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Exam 18: International Aspects of Financial Management

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Question 41

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Suppose a U.S.firm builds a factory in China,staffs it with Chinese workers,uses materials supplied by Chinese companies,and finances the entire operation with a loan from a Chinese bank located in the same town as the factory.This firm is most likely trying to greatly reduce,or eliminate,which one of the following?

A) Interest rate disparities
B) Short-run exposure to exchange rate risk
C) Long-run exposure to exchange rate risk
D) Political risk associated with the foreign operations
E) Translation exposure to exchange rate risk

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

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Question 42

Multiple Choice

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

A) Exchange rate risk
B) Political risk
C) Translation risk
D) LIBOR risk
E) Cross-rate risk

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

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Question 43

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The spot rate on the Canadian dollar is 1.15.Interest rates in Canada are expected to average 3.2 percent while they are anticipated to be 3.6 percent in the U.S.What is the expected exchange rate three years from now?

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

Assume the one-year forward rate between the U.S.and Japan is ¥120.38 = $1.A one-year risk-free security in Japan is yielding 4.3 percent while it is 3.8 percent in the U.S.Assume interest rate parity exists.What is the spot rate between the U.S.and Japan?

The treasurer of a major U.S.firm has $8.2 million to invest for three months.The interest rate in the U.S.is .53 percent per month.The interest rate in the UK is .54 percent per month.The spot exchange rate is €64,and the three-month forward rate is €65.Ignore transaction costs.The treasurer should invest the funds in the ____ because he can earn an additional ____.

Assume you can exchange $1 for either £1 or ? .50 in the U.S.In the London market,you can exchange £1 for ? ) 52.This situation creates an opportunity to profit immediately From which one of the following?

Which of these is defined as an agreement to exchange two securities or two currencies?

Assume the one-year forward rate for the Swiss franc is SF.9655 = $1.The spot rate is SF .9702 = $1.The interest rate on a risk-free asset in Switzerland is 3.8 percent.If interest rate parity exists,a one-year risk-free security in the U.S.is yielding _____ percent.

Currently,you can exchange €100 for $124.15.The inflation rate in Europe is expected to be 3.3 percent as compared to 3.1 percent in the U.S.Assuming that relative purchasing power parity exists,what should the exchange rate be five years from now?

The market where euros,pesos,dollars,and pounds are traded is referred to as the:

Assume the spot rate is SF.9652 = $1.A hotel room in a resort area of Switzerland costs SF375.Based on absolute purchasing power parity,what should an identical room in the U.S.cost?

Which term is defined as having international operations in a world where relative currency values change?

Which one of these most likely represents the greatest political risk for a U.S.-based firm?

You just returned from a trip to Germany and have 356euros in your pocket.How many dollars will you receive when you exchange this money if the U.S.dollar equivalent of the euro is 1.2452?

The spot exchange rate is the exchange rate that applies to a(n) :

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.

A good steak dinner in the U.S.costs 59USDwhile the exact meal costs 825MXN across the border in Mexico.Based on purchasing power parity,what is the implied MXN/USD exchange rate?

Assume you can exchange $1 for either €.8031 euro or £.6390.What is the cross-rate between the pound and the euro?

A U.S.firm has total assets valued at ? 918,000 located in Germany.This valuation did not change from last year.Last year,the exchange rate was ? ) 92 = $1.Today,the exchange rate is ? ) 80 = $1.By what amount did these assets change in value for the year on the firm's U.S.financial statements?