Test Bank Docx | Ch18 + International Aspects Of Financial - Corporate Finance 10e Complete Test Bank by Stephen Ross. DOCX document preview.
Chapter 18
International Aspects of Financial Management
Test Bank - Static Key
1. An American Depositary Receipt is defined as a security:
A. that has been deposited in an interest-bearing account at a U.S. bank.
B. issued outside the U.S. that represents shares of a U.S. stock.
C. issued in the U.S. that represents shares of a foreign stock.
D. that has a guarantee of payment from a U.S. bank.
E. issued in multiple countries but denominated in U.S. currency.
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.1 Terminology
Topic: International corporate finance
2. You are given the exchange rate between the U.S. dollar and the Canadian dollar. You are also given the exchange rate between the U.S. dollar and the Mexican peso. What is the name given to the Canadian dollar per Mexican peso exchange rate derived from the information that was provided?
A. Swap rate
B. Depositary rate
C. Forward rate
D. London Interbank rate
E. Cross-rate
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.1 Terminology
Topic: Exchange rates
3. Eurobonds are best defined as international bonds issued in _____ and denominated in ____.
A. a single country; multiple currencies
B. a single country; a single currency
C. multiple countries; multiple currencies
D. multiple countries; a single currency
E. Euroland; euros
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.1 Terminology
Topic: International corporate finance
4. Which one of the following is the best definition of Eurocurrency?
A. Any paper money used by a country that has adopted the euro as its common currency
B. Money deposited in a financial institution outside the country whose currency is involved
C. Both paper and coins officially adopted under the euro system of coinage
D. U.S. dollars owned by any country that has adopted the euro as its currency
E. Any exchange of funds between two countries that have adopted the euro as their official currency
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.1 Terminology
Topic: International corporate finance
5. Which one of the following terms is used to describe international bonds issued in a single country and generally denominated in that country's currency?
A. Eurobonds
B. American Depositary Receipts
C. Foreign bonds
D. Swaps
E. Gilts
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.1 Terminology
Topic: International corporate finance
6. Which one of the following is the rate that most international banks charge when they loan Eurodollars to other banks?
A. ADR
B. LIBOR
C. Cross-rate
D. Gilt rate
E. Swap rate
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.1 Terminology
Topic: International corporate finance
7. Which of these is defined as an agreement to exchange two securities or two currencies?
A. Hedge
B. Swap
C. SWIFT
D. Gilt
E. Arbitrage
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.1 Terminology
Topic: Currency swaps
8. The market where euros, pesos, dollars, and pounds are traded is referred to as the:
A. ADR market.
B. LIBOR market.
C. gilt market.
D. euromarket.
E. foreign exchange market.
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Foreign exchange markets
9. Which one of the following is the best universal definition of an exchange rate?
A. Price of one country's currency expressed in terms of another country's currency
B. Number of foreign dollars that can be purchased for every one U.S. dollar paid
C. Price of a country's currency expressed in terms of that country's currency unit
D. Number of units of a currency that were originally required to obtain one euro when a country adopted the euro as its official currency
E. Price that must be paid to obtain a good or service from another country
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
10. A trader in Switzerland just agreed to trade Swiss francs for British pounds based on today's exchange rate. The trade is expected to settle tomorrow. What term best describes this exchange?
A. Arbitrage transaction
B. Forward trade
C. Spot trade
D. Purchasing power parity
E. Interest rate parity
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Spot and forward rates
11. The spot exchange rate is the exchange rate that applies to a(n):
A. LIBOR transaction.
B. ADR transaction.
C. spot trade.
D. forward trade.
E. future transaction.
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Spot and forward rates
12. An agreement to exchange currencies sometime in the future is referred to as which one of the following?
A. Forward trade
B. Hedge
C. Gilt
D. Forward exchange rate
E. Spot trade
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Spot and forward rates
13. 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?
A. Spot rate
B. ADR rate
C. London Interbank Offer Rate
D. Forward exchange rate
E. Cross-rate
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Spot and forward rates
14. Which one of the following terms is used to identify the concept that exchange rates vary to keep purchasing power constant among currencies?
