Deck 22: International Corporate Finance

Question 1

Even though a project may generate foreign currency cash flows,the firm cares about the home currency value of the project.

Answer 1

True

Question 2

Why do purely domestic businesses,with no international operations and no imports or exports,still need to be aware of FX markets?

Answer 2

As the value of the home currency appreciates or depreciates relative to other currencies,it affects potential competition from foreign firms.

Question 3

A ________ is written between a firm and a bank and it fixes the currency exchange rate for a transaction that will occur at a future date.

A) currency forward contract
B) currency options contract
C) currency call option
D) currency put option
E) currency loan contract

Answer 3

currency forward contract

Question 4

One British pound can be purchased for $1.65.What is the exchange rate in terms of pounds per dollar?

A) 0.551
B) 0.606
C) 0.626
D) 0.645
E) 0.652

Question 5

At current exchange rates it takes 0.1475 Canadian dollars to buy Chinese yuan (CNY),and 0.6052 Canadian dollars to buy one Brazilian real (BRL).What must the yuan/real exchange rate be in order to eliminate arbitrage opportunities?

A) 0.0893 CNY/BRL
B) 11.2023 CNY/BRL
C) 0.2437 CNY/BRL
D) 4.1031 CNY/BRL
E) 6.7797 CNY/BRL

Question 6

The ________ rate is a price for a currency denominated in another currency.

A) marginal
B) foreign exchange
C) interest
D) reversion
E) conversion

Question 7

Multinational firms often use currency forward contracts and options to hedge foreign exchange rate risk.

Question 8

A ________ exchange rate means that the rate changes constantly depending on the quantity supplied and demanded for the currency.

A) fixed
B) floating
C) banded
D) pegged
E) spot

Question 9

IBM enters into a forward contract to purchase 200,000 euros at a rate of 1.50 USD/EUR one year from today.If the spot exchange rate is 2 USD/EUR one year later,what is the dollar amount that IBM must pay to receive the euros?

A) $200,000
B) $225,000
C) $400,000
D) $300,000
E) $250,000

Question 10

Firms that have a considerable amount of earnings abroad do not face any risk from changes in exchange rates.

Question 11

You have just landed in Paris with $750 in your wallet.At the foreign exchange booth,you see that euros are being quoted at 1.34 CAD/EUR .How many euros can you exchange for your $750?

A) 1,005 euros
B) 559.70 euros
C) 750.00 euros
D) 179.56 euros
E) 641.64 euros

Question 12

One British pound can be purchased for $1.80.What is the exchange rate in terms of pounds per dollar?

A) 0.451
B) 0.491
C) 0.526
D) 0.556
E) 0.547

Question 13

The ________ market is where currencies are traded twenty-four hours a day and with a large turnover.

A) foreign exchange
B) bond
C) stock
D) interbank
E) derivatives

Question 14

Your firm needs to pay its British supplier 1,000,000 British pounds.If the exchange rate is 1.61 CAD/GBP,how many dollars will you need to pay the British supplier?

A) $1,610,000
B) $621,118
C) $385,787
D) $1,000,000
E) $1,320,000

Question 15

One British pound can be purchased for $1.90.What is the exchange rate in terms of pounds per dollar?

A) 0.451
B) 0.491
C) 0.526
D) 0.543
E) 0.551

Question 16

At current exchange rates it takes 1.3955 Canadian dollars to buy one euro (EUR),and 0.3188 Canadian dollars to buy one Malaysian ringgit (MYR).What must the euro/ringgit exchange rate be in order to eliminate arbitrage opportunities?

A) 0.2284 EUR/MYR
B) 0.4449 EUR/MYR
C) 4.3774 EUR/MYR
D) 2.2478 EUR/MYR
E) 0.1639 EUR/MYR

Question 17

Which two currencies account for more than half of all the trading volume in the foreign exchange market?

A) Euro and Chinese yuan
B) U.S. dollar and the British pound
C) Euro and the British pound
D) U.S. dollar and the euro
E) U.S. dollar and the Canadian dollar

Question 18

Hedging with currency options involves a commitment by a firm to buy currency at a fixed rate.

Question 19

The spot exchange rate is the rate at which one currency can be converted into another today.

Question 20

A ________ exchange rate is the rate that a firm can tie in for a future transaction date.

A) fixed
B) forward
C) floating
D) spot
E) pegged

Question 21

A ________ strategy replicates the forward contract by borrowing in one currency,converting to the other currency,and investing in the new currency.

