Deck 21: International Corporate Finance

Question 1

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

Answer 1

True

Question 2

Importers and exporters are key players in the foreign exchange market.

Answer 2

True

Question 3

According to The National Post, the spot exchange rate for the Euro is Euro 1 = $0.63. The six-month forward exchange rate is Euro 1 = $0.67. Based on these quotes, the Euro is selling at a discount relative to the dollar, and the dollar is selling at a premium relative to the Euro.

Answer 3

False

Question 4

Suppose the direct exchange rate for the Canadian dollar and U.S. dollar is 1.11, this means that you can buy $0.90 U.S. for $1 Canadian.

Question 5

Suppose the direct exchange rate for the Canadian dollar and U.S. dollar is 1.11, this means that you can buy $1.11 U.S. for $0.90 Canadian.

Question 6

Suppose the direct exchange rate for the Canadian dollar and U.S. dollar is 1.11, this means that you can buy $1.11 U.S. for $1 Canadian.

Question 7

Triangle arbitrage helps keep the currency market in equilibrium.

Question 8

Suppose the direct exchange rate for the Canadian dollar and U.S. dollar is 1.11, this means that you can buy $1 U.S. for $1.11 Canadian.

Question 9

According to The National Post, the spot exchange rate for the Euro is Euro 1 = $0.63. The six-month forward exchange rate is Euro 1 = $0.67. Based on these quotes, the Euro is selling at a premium relative to the dollar, and the dollar is selling at a discount relative to the Euro.

Question 10

The foreign exchange market is the world's largest financial market.

Question 11

Triangle arbitrage is a profitable situation involving three separate currency exchange transactions.

Question 12

Foreign bonds are issued in a single country.

Question 13

Triangle arbitrage only involves currencies other than the Canadian dollar.

Question 14

Eurobond is another name for a foreign bond.

Question 15

For absolute purchasing power parity to exist, there must be no trade barriers.

Question 16

The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the British pound, the Canadian dollar, and the Euro.

Question 17

The foreign exchange market is an example of an organized exchange with a specific physical location for trading.

Question 18

Foreign bonds often have more stringent disclosure rules than domestic bonds.

Question 19

The trading floor of the foreign exchange market is located in London, England.

Question 20

Triangle arbitrage opportunities can exist in either the spot or the forward market.

Question 21

If absolute purchasing power parity is said to hold for some good, then it must be true that the good in question is standardized, and virtually identical in the markets being considered.

Question 22

For absolute purchasing power parity to exist, no trade barriers can exist

Question 23

For absolute purchasing power parity to exist, goods must have equal economic values.

Question 24

International Pooch is headquartered in Canada, but is considering the construction of a plant in Japan. If they use the foreign currency approach to calculating the NPV, they will:
1) Discount yen cash flows at the required return on yen investments;
2) Compute the NPV in yen;
3) Convert the yen NPV to a dollar NPV.

Question 25

International Pooch is headquartered in Canada, but is considering the construction of a plant in Japan. If they use the home currency approach to calculating the NPV, they will
1) Convert all yen cash flows into dollars;
2) Discount the cash flows at the firm's required return;
3) Compute the NPV in dollars.

Question 26

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

Question 27

International Pooch is headquartered in Canada, but is considering the construction of a plant in Japan. If they use the foreign currency approach to calculating the NPV, they will:
1) Convert all yen cash flows into dollars;
2) Discount the dollar cash flows at the firm's required return for dollar denominated cash flows;
3) Compute the NPV in yen.

Question 28

Assume that the inflation rate in Canada is 3% over the next four years while the rate in the U.S. is 4% for the same time period. Given this, the U.S. dollar will depreciate relative to the Canadian dollar.

Question 29

For absolute purchasing power parity to exist, transaction costs must be zero.

Question 30

Covered interest arbitrage involves a forward contract to exchange currency B for currency
A.

Question 31

Assume that the inflation rate in Canada is 3% over the next four years while the rate in the U.S. is 4% for the same time period. Given this, the U.S. dollar will appreciate relative to the Canadian dollar.

Question 32

International Pooch is headquartered in Canada, but is considering the construction of a plant in Japan. If they use the home currency approach to calculating the NPV, they will:
1) Convert all dollar cash flows into yen;
2) Discount the cash flows at the firm's required return for Japanese denominated cash flows;
3) Compute the NPV in yen.

Question 33

The passage of the North American Free Trade Agreement (NAFTA) in 1994 sharply reduced trade barriers between Canada and Mexico. All else equal, the absolute PPP theory predicts that the exchange rate between the dollar and the peso will adjust to make the cost of goods in Mexico cheaper than the cost of identical goods in Canada.

Question 34

For absolute purchasing power parity to exist, transaction costs must be equal to zero.

Question 35

For absolute purchasing power parity to exist, forward exchange rates must equal the spot rates

Question 36

If absolute purchasing power parity is said to hold for some good, then it must be true that there are no significant barriers to trading the good.

Question 37

If absolute purchasing power parity is said to hold for some good, then it must be true that there are no transactions costs.

Question 38

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

Question 39

Covered interest arbitrage involves an exchange of currency A for currency B at the spot rate.

Question 40

According to the relative purchasing power parity theory, high inflation in country A and low inflation in country B will cause the value of country A's currency to appreciate relative to that of country B.

Question 41

The long-run exchange rate risk faced by an international firm can be reduced if the firm borrows money in the foreign country where they have operations.

Question 42

Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

Question 43

The following describes a translation exposure of exchange rate risk. Your firm has subsidiaries throughout the world. Due to the recent depreciation of the dollar against most foreign currencies, the dollar value of your foreign sales has declined as reflected on the parent's financial statements, even though sales growth is strong.

Question 44

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.

Question 45

The following describes a long-run exposure of exchange rate risk. Your firm buys plumbing products in Asia and sells them in Canada at a substantial discount to plumbing products manufactured in Canada. However, the strengthening economies in Asia (projected to continue into the next decade) have increased Asian demand for their own plumbing products, pushing up local prices and damaging your ability to undercut your Canadian competitors.

Question 46

Your firm has subsidiaries throughout the world. Due to the recent depreciation of the dollar against most foreign currencies, the dollar value of your foreign sales has declined as reflected on the parent's financial statements, even though sales growth is strong. The following was an example of a short run exchange rate risk.

Question 47

The following describes a long-run exposure of exchange rate risk. Your firm has subsidiaries throughout the world. Due to the recent depreciation of the dollar against most foreign currencies, the dollar value of your foreign sales has declined as reflected on the parent's financial statements, even though sales growth is strong.

Question 48

The foreign currency approach to capital budgeting analysis computes the net present value of a project in both the foreign and in the domestic currency.

Question 49

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

Question 50

The foreign currency approach to capital budgeting analysis utilizes the uncovered interest parity relationship.

Question 51

The use of dividends is a method by which a foreign subsidiary can remit cash to its parent company.

Question 52

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.

Question 53

The use of royalties is a method by which a foreign subsidiary can remit cash to its parent company.

Question 54

The use of management fees is a method by which a foreign subsidiary can remit cash to its parent company.

Question 55

The following describes a long-run exposure of exchange rate risk. 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.

Question 56

The usage of forward rates can help reduce the short-run exposure to exchange rate risk.

Question 57

The foreign currency approach to capital budgeting analysis is computationally easier to use than the home currency approach.

Question 58

The following describes a translation exposure of exchange rate risk. 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.

Question 59

The following describes a translation exposure of exchange rate risk. Your firm buys plumbing products in Asia and sells them in Canada at a substantial discount to plumbing products manufactured in Canada. However, the strengthening economies in Asia (projected to continue into the next decade) have increased Asian demand for their own plumbing products, pushing up local prices and damaging your ability to undercut your Canadian competitors.

Question 60

Your firm buys plumbing products in Asia and sells them in Canada at a substantial discount to plumbing products manufactured in Canada. However, the strengthening economies in Asia have increased Asian demand for their own plumbing products, pushing up local prices and damaging your ability to undercut your Canadian competitors. The following was an example of a short run exchange rate risk.

Question 61

Assume that you can buy 45 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?

A) $0.42
B) $0.58
C) $1.13
D) $1.96
E) $2.41

Question 62

The current exchange rate for the Canadian dollar is $.91US. The inflation rate in the U.S. is 2.5% while it is 3.5% in Canada. What is the expected spot rate in two years?

A) $.95
B) $.93
C) $.91
D) $.88
E) $.86

Question 63

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 5 % while it is 6 % 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.

A) $.0033
B) $.0067
C) $.0084
D) $.0633
E) $.0667

Question 64

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 % while it is 6.5 % 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.

A) $.0022
B) $.0025
C) $.0220
D) $.0239
E) $.0250

Question 65

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?

A) -$10,144
B) $1,206
C) $11,418
D) $13,711
E) $16,009

Question 66

Peter discovered an arbitrage opportunity based on the following exchange rates:
$1US = EUR 1.1257
$1US = $\le$ .6928
1 $\le$ = EUR 1.65
If you start with $1, how much of a profit can you earn in U.S. dollars by exchanging currencies given these rates?

A) $.013
B) $.015
C) $.019
D) $.021
E) $.023

Question 67

The spot rate of the U.S. dollar is C$1 = $.94US while the forward rate for one year is C$1 = $.92US. The nominal risk-free rate is 3% in the U.S. and 2% in Canada. How much profit can you make given this situation using covered interest arbitrage?

A) -$.04
B) -$.01
C) $.01
D) $.03
E) $.05

Question 68

A pair of ReMo athletic shoes is currently selling for $89 in the U.S. Assume purchasing power parity holds and all else is constant. What is the price of the same shoes in Australia?

A) $46.28
B) $69.42
C) $135.28
D) $158.27
E) $171.15

Question 69

You are considering a project in Poland, which has an initial cost of 250,000PLN. The project is expected to return a one-time payment of 400,000PLN 5 years from now. The risk-free rate of return is 3 % in Canada and 4 % in Poland. The inflation rate is 2 % in Canada and 5 % in Poland. Currently, you can buy 375PLN for $100. How much will the payment 5 years from now be worth in dollars?

A) $101,490
B) $142,060
C) $1,462,350
D) $1,489,025
E) $1,576,515

Question 70

Reducing the amount of borrowing denominated in the currency of the foreign subsidiary is a method of reducing the long-run exposure risks of foreign exchange.

Question 71

You are considering a project in Poland which has an initial cost of 375,000PLN. The project is expected to return a one-time payment of 500,000PLN 4 years from now. The risk-free rate of return is 4 % in Canada and 4.5 % in Poland. Currently, you can buy 323PLN for $100. How much will the payment 4 years from now be worth in Canadian dollars?

A) $148,613
B) $151,741
C) $153,262
D) $154,799
E) $160,074

Question 72

Producing a product in the country in which it is being sold is a method of reducing the long-run exposure risks of foreign exchange.

Question 73

Assume that you can buy 245 Canadian dollars with 100 British pounds. How much profit (in U.S. dollars) can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars?

A) $.86
B) $.93
C) $1.09
D) $1.37
E) $1.55

Question 74

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%.

What is the cost of the project in Canadian dollars?

A) $13.28 million
B) $14.63 million
C) $19.28 million
D) $21.53 million
E) $23.03 million

Question 75

Suppose the indirect exchange rate for the Canadian dollar is 0.93. Based on this, you know you can buy:

A) $1 U.S. for $0.93 Canadian.
B) $1.93 U.S. for $1 Canadian.
C) $1 U.S. for $1.08 Canadian.
D) $1.08 U.S. for $1 Canadian.
E) $1 U.S. for $1.93 Canadian.

Question 76

The 60-day forward rate for Japanese Yen is *8.02 per $1. The spot rate is *3.09 per $1. In 60 days you expect to receive *1,500,000. If you agree to a forward contract, how many dollars will you receive in 60 days?

A) $13,886
B) $14,550
C) $15,312
D) $154.635 million

Question 77

You are expecting a payment of 500,000PLN 3 years from now. The risk-free rate of return is 4 % in Canada and 2 % in Poland. The inflation rate is 4 % in Canada and 1 % in Poland. Currently, you can buy 380PLN for $100. How much will the payment 3 years from now be worth in dollars?

A) $138,700
B) $138,900
C) $139,800
D) $142,300
E) $144,169

Question 78

Today, you can get either 116 Canadian dollars or 1,102 Mexican pesos for 100 U.S. dollars. Last year, 100 U.S. dollars was worth 123 Canadian dollars or 1,148 Mexican pesos. Which one of the following statements is correct given this information?

A) $100 converted into Canadian dollars last year would now be worth $105.23.
B) $100 converted into Mexican pesos last year would now be worth $99.17.
C) $100 converted into Mexican pesos last year would now be worth $104.17.
D) $100 converted into Canadian dollars last year would now be worth $94.31.
E) $100 invested in Canadian dollars last year would now be worth $107.47.

Question 79

Jeanine started on vacation in the U.S. with a total of $5,000US to spend. She went to London where she exchanged her $5,000 for British pounds. The exchange rate was $1 = $\le$ .69. Jeanine spent half of her money while touring the U.K. She then left the UK and traveled to Germany where she exchanged her remaining British pounds into Euros. The exchange rates at the time were $1 = $\le$ .70 and EUR 1.07 = $1. How many Euros does Jeanine have?

A) $2,129
B) $2,303
C) $2,370
D) $2,637
E) $5,538

Question 80

You are considering a project in Poland which has an initial cost of 325,000PLN. The project is expected to return a one-time payment of 515,000PLN four years from now. The risk-free rate of return is 4 % in the U.S. and 3.5 % in Poland. The inflation rate is 3 % in the U.S. and 2 % in Poland. Currently, you can buy 291PLN for 100USD. How much will the payment four years from now be worth in U.S. dollars?

A) $159,217
B) $180,560
C) $1,460,350
D) $1,468,901
E) $1,528,828