent in the U.S.Assuming that relative purchasing power parity exists,what should the exchange rate be five years from now?

Given the following exchange rates,which of the following currencies are selling at a premium?

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?

Explain how a firm can structure its operations such that it creates its own internal hedge to long-run exposure to exchange rate risk.

In New York,you can exchange $1 for €0.7538 or £0.6789.In Berlin,£1 costs €1.1087.How much profit can you earn on $1,000 using triangle arbitrage?

Which one of the following is defined as an agreement to exchange two securities or two currencies?

Short-run exposure to exchange rate risk is best illustrated by which one of the following?