A) cash-and-carry
B) futures
C) forward
D) foreign investment
E) covered interest

Question 22

Your firm will be importing a large order of its inputs from the United States in eight months and is concerned that the Canadian dollar might fall against the U.S.dollar over that time.To hedge your risk,you decide to enter into a currency forward contract to purchase 1.5 million USD at a rate of 0.9957 CAD/USD.If the spot exchange rate in 8 months' time ends up being 0.9673 CAD/USD,what is your gain or loss from hedging compared to remaining unhedged?

A) $0
B) $44,230
C) -$42,600
D) $42,600
E) -$44,230

Question 23

A Canadian importer needs 10 million U.S.dollars in September,and decides to buy a call option on the USD for September delivery.Suppose a call option on the USD with a September expiration and a strike price of 1.30 USD/CAD trades for 0.0515 CAD per call on 1 USD.If,by the September expiration date,the USD has appreciated to 1.25 USD/CAD,how much did the firm lose (in CAD)from hedging with the option,compared to remaining unhedged?

A) -$15,000
B) -$207,308
C) $0
D) -$307,692
E) -$500,000

Question 24

The spot exchange rate for the British pound is 0.65 GBP/CAD.The one-year interest rate in Canada is 5% and the one-year interest rate in Britain is 7%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

A) 0.646
B) 0.652
C) 0.662
D) 0.674
E) 0.631

Question 25

The one-year forward exchange rate is 40 INR/USD.If the one-year interest rate in the United States is 4% and in India is 7%,what is the spot exchange rate so as to preclude arbitrage?

A) 38.88
B) 39.01
C) 39.23
D) 39.32
E) 39.46

Question 26

A Brazilian firm owes you $2,000,000,payable in three months,however,they insist on paying in Brazilian Reals.The current spot exchange rate is 0.59305 CAD/BRL.The three-month forward exchange rate is 0.61255 CAD/BRL.How many Real should you demand in a forward contract to receive $2,000,000 in three months to hedge the exchange rate risk?

A) 1,186,100 Real
B) 3,372,397 Real
C) 3,265,040 Real
D) 1,225,100 Real
E) 2,450,721 Real

Question 27

A Canadian importer needs $500,000 U.S.dollars in September,and decides to buy a call option on the USD for September delivery.Suppose a call option on the USD with a September expiration and a strike price of 1.20 USD/CADtrades for 0.0325 CAD per call on 1 USD.If,by the September expiration date,the USD depreciates to 1.23 USD/CAD,how much did the firm lose (in CAD)from hedging with the option,compared to remaining unhedged?

A) $15,000
B) $31,250
C) $10,163
D) $26,413
E) $16,250

Question 28

The one-year forward exchange rate is 45 INR/USD.If the one-year interest rate in the United States is 5% and in India is 8%,what is the spot exchange rate so as to preclude arbitrage?

A) 43.23
B) 43.75
C) 43.99
D) 44.32
E) 44.51

Question 29

IBM enters into a forward contract to purchase 100,000 euros at a rate of 1.60 USD/EUR one year from today.If the spot exchange rate is 2 USD/EUR one year later,what is the dollar amount that IBM must pay to receive the euros?

A) $100,000
B) $160,000
C) $200,000
D) $300,000
E) $240,000

Question 30

The importer-exporter dilemma is caused by

A) changing interest rates.
B) increases in inflation.
C) fluctuating exchange rates.
D) deflation.
E) regulatory differences.

Question 31

________ asserts that because a forward contract and a cash-and-carry strategy accomplish the same conversion,they must result in the same exchange rate.

A) Covered interest parity
B) Forward premium puzzle
C) Forward discount puzzle
D) Put-call parity
E) Pecking order theory

Question 32

Your firm will be importing a large order of its inputs from the United States in six months and is concerned that the Canadian dollar might fall against the U.S.dollar over that time.To hedge your risk,you decide to enter into a currency forward contract to purchase 500,000 USD at a rate of 1.0232 CAD/USD.If the spot exchange rate in six months' time ends up being 0.9967 CAD/USD,what is your gain or loss from hedging compared to remaining unhedged?

A) $0
B) $12,992
C) $13,250
D) -$13,250
E) -$12,992

Question 33

If a firm hedges a future purchase of euros by purchasing a call option,the firm ________ the potential cost but will benefit if the euro ________.

A) fixes, depreciates
B) fixes, appreciates
C) caps, depreciates
D) caps, appreciates
E) eliminates, depreciates

Question 34

The one-year forward exchange rate is 50 INR/USD.If the one-year interest rate in the United States is 5% and in India it is 8%,what is the spot exchange rate so as to preclude arbitrage?

