Deck 18: International Aspects of Financial Management

Question 1

The London Interbank Offer Rate (LIBOR)is the rate that most _____ banks charge one another for overnight _____ loans.

A)international;Eurodollar
B)domestic;US dollar
C)international;gold bullion
D)foreign;gold bullion
E)domestic;Eurodollar

Answer 1

international;Eurodollar

Question 2

Rembrandt,Samurai,Yankee,Matilda and Bulldog are all names given to:

A)foreign bonds
B)domestic interest rates
C)domestic bonds
D)foreign interest rates
E)Eurobonds

Answer 2

foreign bonds

Question 3

Exchange rate risk is defined by your textbook as the risk related to:

A)trading in the foreign exchange markets with the sole purpose of arbitrage
B)investing in a foreign currency for the sole purpose of profiting on rate fluctuations
C)having international operations in a world where relative currency values fluctuate
D)trading among three or more currencies within a single day
E)holding a foreign currency as an investment over a period of time

Answer 3

having international operations in a world where relative currency values fluctuate

Question 4

Suppose that you could buy 27 Russian roubles or 108 Japanese yen last year for US$1.Today,US$1 will buy you 28 roubles or 104 yen.Over the past year:

A)the US dollar appreciated against both the rouble and the yen
B)the US dollar depreciated against the Russian rouble
C)the Japanese yen depreciated against the US dollar
D)the US dollar appreciated against the Japanese yen
E)the Russian rouble depreciated against the US dollar

Question 5

Which one of the following is the best universal definition of an exchange rate?

A)number of foreign dollars that can be sold for every one US dollar paid
B)the number of units of a currency that were originally required to obtain one euro when the country adopted the euro as their official currency
C)the price,which includes the government fee,to purchase a country's currency
D)the price of a country's currency expressed in terms of that country's currency unit
E)price of one country's currency expressed in terms of another country's currency

Question 6

The concept that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

A)exchange rate equilibrium
B)exchange rate parity
C)interest rate equilibrium
D)foreign equalisation
E)interest rate parity

Question 7

Most currency prices are quoted in:

A)UK pounds
B)Japanese yen
C)US dollars
D)Swiss francs
E)euros

Question 8

The following rates are given:
1 euro = 1.90 Australian dollars (AUD)
1 euro = 1.90 Swiss francs (CHF)
1 AUD = 0.97 CHF
If you have 100 000 Australian dollars available,how much profit can you earn using the triangle arbitrage?

A)A$1900
B)A$ nil
C)A$3093
D)A$3800
E)A$3000

Question 9

The concept that exchange rates vary to keep purchasing power constant among currencies is referred to as:

A)universal parity
B)exchange rate equilibrium
C)purchasing power equilibrium
D)exchange rate parity
E)purchasing power parity

Question 10

Currently,you can exchange US$1 for £0.53.Assume that the average inflation rate in the US over the next four years will be 4 per cent annually as compared to 5 per cent in the UK Based on relative purchasing power parity,you should expect the _____ over the next 4 years.

A)US dollar to appreciate against all currencies
B)British pound to appreciate against all currencies
C)both the US dollar and the British pound to appreciate against all other currencies
D)US dollar to appreciate against the British pound
E)British pound to appreciate against the US dollar

Question 11

The market where euros,pesos,dollars,and pounds are traded is referred to as which one of the following?

A)ADR market
B)LIBOR market
C)euromarket
D)foreign exchange market
E)gilt market

Question 12

A spot trade is defined as an agreement to exchange currencies based on the exchange rate _____ for settlement within _____ business day(s).

A)today;3
B)one year from today;2
C)today;2
D)one year from today;3
E)today;1

Question 13

The current spot rate between the UK and the US is £0.5418 per US$1.The expected inflation rate in the US is 2.5 per cent.The expected inflation rate in the UK is 4.0 per cent.If relative purchasing power parity exists,the exchange rate 3 years from now will be:

A)£0.5927/$1
B)£0.5623/$1
C)£0.5665/$1
D)£0.5995/$1
E)£0.5601/$1

Question 14

A New Zealand company has total assets valued at A$14 000 000,located in Western Australia.This valuation did not change from last year.Last year the exchange rate was A$0.92 per 1 NZ$.Now the exchange rate is A$0.88 per 1 NZ$.By what amount did the assets change in value on the company's New Zealand financial statement?

A)NZ$909 090
B)NZ$560 000
C)NZ$589 836
D)NZ$478 231
E)NZ$691 700

Question 15

Translation exposure to exchange rate risk is primarily associated with the:

A)daily exchange of a firm's cash receipts
B)daily fluctuations in the exchange rate and a firm's accounts payable
C)actual operations of a firm
D)accounting for a firm's overseas ventures
E)cash investments of a firm

Question 16

The spot rate for the pound is £0.53 = AU$1 and for the euro is €0.78 = AU$1.What is the £/€ cross rate?

