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Exam 18: International Aspects of Financial Management

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Question 41

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The spot rate on the Hong Kong dollar is 7.75. Interest rates in Hong Kong are expected to be 6 percent while they are anticipated to be 2.8 percent in the U.S. What is the expected exchange rate two years from now?

A) HK$8.0000
B) HK$8.1808
C) HK$8.2539
D) HK$8.3778
E) HK$8.4141

F) A) and E)
G) D) and E)

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Question 42

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Explain how the forward exchange market can help reduce short-run exposure to exchange rate risk.

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Short-run exposure to exchange rate risk...

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Question 43

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What is LIBOR and what role does it play in international finance?

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

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?

The spot rate is SF1.1426 = $1. A hotel room in a resort area of Switzerland costs SF385. Based on absolute purchasing power parity, what should an identical room in the U.S. cost?

The 1-year forward rate between the U.S. and Japan is ¥122.47 = $1. A 1-year risk-free security in Japan is yielding 5.3 percent while it is 4.6 percent in the U.S. Assume interest rate parity exists. What is the spot rate between the U.S. and Japan?

Assume you can exchange $1 for either £1.0 or €0.50 in the U.S. In the London market, you can exchange £1 for €0.52. This situation creates an opportunity to profit immediately from which one of the following?

Identify four parties that have a demand for U.S. dollars and explain why they wish to obtain those dollars.

Assume that is the euro price of a product, is the U.S. price of the identical product, and is the spot exchange rate, quoted as the amount of foreign currency per dollar. Given this, which one of the following correctly expresses absolute purchasing power parity?

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

Which one of the following correctly matches a country with its currency?

Which one of the following is the suggested method of handling exchange rate risk for a large, multinational firm headquartered in the U.S.? Assume the operations in each country represent a different division of the firm.

The spot rate between Japan and the U.S. is ¥100.37 = $1, while the 1-year forward rate is ¥99.97 = $1. A 1-year risk-free security in the U.S. is yielding 3.8 percent. What is the rate of return on a 1-year risk-free security in Japan assuming that interest rate parity exists?

The spot rate for the pound is £0.6789 = $1 and for the Canadian dollar is C$1.2381 = $1. What is the £/C$ cross rate?

You are debating between spending a week in Brazil or a week in Chile. You've estimated the cost of the Brazilian trip at 56,300 reals and the Chilean trip at 13.6 million pesos. The currency per U.S. dollar is 2.2212 reals and 581.73 pesos. If you prefer the less expensive trip, as measured in U.S. dollars, you should travel to _____ because you can save _____.

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

The treasurer of a major U.S. firm has $12 million to invest for 3 months. The interest rate in the U.S. is 0.42 percent per month. The interest rate in Great Britain is 0.52 percent per month. The spot exchange rate is £0.70, and the three-month forward rate is £0.71. Ignoring transaction costs, in which country would the treasurer want to invest the company's funds? Why?

A good steak dinner in the U.S. costs $49 while the exact meal costs 660 pesos across the border in Mexico. Based on purchasing power parity, what is the implied Peso/$ exchange rate?

The spot rate between the U.K. and the U.S. is £0.6789 = $1, while the 1-year forward rate is £0.6782 = $1. The risk-free rate in the U.K. is 3.1 percent. The risk-free rate in the U.S. is 2.9 percent. How much profit can you earn on a loan of $2,000 by utilizing covered interest arbitrage?