A) 47.23
B) 48.61
C) 48.99
D) 49.32
E) 49.12

Question 35

Your firm will be importing a large order of its inputs from the United States in three months and is concerned that the Canadian dollar might fall against the U.S.dollar over that time.To hedge your risk,you decide to enter into a currency forward contract to purchase 750,000 USD at a rate of 1.0114 CAD/USD.If the spot exchange rate in 3 months' time ends up being 1.0346 CAD/USD,what is your gain or loss from hedging compared to remaining unhedged?

A) $0
B) $17,400
C) $16,629
D) -$17,400
E) -$16,629

Question 36

The spot exchange rate for the British pound is 0.5 GBP/CAD.The one-year interest rate in Canada is 4% and the one-year interest rate in Britain is 5%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

A) 0.606
B) 0.612
C) 0.617
D) 0.505
E) 0.631

Question 37

IBM enters into a forward contract to purchase 200,000 euros at a rate of 1.90 USD/EUR one year from today.If the spot exchange rate is 2 USD/EUR one year later,what is the dollar amount that IBM must pay to receive the euros?

A) $300,000
B) $325,000
C) $380,000
D) $400,000
E) $240,000

Question 38

A firm wants to hedge a potential transaction but is also concerned about the possibility that it may not take place.In this case it is better to hedge potential risks using

A) options.
B) forwards.
C) futures.
D) a cash-and-carry strategy.
E) the spot exchange rate.

Question 39

A Canadian importer needs 1 million U.S.dollars in September,and decides to buy a call option on the USD for September delivery.Suppose a call option on the USD with a September expiration and a strike price of 1.25 USD/CAD trades for 0.0215 CAD per call on 1 USD.If,by the September expiration date,the USD has appreciated to 1.20 USD/CAD,how much did the firm gain (in CAD)from hedging with the option,compared to remaining unhedged?

A) $11,833
B) $50,000
C) $28,500
D) $21,500
E) $33,333

Question 40

The spot exchange rate for the British pound is 0.6 GBP/CAD.The one-year interest rate in Canada is 5% and the one-year interest rate in Britain is 6%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

A) 0.606
B) 0.612
C) 0.617
D) 0.624
E) 0.631

Question 41

A(n)________ market is one where an investor can exchange any currency in any amount at the spot rate or forward rate and is free to purchase or sell any security in any amount in any country at their current market prices.

A) financial
B) limit order
C) internationally integrated capital
D) over-the-counter

Question 42

With internationally integrated capital markets,the value of an investment depends on the currency used in the analysis.

Question 43

A Canadian exporter will receive $1.5 million USD in September,and decides to buy a put option on the USD for September delivery.Suppose a put option on the USD with a September expiration and a strike price of 1.275 USD/CADtrades for 0.0115CAD per put on 1 USD.If,by the September expiration date,the USD has appreciated to 1.250 USD/CAD,how much did the firm lose (in CAD)from hedging with the option,compared to remaining unhedged?

A) $0
B) $54,750
C) $20,250
D) $17,250
E) $37,500

Question 44

A Canadian exporter will receive $1 million USD in September,and decides to buy a put option on the USD for September delivery.Suppose a put option on the USD with a September expiration and a strike price of 1.225 USD/CADtrades for 0.0225 CAD per put on 1 USD.If,by the September expiration date,the USD has depreciated to 1.275 USD/CAD,how much did the firm gain (in CAD)from hedging with the option,compared to remaining unhedged?

A) $11,833
B) $50,000
C) $9,513
D) $32,013
E) $22,500

Question 45

What is the importer-exporter dilemma?

Question 46

Why do firms prefer forward contracts rather than the cash-can-carry strategy?

Question 47

A Canadian firm is planning to make an investment in Japan.The firm estimates that the project will generate a single cash flow of 10 million JPY after one year.If the one year forward exchange rate is 105 JPY/CAD,and the Canadian cost of capital is 7.5%,what is the PV of the project cash flow?

A) $112,994
B) $94,351
C) $102,381
D) $88,594
E) $95,238

Question 48

A Canadian exporter will receive $10 million USD in September,and decides to buy a put option on the USD for September delivery.Suppose a put option on the USD with a September expiration and a strike price of 1.25 USD/CADtrades for 0.0115CAD per put on 1 USD.If,by the September expiration date,the USD has depreciated to 1.26 USD/CAD,how much did the firm lose (in CAD)from hedging with the option,compared to remaining unhedged?

A) -$51,508
B) -$63,492
C) -$115,000
D) $0
E) -$15,000

Question 49

Consider the following equation: S × =
The term in this equation is

A) the risk-free rate for a foreign investor.
B) the risk-free rate for a Canadian investor.
C) the appropriate cost of capital from the standpoint of a foreign investor.
D) the appropriate cost of capital from the standpoint of a Canadian investor.
E) the forward exchange rate.

