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Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

A) True
B) False

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Which of the following statements is NOT CORRECT?


A) Any bond sold outside the country of the borrower is called an international bond.
B) Foreign bonds and Eurobonds are two important types of international bonds.
C) Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
D) The term Eurobond applies only to foreign bonds denominated in U.S. currency.
E) A Eurodollar is a U.S. dollar deposited in a bank outside the U.S.

F) A) and D)
G) B) and C)

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Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar. Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of return to the Swiss investor?


A) -7.93%
B) -7.13%
C) -6.42%
D) -5.78%
E) -5.20%

F) A) and B)
G) C) and E)

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Suppose one British pound can purchase 1.82 U.S. dollars today in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days?


A) $1.4860
B) $1.6511
C) $1.8346
D) $2.0384
E) $2.2422

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

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D

A currency trader observes the following quotes in the spot market: 1 U) S. dollar = 122 Japanese yen 1 British pound = 2.25 Swiss francs 1 British pound = 1.65 U.S. dollars Given this information, how many yen can be purchased for 1 Swiss franc?


A) 0.8505
B) 0.8723
C) 0.8947
D) 0.9170
E) 0.9400

F) B) and D)
G) All of the above

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C

Currently, a U.S. trader notes that in the 6-month forward market, the Japanese yen is selling at a premium (that is, you receive more dollars per yen in the forward market than you do in the spot market) , while the British pound is selling at a discount. Which of the following statements is CORRECT?


A) If interest rate parity holds, 6-month interest rates should be the same in the U.S., Britain, and Japan.
B) If interest rate parity holds among the three countries, the United States should have the highest 6-month interest rates and Japan should have the lowest rates.
C) If interest rate parity holds among the three countries, Britain should have the highest 6-month interest rates and Japan should have the lowest rates.
D) If interest rate parity holds among the three countries, Japan should have the highest 6-month interest rates and Britain should have the lowest rates.
E) If interest rate parity holds among the three countries, the United States should have the highest 6-month interest rates and Britain should have the lowest rates.

F) A) and B)
G) B) and D)

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The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

A) True
B) False

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If one U.S. dollar sells for 0.60 British pound, how many dollars should one British pound sell for?


A) 1.0935
B) 1.2150
C) 1.3500
D) 1.5000
E) 1.6667

F) A) and C)
G) A) and B)

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E

If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will


A) appreciate against the U.S. dollar.
B) depreciate against the U.S. dollar.
C) remain unchanged against the U.S. dollar.
D) appreciate against other major currencies.
E) appreciate against the dollar and other major currencies.

F) B) and C)
G) A) and C)

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Suppose that currently, 1 British pound equals 1.98 U.S. dollars and 1 U.S. dollar equals 1.02 Swiss francs. How many Swiss francs are needed to purchase 1 pound?


A) 1.9691
B) 2.0196
C) 2.0701
D) 2.1218
E) 2.1749

F) C) and D)
G) A) and B)

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Suppose one year ago, Hein Company had inventory in Britain valued at 240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the U.S. dollar gain or loss in inventory value as a result of the change in exchange rates?


A) -$38,880.00
B) -$43,200.00
C) -$47,520.00
D) -$52,272.00
E) -$57,499.20

F) B) and E)
G) A) and B)

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In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements is most CORRECT?


A) The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
B) The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
C) The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day forward market.
D) The yen-dollar exchange rate in the 180-day forward market equals the yen-dollar exchange rate in the 90-day spot market.
E) The relationship between spot and forward interest rates cannot be inferred.

F) D) and E)
G) None of the above

Correct Answer

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Suppose hockey skates sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.71 U.S. dollar. If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States?


A) $60.39
B) $67.10
C) $74.55
D) $82.01
E) $90.21

F) A) and D)
G) C) and D)

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When the value of the U.S. dollar appreciates against another country's currency, we may purchase more of the foreign currency with the U.S. dollar.

A) True
B) False

Correct Answer

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Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 0.64 euro. What is the cross rate of Swiss francs to euros? (In other words, how many Swiss francs are needed to purchase one euro?)


A) 1.9828
B) 2.2031
C) 2.4234
D) 2.6658
E) 2.9324

F) B) and D)
G) B) and C)

Correct Answer

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A currency trader observes the following quotes in the spot market: 1 U) S. dollar = 10.875 Mexican pesos 1 British pound = 6.205 Danish krone 1 British pound = 1.65 U.S. dollars Given this information, how many Mexican pesos can be purchased for 1 Danish krone?


A) 2.7490
B) 2.8195
C) 2.8918
D) 2.9641
E) 3.0382

F) B) and C)
G) C) and D)

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A Eurodollar is a U.S. dollar deposited in a bank outside the United States.

A) True
B) False

Correct Answer

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Multinational financial management requires that


A) the effects of changing currency values be included in financial analyses.
B) legal and economic differences need not be considered in financial decisions because these differences are insignificant.
C) political risk should be excluded from multinational corporate financial analyses.
D) traditional U.S. and European financial models incorporating the existence of a competitive marketplace not be recast when analyzing projects in other parts of the world.
E) cultural differences need not be accounted for when considering firm goals and employee management.

F) C) and D)
G) All of the above

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Suppose in the spot market 1 U.S. dollar equals 1.75 Canadian dollars. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%) . 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market? In other words, how many Canadian dollars are required to purchase one U.S. dollar in the 180-day forward market?


A) 1.2727
B) 1.4141
C) 1.5712
D) 1.7458
E) 1.9203

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

Correct Answer

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Which of the following are reasons why companies move into international operations?


A) To take advantage of lower production costs in regions where labor costs are relatively low.
B) To develop new markets for the firm's products.
C) To better serve their primary customers.
D) Because important raw materials are located abroad.
E) All of the above.

F) C) and D)
G) None of the above

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