Managing International Risks Test Bank Answers Ch.27 nan

Principles of Corporate Finance, 13e (Brealey)

Chapter 27 Managing International Risks

1) A quotation in the form yen 89.33/$US is called

A) an indirect quote in the United States.

B) a direct quote in the United States.

C) a cross-rate in Japan.

D) None of these options are correct.

2) Important aspects of international finance include:

I) that the basic principles of corporate finance do not apply;

II) the process of foreign exchange valuation of different currencies;

III) that the NPV principle cannot be applied to foreign operations

A) I only

B) I and III only

C) II only

D) III only

3) If the direct quotation for the euro is $1.3565/euro, what is the size of the indirect quotation?

A) 0.2415

B) 0.6435

C) 0.7372

D) 0.3565

4) The spot USD/GBP exchange rate is USD1.99/GBP. What is the indirect quote?

A) GBP 0.6500/USD

B) GBP 0.5025/USD

C) GBP 1.2845/USD

D) GBP 1.4875/USD

5) The spot yen/US dollar exchange rate is 119.795 yen/$US. The three-month forward rate is 118.397 yen/$US. What is the yen's forward premium (or discount) on the dollar, expressed as an annual percentage?

A) 6.5 percent discount

B) 4.7 percent premium

C) 6.5 percent premium

D) 4.7 percent discount

6) The spot peso/$US exchange rate is peso 10.9892/$US. The three-month forward rate is peso 11.0408/$US. What is the peso's forward premium (or discount) on the U.S. dollar, expressed as an annual percentage?

A) 0.8 percent premium

B) 1.9 percent discount

C) 2.1 percent premium

D) 0.5 percent discount

7) The spot $US/euro exchange rate is $US1.3549/euro. The three-month forward rate is $US1.3595/euro. What is the euro's forward premium (or discount) on the U.S. dollar, expressed as an annual percentage?

A) 0.3 percent premium

B) 0.3 percent discount

C) 1.4 percent premium

D) 1.4 percent discount

8) One can describe a currency forward contract as

A) agreeing today to buy or sell a specified amount of a currency at a later date at a price set in the future.

B) agreeing today to buy or sell a specified amount of a currency today at its current price.

C) agreeing today to buy or sell a specified amount of a currency at a later date at a price set today.

D) agreeing today to buy or sell a specified amount of a currency today at a price that will be determined at a later date.

9) Which of the following statement(s) about the currency forward market is (are) true?

I) In the forward market you buy or sell currency for future delivery at a rate set today.

II) A forward market transaction is usually a made-to-order transaction.

III) Most forward transactions are settled in six months or less.

A) I only

B) I and II only

C) II and III only

D) I, II, and III

10) An organized market for currency for future delivery that conducts trades on an exchange is called a(n)

A) spot market.

B) forward market.

C) futures market.

D) options market.

11) Which of the following statement(s) about currency futures market is (are) true?

I) Futures contracts are highly standardized.

II) Futures contracts are made-to-measure contracts.

III) Futures contracts are for specified amounts and for a limited choice of delivery dates. 

A) I only

B) II only

C) I and III only

D) I, II, and III

12) The spot yen/$US exchange rate is Yen119.795/$US, and the one-year forward rate is yen114.571/$US. If the annual interest rate on dollar CDs is 6 percent, what annual interest rate would you expect on Yen CDs?

A) 1.38 percent

B) 5.32 percent

C) 8.06 percent

D) 17.14 percent

13) The spot GBP/USD exchange rate is 0.5025/USD, and the one-year forward rate is GBP 0.5048/USD. If the annual interest rate on dollar CDs is 6 percent, what would you expect the annual interest to be on GBP CDs?

A) 5.52 percent

B) 6.49 percent

C) 3.55 percent

D) 8.25 percent

14) The spot exchange rate for British pounds is 0.5025 (GBP/USD). The one-year risk-free rates in the United States and Britain are 3 percent and 2.75 percent, respectively. What is the forward exchange rate in GBP/USD?

A) 0.6170

B) 0.5037

C) 0.5013

D) 0.6050

15) The expectations theory of exchange implies that

A) the forward rate is determined by the central bank's expectations.

B) on average, the forward rate equals the future spot rate.

C) the forward rate is determined by expectations of future spot interest rates.

D) the forward rate usually equals the future spot rate of exchange.