A)£1.4723/€1
B)£0.6795/€1
C)£1.4717/€1
D)£0.6787/€1
E)£0.6775/€1

Question 17

A vintage Parker,type 65,fountain pen from 1968,popular among collectors,costs 105 British pounds in the United Kingdom,while you can buy the identical pen for 229 Australian dollars in a shop in Melbourne.According to purchasing power parity,the AUD/GBP exchange rate is:

A)A$2.40/£1
B)A$2.18/£1
C)A$2.29/£1
D)A$1.05/£1
E)A$0.46/£1

Question 18

You are given the exchange rate between the US dollar and the Canadian dollar.You are also given the exchange rate between the US dollar and the Mexican peso.What is the name given to the Canadian dollar per Mexican peso exchange rate derived from the information that was provided?

A)london Interbank rate
B)depositary rate
C)cross-rate
D)forward rate
E)swap rate

Question 19

The spot rate for euro is 0.5849 euros for one Australian dollar,and the one year forward rate is €0.5720 = A$1.The risk-free rate in the Eurozone is 4.10%.If interest rate parity exists,a one-year risk-free security is yielding ___ % per annum.

A)4.50%
B)6.36%
C)7.15%
D)5.12%
E)6.80%

Question 20

Eurobonds are best defined as international bonds issued in _____ and denominated in _____.

A)multiple countries;multiple currencies
B)a single country;a single currency
C)multiple countries;a single currency
D)euroland;euros
E)a single country;multiple currencies

Question 21

Which of the following are participants in the foreign exchange market?
I.importers,who pay for goods in foreign currencies
II.exporters,who receive payment in foreign currencies
III.domestic share brokers,who service local clients
IV.portfolio managers,who purchase foreign securities

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

Question 22

You have just agreed to a forward trade that will be settled six months from now.When will the exchange rate for this transaction be determined?

A)whenever the spot rate six months from today is known
B)six months from now
C)today
D)anytime you prefer within the next 6 months
E)three months from today because that is the half-way point

Question 23

Which one of the following states that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate?

A)arbitrage equilibrium
B)relative purchasing power parity
C)cross rate parity
D)interest rate parity
E)absolute purchasing power parity

Question 24

Which one of the following best describes an agreement you make today to exchange US dollars for British pounds three months from now?

A)forward trade
B)arbitrage transaction
C)eurocurrency transaction
D)cross-rate exchange
E)spot trade

Question 25

You have observed the following movements in exchange rates between the Australian dollar and the US Dollar:
Which one of the following statements is correct given this information?

A)You would have made a profit if you invested US$1000 in Australian dollars last week and then converted your money back to US dollars this week.Ignore any interest earnings.
B)The Australian dollar depreciated from last week to this week.
C)This week you can exchange one Australian dollar for $1.2077 US.
D)It is cheaper for an American to travel in Australia this week as compared to last week.
E)Last week,it took AUD$0.8078 to purchase US$1.

Question 26

Which one of the following is an example of the political risks associated with foreign operations?

A)changes in foreign tax laws
B)technological changes
C)exchange rate fluctuations
D)translation exposure to exchange rate risk
E)changes in relative wage rates between the home country and the foreign country

Question 27

You are planning a trip to the UK and plan on spending 3600 pounds.How many dollars will this trip cost you if the exchange rate per one Australian dollar is 0.6789 pounds?

A)$2444.04
B)$5302.70
C)$6044.04
D)$3892.16
E)$5890.01

Question 28

Which one of the following is the risk arising from changes in value caused by political actions?

A)LIBOR risk
B)cross-rate risk
C)translation risk
D)exchange rate risk
E)political risk

Question 29

An agreement to exchange currencies at some time in the future is referred to as which one of the following?

A)gilt
B)spot trade
C)forward exchange rate
D)hedge
E)forward trade

Question 30

Which one of the following statements is correct?

A)New Zealand uses the same currency as Australia and that is the A$.
B)Exchange rates are adjusted each morning and held constant until the next morning.
C)All of South America uses the peso as their currency.
D)The foreign exchange market is the largest financial market in the world.
E)The four most common currencies traded in the foreign exchange market are the US dollar,franc,euro,and peso.

Question 31

Which one of the following must be significantly eliminated if interest rate parity is to exist?

A)absolute purchasing power parity
B)short-run exposure to exchange rate risk
C)covered interest arbitrage opportunities
D)relative purchasing power parity
E)translation exposure

Question 32

Interest rate parity defines the relationships among which of the following?

A)real interest and inflation rates
B)real and nominal interest rates across countries
C)spot exchange rates,future exchange rates,interest rates,and inflation rates
D)spot exchange rates,forward exchange rates,nominal interest rates,and real interest rates
E)forward exchange rates,relative interest rates,and spot exchange rates

Question 33

Assume that P_E is the euro price of a product,P_AU is the Australian price of the identical product,and S₀ is the spot exchange rate,quoted as the amount of Euro per Australian dollar.Given this,which one of the following correctly expresses absolute purchasing power parity?

A)P_AU = S₀ + P_E
B)P_E = S₀ / P_AU
C)P_AU = S₀ ´ P_E
D)P_E = S₀ ´ P_AU
E)P_AU = S₀ / P_E

Question 34

Short-run exposure to exchange rate risk is best illustrated by which one of the following?

