Deck 27: Managing International Risks

Question 1

If the direct quotation for the Euro is $1.3565/Euro, what is the indirect quotation?

A) 0.2415
B) -1.1655
C) 0.7372
D) None of the above

Answer 1

0.7372

Question 2

If a Big Mac costs $2.31 in the USA and in Japan 250 Yens, according to PPP, what is the implied exchange rate in Yens/US$?

A) 106
B) 108.225
C) 119.795
D) None of the above

Answer 2

108.225

Question 3

Assume that both the law of one price and the expectations theory of forward rates hold. The spot rate for the Ruritanean doubloon is 0.455 doubloon/$, and the one-year forward rate is 0.476 doubloon/$. Suppose that next year's forecasted rate of inflation in Ruritania is now revised upward by 10%. How does this affect exchange rates?

A) The current spot rate changes to 0.50 doubloon/$
B) The forward rate changes to 0.524 doubloon/$
C) Next year's expected spot rate changes to 0.501 doubloon/$
D) The forward rate changes to 0.501 doubloon/$

Answer 3

The forward rate changes to 0.524 doubloon/$

Question 4

The most important aspect of international finance is:
I. The basic principles of corporate finance do not apply
II. The process of foreign exchange valuation of different currencies
III. The NPV principle cannot be applied to foreign operations

A) I only
B) I and III only
C) II only
D) III only

Question 5

The expectations theory of forward rates implies that:

A) The forward rate is determined by government's expectations
B) On average, the forward rate is equal to the future spot rate
C) The forward rate is determined by expectations of the future spot interest rate
D) The forward rate is equal to the future spot rate

Question 6

If a Big Mac costs C$3.00 in Canada and $2.31 in the USA, according to purchasing power parity, what is the implied exchange rate in C$/US$?

A) 1.3793
B) 0.725
C) 1.3276
D) None of the above

Question 7

The spot US$/Euro exchange rate is US$1.3549/US$. The 3-month forward rate is US$1.3595/Euro. What is Euro's forward premium (or discount) on the US dollar, expressed as annual rate? (approximately)

A) 0.83% premium
B) 1.9% discount
C) 1.4% premium
D) None of the above

Question 8

Assume that international capital markets are competitive and that the real interest rates are the same. The one-year interest rate is approximately 9% in the USA and 5% in Switzerland. If the expected inflation rate is 6% in the USA, what is the expected inflation rate in Switzerland? (Approximately)

A) 16%
B) 10%
C) 2.1%
D) None of the above

Question 9

Which of the following statement(s) about currency forward market is (are) true?
I. In the forward market you buy or sell currency for future delivery at a rate set today.
II. A forward market transaction is a made-to-measure transaction.
III. Most forward transactions are for six months or less.

A) I only
B) I and II only
C) II and III only
D) I, II and III

Question 10

The spot Yen/US$ exchange rate is Yen119.795/US$ and the one year forward rate is Yen114.571/US$. If the annual interest rate on dollar CDs is 6%, what would you expect the annual interest rate to be on Yen CDs?

A) 1.38%
B) 5.3%
C) 8.0%
D) 17.14%

Question 11

Which of the following statement(s) about currency futures market is (are) true?
I. the futures contracts are highly standardized.
II. the futures contacts are made-to-measure contracts.
III. the futures contracts are for specified amounts and for a limited choice of delivery dates.

A) I only
B) II only
C) I and III only
D) I, II and III

Question 12

The spot exchange rate for British pounds is 0.5025 (BP/US$). The 180-day risk-free rates in the US and Britain are 3% and 2.75%, respectively. What is the forward exchange rate in BP/US$? (Assume that the interest rates are for 180-days.)