A. Exchange rate equilibrium
B. Exchange rate parity
C. Universal parity
D. Market equilibrium
E. Purchasing power parity
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Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
15. Which of these states that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate?
A. Arbitrage equilibrium
B. Relative purchasing power parity
C. Absolute purchasing power parity
D. Interest rate parity
E. Cross-rate parity
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Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
16. Which term is defined as having international operations in a world where relative currency values change?
A. Political risk
B. Relative purchasing power parity
C. Interest rate parity
D. Absolute purchasing power parity
E. Exchange rate risk
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Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.5 Exchange Rate Risk
Topic: Exchange rate risk
17. 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
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Learning Objective: 18-04 Discuss the impact of political risk on international business investing.
Section: 18.6 Political Risk
Topic: Political risk
18. You live in the U.S. and want to invest in a Chinese company, which will be referred to as "CC," because you believe its stock is uniquely positioned to be unusually profitable over the next five years. However, you do not have direct access to the Chinese financial markets. You may be able to indirectly invest in CC by purchasing a(n):
A. swap.
B. American depository receipt.
C. gilt.
D. Bulldog bond.
E. Samurai bond.
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.1 Terminology
Topic: International corporate finance
19. Rembrandt, Samurai, Yankee, and Bulldog are all names associated with which one of the following?
A. Eurobonds
B. Currencies
C. Cross-rate
D. Foreign bonds
E. Foreign interest rates
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.1 Terminology
Topic: International corporate finance
20. Which country is correctly matched with its currency?
A. Canada—pound
B. China—yuan
C. Mexico—real
D. Japan—lira
E. United Kingdom—euro
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Currencies and symbols
21. Which statement is correct?
A. Exchange rates are adjusted each morning and held constant until the following morning.
B. The four most commonly traded currencies in the foreign exchange markets are the U.S. dollar, French franc, European euro, and Brazilian real.
C. All South American countries use the peso as their currency.
D. New Zealand uses the same currency as Australia and that is the A$.
E. The foreign exchange market is the largest financial market in the world.
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Foreign exchange markets
22. Which of the following parties are participants in the foreign exchange market?
I. U.S. importers
II. U.S. exporters
III. U.S. travelers to Europe
IV. Foreign portfolio managers who purchase American securities
A. I and III only
B. II and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Foreign exchange markets
23. Assume the exchange rates for the Canadian dollar versus the U.S. dollar are:
Which statement is correct given this information?
A. Last week, it took C$.8759 to purchase $1.
B. This week you can exchange C$1 for $1.1414.
C. It is cheaper for an American to travel in Canada this week than it was last week.
D. The Canadian dollar depreciated from last week to this week.
E. You would have made a profit if you had invested $100 in Canadian dollars last week and then converted your money back to U.S. dollars this week. Ignore any interest earnings.
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
24. The U.S. dollar equivalent is .3897 for the Brazilian real and 1.5649 for the UK pound. Which one of the following statements is correct given this information?
A. One U.S. dollar will buy .3897 Brazilian reals.
B. If you have .3897 Brazilian reals, they are worth 1.5649 UK pounds.
C. One UK pound will buy 1.5649 U.S. dollars.
D. One Brazilian real will buy 1.5649 UK pounds.
E. One U.S. dollar will buy 1.5649 UK pounds.
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
25. 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?
A. Futures arbitrage
B. Currency hedge
C. Interest rate swap
D. Absolute purchasing power parity
E. Triangle arbitrage
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Triangle arbitrage
26. Later this week, you are traveling from the U.S. to Canada for a week's vacation. This morning, you exchanged some U.S. dollars for Canadian dollars in preparation for that trip. Which one of the following best describes this exchange?
A. Forward trade
B. Spot trade
C. Arbitrage transaction
D. Cross-rate exchange
E. Eurocurrency transaction
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Spot and forward rates
27. Which one of the following best describes an agreement you make today to exchange U.S. dollars for British pounds three months from now?
A. Forward trade
B. Spot trade
C. Arbitrage transaction
D. Cross-rate exchange
E. Eurocurrency transaction
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Spot and forward rates
28. You have just agreed to a forward trade that will be settled six months from now. When is the exchange rate for this transaction determined?
A. Today
B. Three months from today because that is the halfway point
C. Anytime you prefer within the next six months
D. Whenever the spot rate six months from today is known
E. Six months from now
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Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Spot and forward rates
29. Assume a canned soft drink costs $1 in the U.S. and $1.30 in Canada. At the same time, the currency per U.S. dollar is C$1.30. Which one of the following conditions exists in this situation?