16) The Mexican economy is predicted to average double-digit inflation over the next two years at 10 percent per year. The inflation forecast for the United States for the same period is 4 percent per year. If the current exchange rate is $0.091/peso, what is the expected exchange rate two years from now?

A) $0.08604/peso

B) $0.08134/peso

C) $0.10180/peso

D) $0.09625/peso

17) If a Big Mac costs $2.31 in the United States, and in Japan 250 yen, according to PPP, what is the implied exchange rate in yen/$US?

A) 0.00924

B) 108.22500

C) 119.79500

D) 250.00000

18) If a Big Mac costs $C3 in Canada and $2.31 in the United States, according to purchasing power parity, what is the implied exchange rate in terms of $C/$US?

A) 1.3793

B) 1.2987

C) 1.3276

D) 0.7700

19) Assume that both the law of one price and the expectations theory of forward rates hold. The spot rate for the Ruritanean doubloon is 0.455 doubloon/$, and the one-year forward rate is 0.476 doubloon/$. Suppose that next year's forecasted rate of inflation in Ruritania is now revised upward by 10 percent. How does this affect exchange rates?

A) The current spot rate changes to 0.500 doubloon/$.

B) The forward rate changes to 0.524 doubloon/$.

C) Next year's expected spot rate changes to 0.501 doubloon/$.

D) The forward rate changes to 0.501 doubloon/$.

20) Assume that international capital markets are competitive and that global real interest rates are the same. The one-year interest rate is 9 percent in the United States and 5 percent in Switzerland. If the expected inflation rate is 6 percent in the United States, what is the expected inflation rate in Switzerland?

A) 5 percent

B) 4 percent

C) 3 percent

D) 2 percent

21) The current spot rate is GBP 0.5024/USD. The three-month forward rate is GBP 0.5040/USD. The TE Company expects a payment of GBP 100 million in three months. If the firm hedges this transaction in the forward market, what is the USD amount it will receive in three months?

A) USD 198.41 million

B) USD 199.04 million

C) USD 50.40 million

D) USD 50.24 million

22) The current spot rate is $US0.8543/$A. The one-year forward rate is $US0.8475/$A. A U.S. exporter denominates its exports to Australia in $A and expects to receive $A600,000 in one year. What is the value of these exports in one year in $US given that the firm executes a forward hedge?

A) $US 508,500

B) $US 512,580

C) $US 707,965

D) $US 702,329

23) Suppose that the G Company knows that in one month it must pay £7 million for goods that its U.S. subsidiary will receive in Britain. The current exchange rate is $1.99£. The risk that the corporate treasurer faces is that

A) the $US/pound exchange rate falls in a month's time (i.e., the pound weakens).

B) the $US/pound exchange rate rises in a month's time (i.e., the pound strengthens).

C) the $US/pound exchange rate does not change from its current position.

D) the pound exchange rate falls in a month's time (i.e., the pound strengthens).

24) Currency risk exposure can be categorized as

A) transaction exposure.

B) economic exposure.

C) Neither of these options are correct.

D) Both transaction and economic exposure are correct.

25) An Australian firm is evaluating a proposal to build a new plant in the United States. The expected cash flows in $US (in millions) are as follows: Year 0, −100; Year 1, 40; Year 2, 50; Year 3, 65. The discount rate in $A is 10 percent, while the discount rate in $US is 12 percent and the spot rate is $US0.60/$A. Calculate the NPV of the project in $US.

A) +36.40

B) −21.84

C) +13.10

D) +21.84

26) An Australian firm is evaluating a proposal to build a new plant in the United States. The expected cash flows in $US (in millions) are as follows: Year 0, −100; Year 1, 40; Year 2, 50; Year 3, 65. The discount rate in $A is 10 percent, while the discount rate in $US is 12 percent and the spot rate is $US0.85/$A. Calculate the NPV in $A. 

A) +25.69

B) −21.84

C) +13.10

D) +21.84

27) XJ Company from the United States is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, −50; Year 1, 25; Year 2, 35; Year 3, 40. The discount rate in BP is 14 percent and the discount rate in $US is 12 percent. The spot rate is $US1.99/BP. Calculate the NPV of the project in BP.

A) +28.69

B) +25.86

C) +42.67

D) +22.68

28) XJ Company from the United States is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, −50; Year 1, 25; Year 2, 35; Year 3, 40. The discount rate in BP is 14 percent and the discount rate in the $US is 12 percent. The spot rate is $US1.99/BP. Calculate the NPV in $US.