A) 0.6170
B) 0.5037
C) 0.5013
D) none of the above

Question 13

An organized market for currency for future delivery that is traded on an exchange is called:

A) Spot market
B) Forward market
C) Futures market
D) Options market

Question 14

The spot US$/BP exchange rate is US$1.99/BP. What is the indirect quote: [BP = British pound]

A) BP 0.65/US$
B) BP 0.5025/US$
C) BP 1.2845/US$
D) None of the above

Question 15

A currency forward contract is described by:

A) Agreeing today to buy or sell specified amount of a currency at a later date at a price set in the future
B) Agreeing today to buy or sell specified amount of a currency today at its current price
C) Agreeing today to buy or sell specified amount of a currency at a later date at a price set today
D) None of the above

Question 16

The spot Peso/US$ exchange rate is US$10.9892/US$. The 3-month forward rate is US$11.0408/US$. What is Peso's forward premium (or discount) on the US dollar, expressed as an annual rate? (approximately)

A) 0.83% premium
B) 1.9% discount
C) 2.1% premium
D) None of the above

Question 17

The Mexican economy is predicted to average double digit inflation over the next two years of 10% per annum. The inflation forecast for the US is 4% per annum. If the current exchange rate is $0.091/peso, what will be the exchange rate two years from now?

A) $0.0831
B) $0.08134
C) $0.1018
D) none of the above

Question 18

A quotation in the form Yens 119.33/US$ is called:

A) An Indirect quotation in USA
B) A Direct quotation in USA
C) A Cross rate in Japan
D) None of the above

Question 19

The spot BP/$ exchange rate is 0.5025/$ and the one-year forward rate is BP 0.5048/$. If the annual interest rate on dollar CDs is 6%, what would you expect the annual interest to be on BP CDs?

A) 5.52%
B) 6.49%
C) 3.55%
D) 8.25%

Question 20

The spot Yen/US dollar exchange rate is 119.795 Yen/US$. The 3-month forward rate is
118)397 Yen/US$. What is Yen's forward premium (or discount) on the dollar, expressed as annual percent rate?

A) 6.5% discount
B) 4.7% premium
C) 14% discount
D) none of the above

Question 21

The phrase stronger currency implies a forward premium. Given a Euro - US dollar exchange rate of 1.45, which of the following forward rates shows the strongest dollar? (remember how euros are quoted)

A) 1.55
B) 1.65
C) 1.35
D) 1.25

Question 22

Political risk is defined as:

A) Unanticipated changes in exchange rates
B) Unanticipated actions by the host government affecting the cash flows of a project
C) Unanticipated actions by the World Bank affecting the cash flows of a project
D) All of the above

Question 23

XJ Company from the USA is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, -50; Year 1, 25; Year 2,35; Year 3, 40. The discount rate in BP is 14% and the discount rate in the US$ is 12%. The spot rate is US$1.99/BP. Calculate the NPV in US$:

A) +25.86
B) +28.69
C) +51.46
D) None of the above

Question 24

Suppose that the G Company knows that it must pay ≤7 million for goods that it will receive in Britain. The current exchange rate is $1.99/≤. The risk that the corporate treasurer faces is that:

A) The pound exchange rate falls in a month's time to $1.50/≤
B) The pound exchange rate rises in a month's time to $2.10/≤
C) The pound exchange rate does not change from its current position
D) The pound exchange rate falls in a month's time to $1.75/≤

Question 25

If a government was to seize the assets of a MNC and not provide adequate compensation to the owners, the government would be following which practice?

A) Nationalization
B) Expropriation
C) Repatriation
D) Terrorism

Question 26

In the forward exchange market, currency is traded for future delivery.

Question 27

Interest rate parity gives the relationship between forward rate and spot rate in terms of interest rates.

Question 28

If the peso is traded at a forward discount relative to U.S, dollar, then the U.S. dollar is also trading at a discount relative to the peso.

Question 29

The beta of a firm in Switzerland is 1.25. The risk-free rate is 4% and market risk premium is 8.4%. Calculate the required rate of return for this firm.

A) 10.5%
B) 8.4%
C) 14.5%
D) None of the above

Question 30

Risk associated with unanticipated actions by the host country government or the courts is called:

A) Economic risk
B) Transaction risk
C) Political risk
D) None of the above

Question 31

Purchasing power parity implies that any differences in inflation rates will be offset by a change in the exchange rate.

