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International Finance Test Two
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Terms in this set (50)
When interest rate parity holds, covered interest arbitrage is not possible.
a.
When interest rate parity holds, covered interest arbitrage is not possible.b.
When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount.
c.
When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium.
d.
When covered interest arbitrage is not feasible, interest rate parity must hold.
e.
All of the above are true.
d
Assume the following information:
Spot rate today of Swiss franc
=
$.60
1-year forward rate as of today for Swiss franc
=
$.63
Expected spot rate 1 year from now
=
$.64
Rate on 1-year deposits denominated in Swiss francs
=
7%
Rate on 1-year deposits denominated in U.S. dollars
=
9%
From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____%.
a.
5.00
b.
12.35
c.
15.50
d.
14.13
e.
11.22
b
34. Assume the following information:
Current spot rate of Australian dollar
=
$.64
Forecasted spot rate of Australian dollar 1 year from now
=
$.59
1-year forward rate of Australian dollar
=
$.62
Annual interest rate for Australian dollar deposit
=
9%
Annual interest rate in the U.S.
=
6%
Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.
a.
about 6.00
b.
about 9.00
c.
about 7.33
d.
about 8.14
e.
about 5.59
e
Assume the following information:
Current spot rate of New Zealand dollar
=
$.41
Forecasted spot rate of New Zealand dollar 1 year from now
=
$.43
One-year forward rate of the New Zealand dollar
=
$.42
Annual interest rate on New Zealand dollars
=
8%
Annual interest rate on U.S. dollars
=
9%
Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.
a.
about 11.97
b.
about 9.63
c.
about 11.12
d.
about 11.64
e.
about 10.63
e
Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?
a.
2.0.
b.
2.40.
c.
.80.
d.
.50.
e.
none of the above
d
38. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?
a.
$2,041,667.
b.
$9,804.
c.
$500.
d.
$1,639.
c
40. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?
a.
A$39.93.
b.
A$25,043.48.
c.
A$553.00.
d.
none of the above
a
Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.
a.
forward realignment arbitrage
b.
triangular arbitrage
c.
covered interest arbitrage
d.
locational arbitrage
b
Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:
a.
should exhibit a discount.
b.
should exhibit a premium.
c.
should be zero (i.e., it should equal its spot rate).
d.
B or C
a
Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:
a.
larger will be the forward discount of the foreign currency.
b.
larger will be the forward premium of the foreign currency.
c.
smaller will be the forward premium of the foreign currency.
d.
smaller will be the forward discount of the foreign currency.
a
22. Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:
a.
larger will be the forward discount of the foreign currency.
b.
larger will be the forward premium of the foreign currency.
c.
smaller will be the forward premium of the foreign currency.
d.
smaller will be the forward discount of the foreign currency.
b
46. According to interest rate parity (IRP):
a.
the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies.
b.
the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.
c.
the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.
d.
the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.
d
13. According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:
a.
follows their exchange rate movement.
b.
is due to their inflation differentials.
c.
is zero.
d.
is constant over time.
e.
C and D
b
Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.
a.
2 percentage points above; depreciate by about 2%
b.
3 percentage points above; depreciate by about 3%
c.
3 percentage points below; appreciate by about 3%
d.
3 percentage points below; depreciate by about 3%
e.
2 percentage points below; appreciate by about 2%
e
Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____.
a.
appreciate; 3%
b.
appreciate; 1%
c.
depreciate; 3%
d.
depreciate; 2%
e.
appreciate; 2%
e
Assume that the international Fisher effect (IFE) holds between the U.S. and the U.K. The U.S. inflation is expected to be 5%, while British inflation is expected to be 3%. The interest rates offered on pounds are 7% and U.S. interest rates are 7%. What does this say about real interest rates expected by British investors?
a.
real interest rates expected by British investors are equal to the interest rates expected by U.S. investors.
b.
real interest rates expected by British investors are 2 percentage points lower than the real interest rates expected by U.S. investors.
c.
real interest rates expected by British investors are 2 percentage points above the real interest rates expected by U.S. investors.
d.
IFE doesn't hold in this case because the U.S. inflation is higher than the British inflation, but the interest rates offered in both countries are equal.
c
Among the reasons that purchasing power parity (PPP) does not consistently occur are:
a.
exchange rates are affected by interest rate differentials.
b.
exchange rates are affected by national income differentials and government controls.
c.
supply and demand may not adjust if no substitutable goods are available.
d.
all of the above are reasons that PPP does not consistently occur.
d
The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:
a.
$0.0076.
b.
$0.0073.
c.
$0.0070.
d.
$0.0066.
c
The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange rate for the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen has adjusted according to purchasing power parity, the new exchange rate for the yen will be
a.
$0.0078.
b.
$0.0082.
c.
$0.0111.
d.
$0.00492.
e.
None of the above
b
The international Fisher effect (IFE) suggests that:
a.
a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.
b.
a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
c.
a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
d.
a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
a
7. Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:
a.
the nominal interest rates of both countries are the same.
b.
the inflation rates of both countries are the same.
c.
the exchange rates of both countries will move in a similar direction against other currencies.
d.
none of the above
d
If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
a.
the value of the euro would often appreciate against the dollar.
b.
the value of the euro would often depreciate against the dollar.
c.
the value of the euro would remain constant most of the time.
d.
the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
a
Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.
a.
lower U.S. inflation; depreciate
b.
lower U.S. inflation; appreciate
c.
higher U.S. inflation; depreciate
d.
higher U.S. inflation; appreciat
a
According to the international Fisher effect, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____.a.
lower; strengthen
b.
lower; weaken
c.
higher; weaken
d.
higher; strengthen
c
45. According to the international Fisher effect (IFE):
a.
the nominal rate of return on a foreign investment should be equal to the nominal rate of return on the domestic investment.
b.
the exchange rate adjusted rate of return on a foreign investment should be equal to the interest rate on a local money market investment.
c.
the percentage change in the foreign spot exchange rate will be positive if the foreign interest rate is higher than the local interest rate.
d.
the percentage change in the foreign spot exchange rate will be negative if foreign interest rate is lower than the local interest rate.
b
22. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):
MYRt = a0 + a1INCt − 1 + a2INFt − 1 + μt,
where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a0 = .005; a1 = .4; and a2 = .7. The most recent quarterly percentage change in the inflation differential is −5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is:
a.
4.60%.
b.
−1.80%.
c.
5.2%.
d.
−4.60%.
e.
none of the above
b
Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro:
eurot
= b0 + b1INFt − 1 + b2INCt − 1
= .005 + .9INFt − 1 + 1.1INCt − 1
The most recent quarterly percentage change in the inflation differential between the U.S. and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the U.S. and Europe was −1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____%.
a.
appreciation; 3.4
b.
depreciation; 3.4
c.
appreciation; 0.7
d.
appreciation; 1.2
d
The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):
MYRt = a0 + a1INCt − 1 + a2INFt − 1 + μt,
where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a0 = 0.005; a1 = 0.4; and a2 = 0.7. The most recent quarterly percentage change in the inflation differential is −5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is
a.
4.60%.
b.
−1.80%.
c.
5.2%.
d.
−4.60%.
e.
None of the above
b
If a particular currency is consistently declining substantially over time, then a market-based forecast will usually have:
a.
underestimated the future exchange rates over time.
b.
overestimated the future exchange rates over time.
c.
forecasted future exchange rates accurately.
d.
forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.
b
A regression model was applied to explain movements in the Canadian dollar's value over time. The coefficient for the inflation differential between the U.S. and Canada was −0.2. The coefficient of the interest rate differential between the U.S. and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.
a.
increases; increases
b.
decreases; increases
c.
increases; decreases
d.
increases; decreases
c
13. Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is −.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?
a.
The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable.
b.
The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate.
c.
The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate.
d.
The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.
b
Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro's future currency value?
a.
fundamental forecasting.
b.
market-based forecasting.
c.
technical forecasting.
d.
mixed forecasting.
c
Which of the following is not true regarding economic exposure?
a. Even purely domestic firms can be affected by economic exposure.
b. In general, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows.
c. The degree of economic exposure will likely be much greater for a firm involved in international business than for a purely domestic firm.
d. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected.
e. All of the above are true.
b
22. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is $.55. What is the net inflow or outflow as measured in U.S. dollars?
a. $500,000 outflow.
b. $500,000 inflow.
c. $275,000 inflow.
d. $275,000 outflow.
d
23. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.05.
a. $3,675,000 outflow
b. $525,000 outflow
c. $525,000 inflow
d. $210,000 outflow
b
Refer to Exhibit 10-2. What is the portfolio standard deviation?
a. 3.00%.
b. 5.44%.
c. 17.98%.
d. none of the above
b
Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each currency during the next month, what is the maximum one-month loss of the currency portfolio? Use a 95 percent confidence level and assume the monthly percentage changes for each currency are normally distributed.
a. −9.00%.
b. −30.00%.
c. −5.00%.
d. none of the above
a
Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:
a. economic exposure.
b. transaction exposure.
c. translation exposure.
d. economic and transaction exposure.
a
U.S. based Majestic Co. sells products to U.S. consumers and purchases all of materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:
a. economic exposure.
b. translation exposure.
c. transaction exposure.
d. no exposure to exchange rate fluctuations.
a
Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to Italy invoiced in dollars. Additionally, Lazer Co. has a subsidiary in Korea that produces computers in South Korea and sells them there. Lazer also has competitors in different countries. Lazer Co. is subject to:
a. transaction exposure.
b. economic exposure.
c. translation exposure.
d. all of the above.
d
69. Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.
d
Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged
e
If interest rate parity exists and transactions costs are zero, the hedging of payables in euros with a forward hedge will ____.
a. have the same result as a call option hedge on payables
b. have the same result as a put option hedge on payables
c. have the same result as a money market hedge on payables
d. require more dollars than a money market hedge
e. A and D
d
Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:
a. positive.
b. negative.
c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.
d
62. Campbell Company has a subsidiary located in Jamaica. The subsidiary has generated losses for the last five years and is expected to generate losses for the next ten years. Campbell is reluctant to divest of this subsidiary, however. Given this information, Campbell would ____ from a(n) ____ of the Jamaican dollar.
a. benefit; appreciation
b. benefit; depreciation
c. not benefit; appreciation
d. not benefit; depreciation
e. B and CQASE
e
A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash inflows denominated in Barbados dollars. Given this information, the MNC would ____ from a(n) ____ of the Barbados dollar.
a. benefit; appreciation
b. benefit; depreciation
c. not benefit; appreciation
d. none of the above
a
Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____.
a. decreasing foreign revenues; decreasing foreign expenses
b. decreasing foreign revenues; increasing foreign expenses
c. increasing foreign revenues; decreasing foreign revenues
d. decreasing foreign expenses; increasing foreign revenues
d
If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce their economic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that:
a. cash inflows exceed cash outflows in each foreign currency.
b. cash outflows exceed cash inflows in each foreign currency.
c. cash inflows match cash outflows in each foreign currency.
d. none of the above
c
An MNC is attempting to reduce its economic exposure by financing a portion of its business with loans in the foreign currency. If the foreign currency weakens, the MNC will need ____ of the foreign currency to cover the loan payment, while the MNC's foreign currency revenues will convert to ____ dollars.a. more; fewer
b. more; more
c. less; fewer
d. less; more
c
Sarakose Co. is a U.S. company with sales to Canada amounting to C$5 million. Its cost of materials attributable to the purchase of Canadian goods is C$7 million. Its interest expense on Canadian loans is C$5 million. The dollar value of Sarakose's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of its cash flows would ____ if the Canadian dollar appreciates.
a. increase; increase
b. decrease; increase
c. decrease; decrease
d. increase; decrease
e. increase; be unaffected
c
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