Question 50

A currency forward contract passes exchange rate risk from a firm to the bank that has written the forward contract.Why is the bank willing to bear this risk?

Question 51

A Canadian firm is planning to make an investment in Europe.The firm estimates that the project will generate a single cash flow of 200,000 euros after one year.If the one year forward exchange rate is 1.34 CAD/EUR,and the Canadian cost of capital is 6%,what is the PV of the project cash flow?

A) $252,830
B) $158,209
C) $140,805
D) $188,679
E) $268,000

Question 52

What is covered interest parity?

Question 53

Consider the following equation: S × =
The term in this equation is

A) the appropriate cost of capital from the standpoint of a Canadian investor.
B) the risk-free rate for a foreign investor.
C) the risk-free rate for a Canadian investor.
D) the appropriate cost of capital from the standpoint of a foreign investor.
E) the forward exchange rate.

Question 54

Use the information for the question(s) below.
You are a Canadian investor who is trying to calculate the present value (PV) of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = 1.8839 CAD/GBP and the forward rate is F₁ = 1.8862 CAD/GBP. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate GBP discount rate is 5.24%.
The present value (PV)of the £5 million cash inflow computed by first discounting the pounds and then converting into dollars is closest to:

A) $8,961,420
B) $8,950,495
C) $8,954,615
D) $8,943,695
E) $9,004,167

Question 55

What are the three factors that drive the supply and demand for each currency?

Question 56

Consider the following equation:
S × =
The term F in this equation is

A) the future spot exchange rate.
B) the current spot exchange rate.
C) the amount of foreign currency.
D) the forward exchange rate.
E) the foreign interest rate.

Question 57

Why might firms prefer hedging with options rather than forward contracts?

Question 58

Consider the following equation: S × =
The term S in this equation is

A) the forward exchange rate.
B) the amount of foreign currency.
C) the future spot exchange rate.
D) the current spot exchange rate.
E) the domestic interest rate

Question 59

What is a cash-and-carry strategy?

Question 60

A Canadian firm is planning to make an investment in the UK.The firm estimates that the project will generate a single cash flow of 1 million GBP after one year.If the one year forward exchange rate is 2.12 CAD/GBP,and the Canadian cost of capital is 5.4%,what is the PV of the project cash flow?

A) $2.12 million
B) $2.01 million
C) $447,531
D) $497,170
E) $948,767

Question 61

Use the information for the question(s) below.
You are a Canadian investor who is trying to calculate the present value (PV) of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = 1.8839 CAD/GBP and the forward rate is F₁ = 1.8862 CAD/GBP. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate GBP discount rate is 5.24%.
The present value (PV)of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:

A) $8,950,495
B) $8,954,615
C) $8,943,695
D) $8,961,420
E) $9,004,167

Question 62

What are internationally integrated capital markets?

Question 63

Canadian tax liabilities are ________ until the foreign subsidiary profits are repatriated to Canada.

A) not incurred
B) incurred no matter what
C) accrued
D) increased
E) decreased

Question 64

Luther Industries,a Canadian firm,is considering an investment in Japan.The dollar cost of equity for Luther is 12%.The risk-free interest rates on dollars and yen are rCAD = 5.5% and rJPY = 1.5%,respectively.Luther industries is willing to assume that capital markets are internationally integrated.Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates.The yen cost of equity for Luther Industries is closest to:

A) 14.0%
B) 12.3%
C) 7.8%
D) 18.5%
E) 9.3%

Question 65

Suppose the WACC for a Canadian company is 7.6%,and the Canadian risk-free interest rate is 4%.If the European risk-free interest rate is 2.5%,what is the company's European WACC?

A) 6%
B) 6.1%
C) 9.1%
D) 9.2%
E) 7.6%

Question 66

Use the information for the question(s) below.
KT Enterprises, a Canadian import-export trading company, is considering its international tax situation. Currently KT's Canadian tax rate is 35%. KT has significant operations in both Japan and Ireland. In Japan, the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%. In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%. KT's profits, which are fully and immediately repatriated, and foreign taxes paid for the current year are shown here (in millions):

The amount of the taxes paid in dollars for the Japanese operations is closest to:

A) $29.5 million
B) $5.1 million
C) $50.0 million
D) $20.5 million
E) $23.0 million

Question 67

Use the information for the question(s) below.
You are a Canadian investor who is trying to calculate the present value (PV) of a 15 million British pound cash inflow that will occur one year from now. The spot exchange rate is 1.5742 CAD/GBP and the forward rate is F₁ = 1.5682 CAD/GBP. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate British pound discount rate is 1.45%.
What is the present value of the pound cash inflow computed by first discounting the pounds and converting them into dollars?