Question 32

Big Mac exchange rate provides official exchange rate quotes for different currencies.

Question 33

The spot rate = US$0.8543/A$; the one year forward rate = US$0.8475/A$. A US exporter denominates its exports to Australia in A$ and expects to receive A$600,000 in one year. What will the value of these exports in one year in US$ given that the firm executes a forward hedge? (Ignore transaction costs)

A) US$508,500
B) US$512,580
C) US$707,965
D) None of the above

Question 34

Which development in recent years has had the greatest impact on international managers?

A) Capital movement
B) Demographics
C) Political unrest
D) Information technology

Question 35

Spot rate = BP 0.5024/US$; 3-month forward rate = BP 0.5040/US$. TE Company is expecting a payment of BP 100 million in 3 months. If the firm hedges this transaction in forward market what is the US$ amount it will receive in three months? (Ignore transaction costs)

A) US$198.41 million
B) US$199.04 million
C) US $50.40 million
D) None of the above

Question 36

XJ Company from the USA is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, -50; Year 1, 25; Year 2, 35; Year 3, 40. The discount rate in BP is 14% and the discount rate in the US$ is 12%. The spot rate is US$1.99/BP. Calculate the NPV of the project in BP:

A) +28.69
B) +25.86
C) +42.67
D) None of the above

Question 37

The country with the highest score is:

A) Luxembourg
B) Netherlands
C) Finland
D) United Kingdom

Question 38

If the US dollar interest rate is 4% and the peso interest rate is 7%, what is the likely 1 year forward rate if the spot dollar - peso rate is 11?

A) 11.54
B) 11.32
C) 10.68
D) 10.23

Question 39

Currency risk exposure can be categorized as:

A) Transactions exposure
B) Economic exposure
C) Translation exposure
D) All of the above

Question 40

The dollar interest rate is 6%, and the Swiss franc interest rate is 4%. If the required rate
Of return for a project in Switzerland is 15%, calculate the required rate of return in the US for a similar project:

A) 17.2%
B) 12.8%
C) 15%
D) None of the above

Question 41

Briefly explain the expectations theory of forward exchange rates.

Question 42

Briefly explain the term economic exposure.

Question 43

For a project's cost of capital measured in Swiss francs, we use Swiss interest rates and beta with respect to Swiss market.

Question 44

Project financing is often designed to reduce a foreign government's incentive to expropriate capital investment.

Question 45

Briefly explain the term transaction exposure.

Question 46

When a firm ignores currency risk and discounts dollar cash flows using dollar cost of capital, it is implicitly assuming that the currency risk is hedged.

Question 47

Briefly explain the different types of currency markets.

Question 48

Briefly explain the foreign exchange market.

Question 49

The cost of hedging foreign currency risk is the difference between the forward rate and the expected spot rate.

Question 50

For estimating the cash flows of a foreign project, there is no need to forecast exchange rates for the life of the project.

Question 51

The strength of a currency is directly related to its interest rates and inflation expectations.

Question 52

Briefly explain why no currency forecast is needed when estimating the cash flows from an international project?

Question 53

The terms "transaction exposure" and "economic exposure" are two names for the same
"foreign exchange risk."

Question 54

If the price of a Big Mac in the US is $2.56 and in Japan it is Yens 300, then the implied exchange rate is Yens 117.18/US$.

Question 55

Briefly explain the concept of purchasing power parity.

Question 56

The risk that an unfriendly government might expropriate a firm's assets is called political risk.

Question 57

When a currency gets stronger, that forward rate of the currency must have increased against all currencies.

Question 58

Briefly explain the concept of interest rate parity.

Question 59

The cost of hedging foreign currency risk is the difference between the forward rate and today's spot rate.

Question 60

In general, the countries with the highest interest rates also had the highest inflation rates.

Question 61

Briefly explain the term political risk.

Question 62

What is wrong with the following news report? "Today the dollar ended the trading session stronger."

Question 63

Briefly show how the cost of capital is calculated for international projects using CAPM (capital asset pricing model).