A)change in book value when the market value of an asset remains constant
B)unrealised foreign exchange gains
C)daily fluctuations in the spot rate
D)changes in relative economic conditions between two countries
E)increases in the forward rate as the time to settlement increases

Question 35

Relative purchasing power parity is based on the principle that the expected percentage change in the exchange rate between two countries is equal to which one of the following?

A)average inflation rate of the two countries
B)difference between the two countries' average inflation and interest rates
C)difference in the inflation rates of the two countries
D)difference in the risk-free interest rates in the two countries
E)average interest rate in the two countries

Question 36

Which one of the following terms is defined as having international operations in a world where relative currency values change?

A)exchange rate risk
B)absolute purchasing power parity
C)political risk
D)relative purchasing power parity
E)interest rate parity

Question 37

Which one of the following is the agreed-upon exchange rate that is to be used when currencies are exchanged at some point in the future based on an agreement made today?

A)ADR rate
B)cross-rate
C)forward exchange rate
D)spot rate
E)London Interbank Offer Rate

Question 38

Which one of the following is the best definition of Eurocurrency?

A)any paper money used by a country that has adopted the euro as its common currency
B)both paper and coins officially adopted under the euro system of coinage
C)money deposited in a financial institution outside of the country whose currency is involved
D)US dollars owned by any country which has adopted the euro as its currency
E)any exchange of funds between two countries that have adopted the euro as their official currency

Question 39

The exchange rate is 1.14 Swiss francs per Australian dollar.How many Australian dollars are needed to purchase 2500 Swiss francs?

A)$2192.98
B)$2646.64
C)$2850.00
D)$2021.21
E)$2918.46

Question 40

Assume a canned soft drink costs $1 in the US and $1.30 in Canada.At the same time,the currency per US dollar is C$1.30.Which one of the following conditions exists in this situation?

A)interest rate parity
B)relative purchasing power parity
C)equal spot and forward rates
D)absolute purchasing power parity
E)translation exposure

Question 41

Ozzie Nuts Pty Ltd import walnuts from California at a landed cost of US$25.00 per case and sell 10 000 cases per year at A$30.00.Currently the exchange rate is AUD$1 = USD$0.9000 and the company's gross profit would be A$22 222 for a year at this exchange rate.Experts are predicting that the exchange rate will fall to USD$0.8300.If the experts are correct,what will happen to Ozzie Nuts' full year gross profit if the selling price remains unchanged?

A)Gross profit will not change.
B)Gross profit will increase by A$23 428.
C)Gross profit will fall to A$1205.
D)The company will make a loss on the transactions.
E)The company will continue to make a profit.

Question 42

The spot rate on the Canadian dollar is A$1 = C$1.23.Interest rates in Canada are expected to average 4.2 per cent while they are anticipated to be 3.3 per cent in Australia.What is the expected exchange rate three years from now?

A)C$1.2483
B)C$1.2108
C)C$1.2760
D)C$1.1971
E)C$1.2635

Question 43

The current spot rate between the UK and Australia is AUD$1 = £0.6764.The expected inflation rate in Australia is 1.8 per cent.The expected inflation rate in the UK is 3.4 per cent.If relative purchasing power parity exists,what will the exchange rate be 2 years from now?

A)£0.5331
B)£0.6549
C)£0.6982
D)£.0.6872
E)£.0.6656

Question 44

A particular set of golf clubs in the US costs $990.According to absolute purchasing power parity,what should the identical set of clubs cost in Australia when the spot rate is AUD$1 = 0.9125?

A)$1084.93
B)$993.83
C)$903.38
D)$1000.00
E)$1200.00

Question 45

Currently,you can exchange €100 for A$132.66.The inflation rate in Europe is expected to be 3.1 per cent as compared to 3.6 per cent in Australia.Assuming that relative purchasing power parity exists,what should the exchange rate be 5 years from now?

A)€0.7351
B)€0.7367
C)€0.7298
D)€0.7405
E)€0.7423

Question 46

The current spot rate between Australia and the US is US$0.6789 per AUD$1.The expected inflation rate in the US is 2.1 per cent.The expected inflation rate in Australia is 2.6 per cent.If relative purchasing power parity exists,what will the exchange rate be next year?

A)AUD$1 = US$1.5601
B)AUD$1 = US$0.6755
C)AUD$1 = US$1.4804
D)AUD$1 = US$0.6410
E)AUD$1 = US$0.7110

Question 47

Currently,you can exchange A$100 for €75.42.The inflation rate in Europe is expected to be 3.8 per cent as compared to 2.1 per cent in Australia.Assuming that relative purchasing power parity exists,what should the exchange rate be 4 years from now?

A)€0.7670
B)€0.8068
C)€0.7414
D)€0.7042
E)€0.7778

Question 48

Your favourite golf shoes cost US$89 in the US while the identical shoes cost A$110.00 in Australia.According to purchasing power parity,what is one Australian dollar worth?

A)US$1.3305
B)US$1.1236
C)US$0.8091
D)US$0.8901
E)US$1.2360