Q&A Hero

Q: Assume that a buyer of Italian wine saw the following quotes: spot rate of .75 euros to the U.S. dollar; 30-day forward rate of .747 euros to the U.S. dollar; 90-day forward rate of .744 euros to the U.S. dollar. What does this information imply? A) The forward euro is selling at a premium as compared with the spot euro. B) The dollar is expected to maintain the same value in the near future relative to the euro. C) The forward euro is selling at a discount as compared with the spot euro. D) None of the above.

Q: You are on your way to a beautiful Mexican resort. The current exchange rate is 12 pesos to the dollar. When you arrive, you convert 1,000 US$ for how many pesos? A) 12,000 pesos B) 1,200 pesos C) 8,333 pesos D) 83.33 pesos

Q: You are leaving Mexico and have 3,000 pesos to change into dollars. The exchange rate is 10.2 pesos to the dollar. How many dollars will you receive? A) You will receive 30,600 US$. B) You will receive 294.12 US$. C) You will lose money converting back into dollars. D) This is not enough information to find the number of dollars.

Q: Assume that an importer of wine were to purchase 5,000 cases of premium French Bordeaux for 700,000 euros. Further assume that the quoted exchange rates are as follows: spot rate = .70 euros to the U.S. dollar; 30-day forward rate = .705 euros to the U.S. dollar; and 90-day forward rate = .710 euros to the U.S. dollar. If the actual currency exchange rate at the time payment is due in 90 days is equal to the forward rate of .710 euros to the U.S. dollar, how much would the wine cost the importer in U.S. dollars if payment is made in 90 days? Round to the nearest dollar. A) $704,225 B) $355,000 C) $497,000 D) $985,915

Q: One U.S. dollar buys 92.61 yen and 12.707 Mexican pesos. What is price of pesos in yen? A) 7.2881 B) .1372 C) .0787 D) 1.0798

Q: Assume that an investor owned 5,000 shares of Anheuser-Busch Corporation common stock prior to the acquisition by InBev of Belgium. At the time of the acquisition, the dollar was worth .77 euros. Further assume that the purchase price was equal to 54 euros per share. What was the sales price of Anheuser Busch common stock per share in U.S. dollars? A) $41.58 B) $54 C) $77 D) $70.13

Q: Transactions carried out in the foreign exchange markets include: A) spot transactions. B) forward exchange contracts which allow the exchange of one currency for another today. C) swaps. D) both A and B.

Q: Assume that an investor purchased 200,000,000 Japanese yen in New York at an exchange rate of 93 yen to the dollar and simultaneously sold the yen in Tokyo at an exchange rate of 91 Japanese yen to the dollar. Further assume that there was no cost associated with this transaction. What profit or loss did the investor make? A) ($43,010) loss B) $47,272 profit C) ($47,272) loss D) $43,956 profit

Q: An investor purchased Canadian dollars at an exchange rate of $0.97 U.S. to 1 Canadian dollar. The Canadian dollars cost her $1,000,000 (U.S. dollars). How many Canadian dollars did she buy? A) $103,090 B) $970,026 C) $1,030,927 D) $97,000

Q: An investor purchased 1,000,000 Canadian dollars at an exchange rate of 1.0309 Canadian dollars to the U.S. dollar. The Canadian dollars cost her ________. A) $103,090 B) $970,026 C) $1,030,927 D) $97,000

Q: An investor purchased 200,000,000 Japanese yen at an exchange rate of 93 yen to the dollar. the yen cost her ________. A) $18,600 B) $10,752.70 C) $21,505.30 D) $186,000

Q: An attempt to profit by converting dollars to yen, yen to euros, and euros back to dollars would be an example of: A) arbitrage. B) speculation. C) hedging. D) intervention.

Q: What keeps foreign exchange quotes in two different countries in line with each other? A) Cross rates B) Forward rates C) Arbitrage D) Spot rates

Q: Which of the following statements about exchange rates is true? A) Exchange rates are fixed by international agreements. B) Exchange fluctuate between currencies but are fixed in terms of gold. C) Exchange rates fluctuate constantly. D) Are regulated by a special committee of the United Nations.

Q: After the U.S. dollar, the most widely traded currency is: A) the Saudi riyal. B) the euro. C) the Swiss franc. D) the Canadian dollar.

Q: Buying and selling in more than one market to make a riskless profit is called: A) profit maximization. B) arbitrage. C) international trading. D) cannot be determined from the above information.