A) +25.86

B) +28.69

C) +51.46

D) +45.14

29) Political risk is can be thought of as

A) unanticipated changes in exchange rates.

B) unanticipated actions by the host government affecting the cash flows of a project.

C) unanticipated actions by the World Bank affecting the cash flows of a project.

D) All of these options are correct.

30) The risk associated with unanticipated actions by the host country government or its courts towards a multinational firm is called

A) economic risk.

B) transaction risk.

C) political risk.

D) translation risk.

31) The dollar interest rate is 6 percent, and the Swiss franc interest rate is 4 percent. If the required rate of return for a project in Switzerland is 15 percent, calculate the required rate of return in the United States for a similar project.

A) 17.2 percent

B) 12.8 percent

C) 15 percent

D) 8.5 percent

32) The beta of a firm's equity in Switzerland is 1.25. The risk-free rate is 4 percent and market risk premium is 8.4 percent. Calculate the required rate of return for the equity of this firm.

A) 10.5 percent

B) 8.4 percent

C) 14.5 percent

D) 9.5 percent

33) The country with the most favorable political risk score is

A) the United States.

B) France.

C) Norway.

D) the United Kingdom.

34) If a government were to seize the assets of a multinational company and not provide adequate compensation to its owners, the government would be following which practice?

A) WTO resolution

B) Expropriation

C) Repatriation

D) Terrorism

35) Your U.S.-based firm is deciding between using currency futures contracts or a forward contract with its commercial bank in order to hedge a scheduled dividend from its subsidiary corporation in Germany. The dividend will be repatriated in July, while the currency futures contracts are only available for June or September delivery. Which of the following choices properly hedges the transaction without basis risk?

A) Long euro future contracts

B) Short euro future contracts

C) Forward to sell euros forward in July.

D) Forward to buy euros forward in July.

36) The phrase "stronger currency" implies a forward premium. Given a euro-U.S. dollar exchange rate of $1.45/euro, which of the following values for the forward rate shows the strongest dollar?

A) 1.55

B) 1.65

C) 1.35

D) 1.25

37) If the U.S. dollar interest rate is 4 percent and the peso interest rate is 7 percent, what is the likely one-year forward rate if the spot dollar-peso rate is peso 11/$US?

A) 11.54

B) 11.32

C) 10.68

D) 10.23

38) In the forward exchange market, currency is traded for future delivery.

39) If the peso is traded at a forward discount relative to the U.S. dollar, then the U.S. dollar is also trading at a discount relative to the peso.

40) Interest rate parity gives the relationship between the forward rate and the spot rate of exchange in terms of interest rates.

41) Purchasing power parity implies that any differences in inflation rates will be offset by a change in the exchange rate.

42) The Big Mac exchange rate matches official exchange rate quotes for different currencies.

43) If the price of a Big Mac in the United States is $2.56, and in Japan it is yen 300, then the implied exchange rate is yen 117.19/$US.

44) In general, the countries with the highest interest rates also have the highest inflation rates.

45) The true cost of hedging foreign currency risk is the difference between the forward rate and the expected spot rate.

46) The true cost of hedging foreign currency risk is the difference between the forward rate and today's spot rate.

47) The terms transaction exposure and economic exposure are two names for the same foreign exchange risk.

48) When estimating the cash flows and NPV for a foreign project, there is no need to forecast exchange rates for the life of the project.

49) Purchasing power parity provides a better long-run indicator for future price changes than short-run indicator.

50) For a project's cost of capital measured in Swiss francs, one should use Swiss interest rates and beta with respect to Swiss market.

51) The risk that an unfriendly government might expropriate a firm's assets is called political risk.

52) Project financing is often designed to reduce a foreign government's incentive to expropriate capital investment.

53) When a currency gets stronger, the forward rate of that currency must have increased against all currencies.

54) The strength of a currency is directly related to its interest rate and inflation expectations.

55) Briefly describe what happens in foreign exchange markets.

56) Briefly describe the different types of currency markets.

57) Briefly explain the concept of interest rate parity.

58) Briefly explain the expectations theory of forward exchange rates.

59) Briefly explain the concept of purchasing power parity.

60) Briefly explain the term transaction exposure.

61) Briefly explain the term economic exposure.

62) Briefly explain why a currency forecast is not necessarily required when a multinational firm estimates the cash flows from an international project?

63) Briefly explain the term political risk.

64) What is wrong with the following news report? "Today the dollar ended the trading session stronger."