A. Absolute purchasing power parity
B. Interest rate parity
C. Relative purchasing power parity
D. Translation exposure
E. Equal spot and forward rates
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Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
30. Assume that PE is the euro price of a product, PUS is the U.S. price of the identical product, and S0 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?
A. PUS = S0/PE
B. PUS = S0 ×PE
C. PUS = S0 + PE
D. PE = S0/PUS
E. PE = S0 ×PUS
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Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
31. Relative purchasing power parity is based on the principle that the expected percentage change in the exchange rate between two countries is equal to which one of the following?
A. Difference in the risk-free interest rates in the two countries
B. Average interest rate in the two countries
C. Average inflation rate of the two countries
D. Difference in the inflation rates of the two countries
E. Difference between the two countries' average inflation and interest rates
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Difficulty: 1 Easy
Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
32. Assume you can currently exchange $1 for ¥100. Also assume the inflation rate will be 2.5 percent annually in the U.S. and 2 percent in Japan. Given these assumptions, how many yen should you expect in exchange for $1 next year?
A. More than 100
B. Either 100 or more than 100
C. Exactly 100
D. Either 100 or less than 100
E. Less than 100
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Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
33. Currently, you can exchange $1 for SF1.14. Assume the average inflation rate in the U.S. over the next two years will be 2.5 percent annually as compared to 3 percent in Switzerland. Based on this information and relative purchasing power parity, which of the following assumptions can you make regarding the next two years?
A. The Swiss franc will appreciate against all currencies.
B. The Swiss franc will appreciate against the U.S. dollar.
C. The U.S. dollar will appreciate against all currencies.
D. The U.S. dollar will appreciate against the Swiss franc.
E. Both the U.S. dollar and the Swiss franc will appreciate against all other currencies.
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Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
34. Suppose you could buy 1,115 South Korean won or 100 Pakistani rupees last year for $1. Today, $1 will buy you 1,113 won or 102 rupees. Which one of the following occurred over the past year?
A. The dollar appreciated against the won.
B. The dollar depreciated against the rupee.
C. The dollar appreciated against both the won and the rupee.
D. The won depreciated against the dollar.
E. The rupee depreciated against the dollar.
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Difficulty: 2 Medium
Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.3 Purchasing Power Parity
Topic: Exchange rates
35. Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the $1 is borrowed and S<sub>0</sub> = spot rate; F<sub>1</sub> = one-year forward rate; R<sub>F</sub> = foreign country risk-free rate; and R<sub>US</sub> = U.S. risk-free rate.
A. $1 × F1 × (1 + RF)/S0– $1 × (1 + RUS)
B. $1 × S0 × (1 + RF)/F1– $1 × (1 + RUS)
C. $1 × F1 × (1 + RF)/S0 + $1 × (1 + RUS)
D. $1 × S0 × (1 + RF) – $1 × (1 + RUS)/F1
E. $1 × S0 × (1 + RF)/F1 + $1 × (1 + RUS)
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Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Covered interest arbitrage
36. Which of these must be significantly eliminated if interest rate parity is to exist?
A. Absolute purchasing power parity
B. Short-run exposure to exchange rate risk
C. Covered interest arbitrage opportunities
D. Relative purchasing power parity
E. Translation exposure
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Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
37. Interest rate parity defines the relationships among which of the following?
A. Spot exchange rates, future exchange rates, interest rates, and inflation rates
B. Real and nominal interest rates across countries
C. Real interest and inflation rates
D. Forward exchange rates, relative interest rates, and spot exchange rates
E. Spot exchange rates, forward exchange rates, nominal interest rates, and real interest rates
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Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
38. Which of these occurs when interest rate parity exists between Countries A and B?
A. Country A investors are indifferent between risk-free investments in Countries A and B.
B. Forward exchange rates for Countries A and B must be equal for all time periods.
C. Risk-free interest rates in Countries A and B must be equal.
D. Spot and forward exchange rates between the currencies of the two countries must be equal.
E. Significant covered interest arbitrage opportunities between currencies of Countries A and B must exist.
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Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
39. Which one of the following is an example of long-run exposure to exchange rate risk? Ignore all fees and transaction costs.
A. A U.S. firm owns land in Mexico valued at three million pesos. That value has remained constant in Mexican pesos for the past year. However, the firm's financial statement reflects a 3 percent decrease in the value of that land for last year.
B. A U.S. firm sells $250,000 worth of goods to Peru. However, when the payment for those goods arrives and the U.S. firm exchanges the foreign currency, it receives only $248,700.
C. A U.S. firm purchases $120,000 worth of goods from Canada. However, by the time the goods arrive and the invoice is payable, the cost of those goods has increased to $120,400.
D. A few years ago, a U.S. firm built a factory in Asia to take advantage of the lower labor costs. Today, the Asian labor costs have increased such that the Asian factory no longer provides a cost advantage over a U.S. factory.
E. A U.S. traveler withdrew an extra $2,000 in cash from her savings account to take with her as emergency funds when she traveled to Mexico. Before leaving on her trip, she exchanged this money into Mexican pesos. She never used any of this money during her vacation, so exchanged all of it back into U.S. dollars on her return and received $1,960.
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Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.5 Exchange Rate Risk
Topic: Exchange rate risk
40. Short-run exposure to exchange rate risk is best illustrated by which one of the following?
A. Change in book value when the market value of an asset remains constant
B. Daily fluctuations in the spot rate
C. Increases in the forward rate as the time to settlement increases
D. Changes in relative economic conditions between two countries
E. Unrealized foreign exchange gains
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Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.5 Exchange Rate Risk
Topic: Exchange rate risk
41. 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
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Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.5 Exchange Rate Risk
Topic: Exchange rate risk
42. The foreign subsidiary of a U.S. firm is profitable when profits are measured in the foreign currency but those profits become losses when measured in U.S. dollars. This is an example of 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
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Difficulty: 1 Easy
Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.5 Exchange Rate Risk
Topic: Exchange rate risk
43. 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. At the division level
B. At a level that combines all divisions representing a separate geographic continent
C. At a level that combines divisions based on the currency used by each division
D. By segregating U.S. operations and foreign operations
E. On a centralized basis for all divisions
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Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.5 Exchange Rate Risk
Topic: Exchange rate risk
44. Which one of these most likely represents the greatest political risk for a U.S.-based firm?
A. A product assembly plant located in a foreign country
B. A foreign sales office
C. Accounting office that handles all payroll functions and is located in a foreign country
D. Natural ore mine in a foreign country
E. Subassembly plant in a foreign country that uses U.S.-made components
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Difficulty: 1 Easy
Learning Objective: 18-04 Discuss the impact of political risk on international business investing.
Section: 18.6 Political Risk
Topic: Political risk
45. Which one of the following is an example of the political risks associated with foreign operations?
A. Technological changes
B. Exchange rate fluctuations
C. Translation exposure to exchange rate risk
D. Changes in foreign tax laws
E. Changes in relative wage rates between the home country and the foreign country
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Difficulty: 1 Easy
Learning Objective: 18-04 Discuss the impact of political risk on international business investing.
Section: 18.6 Political Risk
Topic: Political risk
46. Assume the exchange rate is 1.05 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 1,250 Swiss francs?
A. $1,315.79
B. $1,190.48
C. $1,128.80
D. $1,140.00
E. $1,318.46
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Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
47. You are going to London and plan on spending £5,300. How many dollars will this trip cost you if the currency per $1 is £..77?
A. $6,875.95
B. $6,892.16
C. $6,883.12
D. $6,890.01
E. $7,044.04
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
48. You just returned from a trip to Germany and have 277 euros in your pocket. How many dollars will you receive when you exchange this money if the U.S. dollar equivalent of the euro is 0.89?
A. $202.56
B. $246.53
C. $204.35
D. $397.18
E. $262.56
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
49. You are planning an extended trip to India and have located some housing that you can lease for 37,250 rupees per month. What is the cost per month in U.S. dollars if the exchange rate is Rs1 = $.01606?
A. $1,208.15
B. $598.24
C. $1,311.27
D. $695.35
E. $709.30
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
50. 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 2.5658 reals and 609.10 pesos. If you prefer the less expensive trip, as measured in U.S. dollars, you should travel to _____ because you can save ____.
A. Brazil; you can save $460.45
B. Brazil; you can save $518.74
C. Chile; you can save $384.29
D. Chile; you can save $613.33
E. Brazil; you can save $385.55
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
51. Your German friend has decided to come and visit you in the U.S. You estimate the cost of her trip at $2,200. What is the cost to her in euros if the U.S. dollar equivalent of the euro is 1.2452?
