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Exam 21: International Corporate Finance

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Question 21

Multiple Choice

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You have 100 British pounds. A friend of yours is willing to exchange 180 Canadian dollars for your 100 British pounds. What will be your profit or loss if you accept your friend's offer, given the following exchange rates?

A) £7.63 loss
B) £13.29 loss
C) £28.51 loss
D) £7.63 profit
E) £28.51 profit

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

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Question 22

Multiple Choice

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Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127?

A) unbiased forward rates condition
B) uncovered interest rate parity
C) international Fisher effect
D) purchasing power parity
E) interest rate parity

F) B) and E)
G) A) and E)

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Question 23

Multiple Choice

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Assume the current spot rate is C$1.1875 and the one-year forward rate is C$1.1724. The nominal risk-free rate in Canada is 4 percent while it is 3 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.

Suppose the spot and six-month forward rates on the Norwegian krone are Kr6.36 and Kr6.56, respectively. The annual risk-free rate in the United States is 5 percent, and the annual risk-free rate in Norway is 7 percent. What would the six-month forward rate have to be on the Norwegian krone to prevent arbitrage?

You are analyzing a project with an initial cost of £130,000. The project is expected to return £20,000 the first year, £50,000 the second year and £100,000 the third and final year. There is no salvage value. The current spot rate is £0.6211. The nominal risk-free return is 5.5 percent in the U.K. and 6 percent in the U.S. The return relevant to the project is 14 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

Which one of the following is the risk that a firm faces when it opens a facility in a foreign country, given that the exchange rate between the firm's home country and this foreign country fluctuates over time?

Based on the following information, the value of the U.S. dollar will _____ with respect to the yen and will _____ with respect to the Canadian dollar.

Relative purchasing power parity:

Suppose the spot exchange rate for the Canadian dollar is C$1.28 and the six-month forward rate is C$1.33. The U.S. dollar is selling at a _____ relative to the Canadian dollar and the U.S. dollar is expected to _____ relative to the Canadian dollar.

Currently, $1 will buy C$1.2103 while $1.2762 will buy €1. What is the exchange rate between the Canadian dollar and the euro?

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.6869. The expected inflation rate in Norway is 6 percent and in the U.S. it is 3.5 percent. A risk-free asset in the U.S. is yielding 4 percent. What risk-free rate of return should you expect on a Norwegian security?

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. requires an exchange rate for each time period for which there is a cash flow. IV. computes the NPV of a project in both the foreign and the domestic currency.

The market value of the Blackwell Corporation just declined by 5 percent. Analysts believe this decrease in value was caused by recent legislation passed by Congress. Which type of risk does this illustrate?

The price of one Euro expressed in U.S. dollars is referred to as a(n) :

Assume you can buy 52 British pounds with 100 Canadian dollars. How much profit can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars?

Suppose your company imports computer motherboards from Singapore. The exchange rate is currently 1.5803S$/US$. You have just placed an order for 30,000 motherboards at a cost to you of 170.90 Singapore dollars each. You will pay for the shipment when it arrives in 120 days. You can sell the motherboards for $148 each. What will your profit be if the exchange rate goes up by 8 percent over the next 120 days?

The home currency approach:

The unbiased forward rate is a:

What conditions are necessary for absolute purchasing power parity (PPP) to exist? Is it realistic to believe PPP can exist within a country let alone across national borders?

The home currency approach: