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Exam 21: International Corporate Finance

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Question 161

Multiple Choice

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If a commodity costs the same regardless of the currency used to purchase it or the country where it is sold, then _________________.

A) Forward exchange rates are equal.
B) Interest rate parity holds.
C) Relative purchasing power parity holds.
D) Uncovered interest rate parity holds.
E) Absolute purchasing power parity holds.

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

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Question 162

Multiple Choice

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In the spot market, $1 is currently equal to £.5086. The expected inflation rate in the U.K. is 3 percent and in the U.S. 4 percent. What is the expected exchange rate three years from now if Relative purchasing power parity exists?

A) £.4927
B) £.4935
C) £.5067
D) £.5188
E) £.5240

F) None of the above
G) A) and C)

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Question 163

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Which one of the following conditions states that the expected percentage change in the exchange rate is equal to the difference in interest rates?

A Canadian firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost £16 million and will generate cash inflows of £7.6 million per year at the end of each of the next three Years. After that, the company will be worthless. The current exchange rate is £0.83 British pounds Per $1. The Canadian inflation rate is expected to be 4% over this period. The current risk-free rate Of interest in Canada is 5% and the risk-free rate in Great Britain is 8%.[LINE][LINE]Assume the cost Of capital for this project is 15% on dollar investments. What is the NPV of this project using the Foreign currency approach?

A Japanese firm builds a manufacturing plant in Canada to avoid transportation charges in bringing its goods to the Canadian market. The Japanese firm is apparently willing to bear the _________________ of changes in the relative economic conditions between Canada and Japan.

An international firm that imports raw materials can reduce its _____ exposure to _____ rate risk by entering into a forward contract.

Absolute purchasing power parity is most apt to exist for which one of the following items?

You want to invest in a riskless project in Sweden. The project has an initial cost of SKr2.1 million and is expected to produce cash inflows of SKr810,000 a year for 3 years. The project will be Worthless after the first 3 years. The expected inflation rate in Sweden is 2 percent while it is 5 Percent in Canada. A risk-free security is paying 6 percent in Canada. The current spot rate is $1 = SKr7.55. What is the net present value of this project in Swedish krona using the foreign currency Approach? Assume that the international Fisher effect applies.

Uncovered Interest Rate Parity (UIP) can best be defined as:

A risk-free asset in the U.S. is currently yielding 3 percent while a Canadian risk-free asset is yielding 2 percent. The current spot rate is C$.92 is equal to US$1. What is the approximate two- Year forward rate if interest rate parity holds?

A Canadian firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost £16 million and will generate cash inflows of £7.6 million per year at the end of each of the next three Years. After that, the company will be worthless. The current exchange rate is £0.83 British pounds Per $1. The Canadian inflation rate is expected to be 4% over this period. The current risk-free rate Of interest in Canada is 5% and the risk-free rate in Great Britain is 8%.[LINE][LINE]Assume the cost Of capital for this project is 15% on dollar investments. What is the approximate discount rate you Would use to discount the cash flows if you were to evaluate this project using the foreign currency Approach?

The current spot rate is C$1.1578 and the one-year forward rate is C$1.1397. The nominal risk-free rate in Canada is 7 percent while it is 6.5 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.

Forward rate can best be defined as:

In the spot market, $1 is currently equal to £0.5086. The expected inflation rate in the U.K. is 5 percent and in the U.S. 4 percent. What is the expected exchange rate one year from now if relative Purchasing power parity exists?

The translation exposure to exchange rate risk is best described as:

______________ explains the absolute level of the exchange rate.

How well do you think relative PPP and UIP 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 exchange rate on a spot trade is called the _____ exchange rate.

Uncovered interest parity is defined as the condition which states that the:

Spot trades must be settled: