Exam 21: International Corporate Finance

What is required for absolute purchasing power parity to hold? Do you think absolute PPP would hold in the case where a computer retailer in the U.S. sits directly across the border from a computer retailer in Canada? How about Houston, Texas and Winnipeg, Manitoba?

Money deposited in a financial centre outside the country whose currency is involved is called:

Which one of the following formulas correctly describes the relative purchasing power parity relationship?

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

For absolute purchasing power parity to exist, the products must be identical.

According to The National Post, today's direct exchange rate for Euros has gone from $1.4530 to $1.4546. In other words, _________________.

A Canadian firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost $\le$ 16 million and will generate cash inflows of $\le$ 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 $\le$ 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%. 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?

Provide a definition for generalized Fisher effect (GFE).

You sell custom-designed refrigerators in Canada. The refrigerators are manufactured in Mexico and it takes about 60 days from the time you agree to a sale and accept payment in Canada until you take delivery of the refrigerator and pay the Mexican firm. Your profit, therefore, is affected by changes in the dollar/peso exchange rate between the order and delivery dates. The following was an example of a short run exchange rate risk.

A recent article in the "Foreign Exchange" column of The Wall Street Journal contained the following headline: "Dollar Rally Seen Unlikely Due to Fears U.S. Inflation is Picking Up Momentum". What is the relationship between the value of the dollar (relative to foreign currencies) and the rate of inflation in the United States?

The LIBOR is the:

Today, you can exchange $1 for $\le$ .5428. Last week, $\le$ 1 was worth $1.88. If you had converted $\le$ 100 into dollars last week you would now have a:

Foreign bonds are usually denominated in the currency of the country in which they are issued.

The spot rate for the British pound currently is $\le$ .5086 per $1. The one-year forward rate is $\le$ .4975 per $1. A risk-free asset in the U.S. is currently earning 4 %. If interest rate parity holds, what rate can you earn on a one-year risk-free British security?

The foreign currency approach to capital budgeting analysis produces the same results as the home currency approach.

Provide a definition for uncovered interest parity (UIP).

The camera you want to buy costs $269 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8635? Assume absolute purchasing power parity exists.

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

You are analyzing a project with an initial cost of $\le$ 45,000. The project is expected to return $\le$ 8,000 the first year, $\le$ 22,000 the second year and $\le$ 20,000 the third and final year. The current spot rate is $\le$ .57. The nominal risk-free return is 5.5 % in the U.K. and 4.5 % in Canada. The return relevant to the project is 9 % in the U.K. and 10.5 % in Canada. Assume that uncovered interest rate parity exists. What is the net present value of this project in Canadian dollars?

Remitting profits to the parent company from a foreign subsidiary more frequently is a method of reducing the long-run exposure risks of foreign exchange.