Q: If the quote for a forward exchange contract is greater than the computed price, the forward contract is: A) overvalued. B) undervalued. C) a good buy. D) at equilibrium.

Q: Forward rates are quoted: A) in direct form. B) in indirect form. C) at a premium or discount. D) all of the above.

Q: A spot transaction occurs when one currency is: A) deposited in a foreign bank. B) immediately exchanged for another currency. C) exchanged for another currency at a specified price. D) traded for another at an agreed-upon future price.

Q: Suppose International Trading Enterprises purchased 25,000 kilograms of Belgian chocolate for a price of 100,000 euros. If the current exchange rate is .69368 euros to the U.S. dollar, what is the purchase price of the chocolate in dollars? A) $14,416 B) $693,368 C) $69,368 D) $144,159

Q: Participants in foreign exchange trading include: A) importers and exporters. B) investors and portfolio managers. C) currency traders. D) all of the above.

Q: Trading in foreign exchange markets is dominated by: A) Russian rubles, Indian rupees and Indonesian rupeas. B) Spanish pesetas, German marks, French francs. C) Chinese renminbis, Indian rupees and pesos of various Latin American countries. D) U. S. dollars, the British pound, the euro and the yen.

Q: Briefly discuss the factors that multinational firms consider in arriving at capital structure decisions.

Q: What are some of the potential risks, other than exchange rate risk, that need to be considered in foreign direct investment decisions.

Q: The spot exchange rate for the Thai bhat is 33.135 bhat to the dollar. The Host Hotel Company will be able to repatriate profits from its luxury resort hotel in Phuket in 5 years. It has estimated the 5 year forward rate at 38 bhat to the dollar. The risk-free rate in the U.S. is 4% and Host uses an 11 % risk premium for investments of this type. If the expected accumulated profits after 5 years are 100 million bhat, what is their present value in U.S. dollars.

Q: The interest rate in the U.S. is 4%, in Switzerland it is 3%. The spot rate is 1.0232 USD to the Swiss franc. A U.S. based hotel chain needs to project forward exchange rates for the next five years. Complete the table below. Year Spot Rate x rate differential Forward Rate 0 1 2 3 4 5

Q: The relevant sources of risk for direct foreign investment capital budgeting decisions are the same as those faced when making domestic capital budgeting decisions.

Q: Multinational corporations can have lower cost of capital and more continuous access to external finance compared to a domestic firm.

Q: Millheim Electronics is an American firm operating in India, whose government refuses to allow Millheim to send its earnings out of the country. This is an example of repatriation of profits.

Q: Because a large part of a subsidiary's equity funds comes from the parent, the subsidiary should use the same cost of equity as the parent.

Q: The cost of debt used in the international investment decision is the lesser of the parent's or the subsidiary's cost of debt.

Q: Economic exposure refers to the overall impact of exchange rate changes on the value of the firm.

Q: Expropriation of plant and equipment without compensation is an example of financial risk from direct foreign investments.

Q: Capital markets in foreign countries: A) offer lower returns than those obtainable in the domestic capital markets. B) provide international diversification. C) in general are becoming less integrated due to the widespread availability of interest rate and currency swaps. D) increase portfolio betas.

Q: Foreign countries claim that multinational corporations: A) cause stability in their currencies in foreign exchange markets. B) exploit local labor with low wages. C) have no political or cultural loyalty. D) both B and C.

Q: If the net present value of a direct foreign investment is negative, the multinational firm should: A) reject any proposals. B) consider establishing a sales office. C) consider licensing. D) both A and C.

Q: An important (additional) consideration for a direct foreign investment is: A) political risk. B) maximizing the firm's profits. C) attaining a high international P/E ratio. D) all of the above.

Q: Risks of foreign direct investment potentially include: A) exchange rate fluctuations. B) political instability. C) competition from foreign competitors. D) all of the above.

Q: Exchange rate risk: A) exists when the contract is written in terms of the foreign currency. B) exists also in direct foreign investments and foreign portfolio investments. C) does not exist if the international trade contract is written in terms of the domestic currency. D) all of the above.

Q: Exchange rate risk: A) arises from the fact that the spot exchange rate on a future date is a random variable. B) applies only to certain types of international businesses. C) has been phased out due to recent international legislation. D) is not a significant factor in foreign investment decisions.

Q: When multinational companies evaluate capital investments in foreign countries, they discount: A) pre-tax earnings of the foreign subsidiary. B) foreign earnings at home country discount rates. C) only earnings that are expected to be transferred back to the parent company. D) all cash flows in the foreign currency at the host country discount rates.

Q: Some complexities of conducting international business include: A) multiple currencies. B) differing legal requirements. C) restrictions on repatriating earnings. D) all of the above.

Q: RAH Inc., a U.S. corporation is evaluating a proposal to construct and lease an office building in Kiev. RAH's weighted average cost of capital is 11%. The risk free rate in the U.S. is 3.75%. RAH believes that conditions in Kiev warrant a required rate of return that is 12% above the risk-free rate. Cash flows from the hotel project should be discounted at: A) 23%. B) 14.75%. C) 15.75%. D) 12%.

Q: The spot exchange rate for the Thai bhat is 33.135 bhat to the dollar or .00318 dollar to the bhat. For capital budgeting purposes, Ramo Corp needs to estimate the exchange rate 5 years from now. The U.S. interest rate is 4%; the interest rate in Thailand is 8%. The estimated 5 year forward rate is: A) 27.44 bhat to the dollar. B) 40.02 bhat to the dollar. C) 31.90 bhat to the dollar. D) 34.41 bhat to the dollar.

Q: The spot exchange rate for the Thai bhat is 33.135 bhat to the dollar. The 1 year forward rate is 34.175. Ramo Corp. has undertaken a capital project in Bangkok that is expected to produce a cash flow of 17,087,500 bhat at the end of the first year. The company will discount cash flows at a rate of 14%. What is the present value of the first year cash flow in U.S. dollars. A) $14,989,035 B) $500,000 C) $438,596 D) $452,363

Q: In 2010, the U. S. A. comprised ________ of the world's stock market capitalization. A) 20% B) just under 50% C) 75% D) 90%

Q: One reason for international investment is that: A) the economies of many countries are growing faster than the U.S. B) price-earnings (P/E) ratios are higher in foreign countries. C) doing business in foreign countries is simpler than in the U. S. D) raw materials are typically cheaper in other countries than in the U. S.

Q: Which of the following international business activities constitutes a foreign direct investment? All firms mentioned are U.S. based. A) Yanqui Spirits imports a 1000 cases of rum from the Dominican Republic. B) WMT Inc. opens a big-box retail facility in Nicaragua. C) Condor University runs training sessions for Indonesian civil servants on its California Campus. D) Merkizer Pharmaceuticals licenses an Indian company to manufacture a drug under its patents.

Q: Jean-Marc lives in Besanon, a French city near the Swiss border. The exchange rate is 1.47 Swiss francs to the euro. If Jean-Marc's shopping cart of groceries typically costs him 80 euros, what should it cost him if he drives across the border to Switzerland? Do you think that purchase price parity would apply in this situation?

Q: What is the law of one price? How does it apply to foreign exchange rates?

Q: Assume that the interest rate in India is 10% while in Europe it is 3% and that the exchange rate is 65.50 rupees to the euro. What would we expect the 6 month exchange rate to be?

Q: What is meant by interest rate parity?

Q: The price of a Big Mac is more or less the same everywhere in the world.

Q: The forward price of currencies can be either higher, lower or even the same as the spot price.

Q: Prices differences of identical items in different currencies can best be explained by the international Fisher effect.

Q: If a country is has high interest rates because of inflation, the forward price of its currency will be higher than the spot price.

Q: Purchasing price parity is more likely to be the case for common commodities than for personal services.

Q: If a currency's forward price in U. S. dollars is lower than the spot price, interest rates are higher in the foreign country than they are in the U.S.

Q: If a currency's forward price in U. S. dollars is higher than the spot price, interest rates are higher in the foreign country than they are in the U.S.

Q: Assume that a Toyota sold for 1,476,000 yen in 1990. If the price for this automobile was $8,200 in 1985, and the car still sells for the same amount of yen today, but the current exchange rate is 90 yen per dollar, what is the car selling for today in U.S. dollars? A) $ 14,760 B) $16,400 C) $18,204 D) $12,062

Q: Which of the following is a conceptual method for keeping the foreign currency market in equilibrium? A) The purchasing power parity mechanisms B) The balance of trade mechanisms C) Government intervention through central banks D) The interest rate parity mechanisms

Q: Which of the following statements is true? A) Interest rate parity indicates that the forward premium or discount should be greater than the differences in the national interest rates for securities of the same maturity. B) Purchasing power parity indicates that, in the long run, exchange rates adjust to reflect international differences in inflation so that the purchasing power of each currency tends to remain the same. C) The International Fisher Effect indicates that the nominal interest rate should be the same all over the world at all times if the market is efficient. D) Both B and C.

Q: The nominal rate of interest in Russia is 9.5% and the inflation rate is 8%. The nominal rate of interest in Canada is 2.5% and the inflation rate is zero. We would expect: A) the ruble to strengthen against the dollar. B) the exchange rate between the Canadian dollar and the ruble to stay the same because of interest rate parity. C) the exchange rate between the Canadian dollar and the ruble to stay the same because of purchasing price parity. D) the Canadian dollar to strengthen against the ruble.

Q: The nominal rate of interest in Russia is 9.5% and the inflation rate is 8%. The nominal rate of interest in Spain is 3% and the inflation rate is 1%. Which country has the higher real rate of interest? A) Russia B) Spain C) There is no difference. D) There is not enough information

Q: According to the international Fisher effect, if the nominal interest rate in Russia is 9.5% and the inflation rate is 8%, the real rate of interest is approximately: A) 18.26%. B) 6.5%. C) 1.5%. D) -1.5%.

Q: According to the domestic Fisher effect, if the inflation rate is 5%, and the nominal rate of interest is 7%, the real rate of interest is: A) 2.00%. B) 1.904%. C) 4.65%. D) 0.5252%.

Q: According to the domestic Fisher effect, if the inflation rate is 3% and the real rate of interest is 2%, the nominal rate of interest will be: A) 5.06%. B) 5.00%. C) 6%. D) 8.15%.

Q: The current spot exchange rate between the Japanese yen and the U.S. dollar is 92.61 Y/US$. The yen is expected to appreciate by 4% against the dollar over the next year. What do you expect the spot exchange rate between the yen and the dollar to be one year from now? A) 92.61 Y/US$ B) 98.18 Y/US$ C) 89.05 Y/US$ D) 103.08 Y/US$

Q: 10,000 bushels of corn currently sells in the U. S. for $57,300. The current exchange rate is 45.5 rupees to the dollar. If purchasing power parity prevails, what is the price of 10,000 bushels of corn in rupees? A) 2,607,150 rupees B) 12,593.34 rupees C) 45,500 rupees D) 260,715 rupees

Q: A barrel of oil currently costs $85 in U.S. dollars. The current exchange rate is $1.40 U. S. to the euro. If purchasing power parity prevails what is the price of a barrel of oil in euros? A) 71.43 euros B) 140 euros C) 119 euros D) 60.71 euros

Q: The spot exchange rate for Canadian dollars is .97 to the U.S.dollar. The 6 months forward rate is .9698 to the U.S. dollar. The interest rate in Canada (annual) is 2.04%. What is the U. S. Interest rate? A) 2.02% B) 4.04% C) 1.08% D) .9982%

Q: The 1 year interest rate in the U.S. is 2%. The spot exchange rate for Canadian dollars .97 to the U.S.dollar. The 6 months forward rate is .9698 to the U.S. dollar. These prices indicate that interest rates in Canada, on an annualized basis, are about: A) .08% lower. B) .08% higher. C) .04% higher. D) .8% lower.

Q: The 1 year interest rate in the U.S. is 1%. The spot exchange rate for yen is 92.61 to the dollar. The 6 months forward rate is 92.57 to the dollar. These prices indicate that interest rates in Japan, on an annualized basis, are about: A) .08% lower. B) .08% higher. C) .04% higher. D) .8% lower.

Q: The purchasing power parity theory is least likely to apply to the price of: A) oral surgery. B) smart phones. C) crude oil. D) cane sugar.

Q: Which of the following statements is true? A) The forward rate is the same as the spot rate that will prevail in the future. B) Only the forward rate is known. C) An indirect quote is the exchange rate that indicates the number of units of the home currency required to buy one unit of foreign currency. D) Both B and C.

Q: The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the: A) purchasing power parity theory. B) balance of payments quantum theory. C) interest rate parity theory. D) arbitrage markets theory.

Q: A theory that relates the ratios of spot and forward exchange to differences in interest rates in two countries or currency zones is known as: A) interest rate parity. B) purchasing power parity. C) market efficiency. D) forward/spot equivalence hypothesis.

Q: One U.S. dollar buys 12.706 Mexican pesos and .6936 euros. What is the peso/euro exchange rate.

Q: As of January 8, 2010, the spot rate for Swiss francs was .9772. The 180 day forward rate was .9783. Compute the annualized percentage rate premium or discount for Swiss francs.

Q: What is the difference between and "ask" quote and a "bid" quote.