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Exam 31: International Corporate Finance

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Question 51

Multiple Choice

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Relative purchasing power parity:

A) states that identical items should cost the same regardless of the currency used to make the purchase.
B) relates differences in inflation rates to changes in exchange rates.
C) compares the real rate of return to the nominal rate of return.
D) looks at the factors that determine the changes in interest rates.
E) analyzes the changes in inflation rates to determine the causE.

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

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Question 52

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The current spot rate is C$1.400 and the one-year forward rate is C$1.344. The nominal risk-free rate in Canada is 4 percent while it is 8 percent in the U.S. Using covered interest arbitrage,you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

A) $.0000
B) $.0033
C) $.0040
D) $.0833
E) $.0840

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

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Question 53

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Describe the foreign currency and home currency approaches to capital budgeting. Which is better? Which approach would you recommend a U.S. firm use? Justify your answer.

International bonds issued in a single country and denominated in that country's currency are called:

Gilts are government securities issued by:

The expected inflation rate in Finland is 2 percent while it is 4 percent in the U.S. A risk-free asset in the U.S. is yielding 5.5 percent. What real rate of return should you expect on a risk-free Finnish security?

How many euros can you get for $2,500 given the following exchange rates?

Currently,$1 will buy C$1.36 while $1.10 will buy €1. What is the exchange rate between the Canadian dollar and the euro?

An international firm which imports raw materials can reduce its _____ exposure to _____ rate risk by entering into a forward contract.

_____ holds because of the possibility of covered interest arbitrage.

You want to invest in a project in Canada. The project has an initial cost of C$1.2 million and is expected to produce cash inflows of C$600,000 a year for 3 years. The project will be worthless after the first 3 years. The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S. The applicable interest rate in Canada is 8 percent. The current spot rate is C$1 = $.69. What is the net present value of this project in Canadian dollars using the foreign currency approach?

Remitting cash flows is a term used to describe:

"The rate of change in commodity price levels between two countries determines the rate of change in exchange rates between the two countries." This is a statement of:

The foreign currency approach to capital budgeting analysis: I. is computationally easier to use than the home currency approach. II) produces the same results as the home currency approach. III) utilizes the uncovered interest parity relationship. IV) computes the net present value of a project in both the foreign and in the domestic currency.

Suppose that the spot rate on the Canadian dollar is C$1.18. The risk-free nominal rate in the U.S. is 5 percent while it is only 4 percent in Canada. Which one of the following three-year forward rates best establishes the approximate interest rate parity condition?