A) $23,275,505
B) $23,186,792
C) $23,367,640
D) $23,278,575
E) $23,176,344

Question 68

Use the information for the question(s) below.
KT Enterprises, a Canadian import-export trading company, is considering its international tax situation. Currently KT's Canadian tax rate is 35%. KT has significant operations in both Japan and Ireland. In Japan, the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%. In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%. KT's profits, which are fully and immediately repatriated, and foreign taxes paid for the current year are shown here (in millions):

After the Japanese taxes are paid,the amount of the earnings before interest and after taxes in dollars from the Japanese operations is closest to:

A) $20.5 million
B) $29.5 million
C) $5.1 million
D) $50.0 million
E) $23.0 million

Question 69

The amount of taxes paid by a foreign subsidiary does not depend on the amount repatriated back to the home country.

Question 70

Use the information for the question(s) below.
KT Enterprises, a Canadian import-export trading company, is considering its international tax situation. Currently KT's Canadian tax rate is 35%. KT has significant operations in both Japan and Ireland. In Japan, the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%. In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%. KT's profits, which are fully and immediately repatriated, and foreign taxes paid for the current year are shown here (in millions):

After the Irish taxes are paid,the amount of the earnings before interest and after taxes in dollars from the Ireland operations is closest to:

A) $5.1 million
B) $20.5 million
C) $35.6 million
D) $29.5 million
E) $23.0 million

Question 71

Use the information for the question(s) below.
The current spot exchange rate, S, is 1.8862 CAD/GBP. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, rCAD, is 5.35% and the risk-free interest rate on pounds, rGBP, is 4.80%.
Using the covered interest parity condition,the calculated one-year forward rate F₁ is closest to:

A) 1.8568 CAD/GBP
B) 1.8764 CAD/GBP
C) 1.9161 CAD/GBP
D) 1.8961 CAD/GBP
E) 1.8842 CAD/GBP

Question 72

Use the information for the question(s) below.
You are a Canadian investor who is trying to calculate the present value (PV) of a 15 million British pound cash inflow that will occur one year from now. The spot exchange rate is 1.5742 CAD/GBP and the forward rate is F₁ = 1.5682 CAD/GBP. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate British pound discount rate is 1.45%.
What is the present value of the dollar cash inflow computed by first converting the pounds into dollars and then discounting the dollars?

A) $23,275,505
B) $23,186,792
C) $23,367,640
D) $23,278,575
E) $23,310,005

Question 73

Canadian tax policy requires Canadian corporations to pay taxes on their foreign income at the same rate as profits earned in Canada.

Question 74

Use the information for the question(s) below.
The current spot exchange rate, S, is 1.8862 CAD/GBP. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, rCAD, is 5.35% and the risk-free interest rate on pounds, rGBP, is 4.80%.
Using the covered interest parity condition,the calculated three-year forward rate F₃ is closest to:

A) 1.8568 CAD/GBP
B) 1.9161 CAD/GBP
C) 1.8961 CAD/GBP
D) 1.8764 CAD/GBP
E) 1.8842 CAD/GBP

Question 75

The Law of One Price asserts that we will obtain the same valuation of a project whether
(a)we use the domestic cost of capital of the domestic currency equivalent cash flows at the forward exchange rates or
(b)we use the corresponding foreign cost of capital and then convert the present value (PV)of the foreign currency value of the cash flows at the spot rate.

Question 76

Pooling of all foreign tax liabilities on earnings allows corporations to

A) reduce income.
B) repatriate income.
C) reduce their overall taxes.
D) increase their tax liabilities.
E) achieve economies of scale.

Question 77

Suppose the WACC for a Canadian company is 8%,and the Canadian risk-free interest rate is 2.5%.If the Japanese risk-free interest rate is 0.5%,what is the company's Japanese WACC?

A) 7.5%
B) 10.1%
C) 5.9%
D) 8.5%
E) 6%

Question 78

Suppose the WACC for a Canadian company is 6.1%,and the Canadian risk-free interest rate is 3%.If the U.S.risk-free interest rate is 1.4%,what is the company's U.S.WACC?

A) 7.5%
B) 7.8%
C) 4.7%
D) 4.5%
E) 7.6%

Question 79

If a foreign project is owned by a domestic corporation,managers and shareholders need to determine the home currency value of the foreign currency cash flows.

Question 80

________ is a term used to describe the transfer of profits from a foreign subsidiary to the home country.

A) Repatriation
B) Depreciation
C) Privatization
D) Reversion
E) Nationalization