A. €1,566.67
B. €1,766.78
C. €1,908.50
D. €2,739.44
E. €2,806.16
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
52. Assume you can exchange $1 for either €.8031 euro or £.6390. What is the cross-rate between the pound and the euro?
A. £.7519/€1
B. £.8356/€1
C. £.7957/€1
D. £1.0852/€1
E. £1.5577/€1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
53. Assume you can exchange $1 for either C$1.1417 or ¥118.62. What is the cross-rate between the Canadian dollar and the Japanese yen?
A. C$.009625/¥1
B. C$.003723/¥1
C. C$.004582/¥1
D. C$138.2191/¥1
E. C$135.43/¥1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
54. Assume you can purchase either 114 Canadian dollars or 11,865 Japanese yen for $100. What is the ¥/C$ cross-rate?
A. ¥104.08/C$1
B. ¥99.94/C$1
C. ¥101.23/C$1
D. ¥106.27/C$1
E. ¥107.08/C$1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
55. Assume the spot rate for the pound is £.6390 = $1 and for the Canadian dollar is C$1.1417 = $1. What is the £/C$ cross-rate?
A. £.5597/C$1
B. £.6027/C$1
C. £.7295/C$1
D. £.7594/C$1
E. £.7608/C$1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
56. Assume you can exchange $1 for ¥111.57 or €0.89 in New York. In Tokyo, the exchange rate is ¥1 = €0.008. If you have $1,100, how much profit can you earn using triangle arbitrage?
A. $1.79
B. $1.98
C. $3.16
D. $3.82
E. $6.85
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Triangle arbitrage
57. Assume that in New York, you can exchange $1 for €0.89 or £.0.6391 In Berlin, £1 costs €1.16. How much profit can you earn on $1,000 using triangle arbitrage?
A. $912.81
B. $138.56
C. $.200.50
D. $317.75
E. $187.47
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Triangle arbitrage
58. Assume the exchange rates in New York for $1 are C$1.1382 and £.6387 while in Toronto, C$1 will buy £.5612. How much profit can you earn on $10,000 using triangle arbitrage?
A. $.91
B. $1.08
C. $.97
D. $1.03
E. $1.11
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Triangle arbitrage
59. Assume your favorite running shoes cost $119 in the U.S. while the identical shoes cost C$139.50 in Canada. According to purchasing power parity, what is the C$/$ exchange rate?
A. C$.8530/$1
B. C$.8426/$1
C. C$1.0918/$1
D. C$1.1723/$1
E. C$1.2305/$1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
60. 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?
A. 13.76MXN/1USD
B. 13.98MXN/1USD
C. 14.04MXN/1USD
D. 14.23MXN/1USD
E. 14.11MXN/1USD
AACSB: Analytical Thinking
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
61. 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?
A. $374.24
B. $388.52
C. $387.05
D. $361.95
E. $339.90
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
62. A particular set of golf clubs in the U.S. costs $879. According to absolute purchasing power parity, what should the identical set of clubs cost in the UK if the spot rate is £.6421 = $1?
A. £1,368.95
B. £1,428.08
C. £533.80
D. £547.50
E. £564.41
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
63. Assume the current spot rate between the UK and the U.S. is £0.6391 per $1, the expected inflation rate in the U.S. is 1.9 percent, and the expected inflation rate in the UK is 2.1 percent. If relative purchasing power parity exists, what will the exchange rate be next year?
A. £.6389/$1
B. £.6404/$1
C. £.6823/$1
D. £.6322/$1
E. £.6336/$1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
64. Assume the current spot rate between the UK and the U.S. is £.6402 per $1. The expected inflation rate in the U.S. is 1.9 percent. The expected inflation rate in the UK is 2.1 percent. If relative purchasing power parity exists, what will the exchange rate be two years from now?
A. £.6549/$1
B. £.6404/$1
C. £.6417/$1
D. £.6382/$1
E. £.6453/$1
AACSB: Analytical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
65. Assume you can currently exchange $100 for €80.25. The inflation rate in Europe is expected to be 1.8 percent as compared to 2.4 percent in the U.S. Based on relative purchasing power parity, what should the exchange rate be four years from now?
A. €.8219/$1
B. €.8014/$1
C. €.7970/$1
D. €.8073/$1
E. €.7834/$1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
66. 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?
A. €.8098/$1
B. €.8136/$1
C. €.8071/$1
D. €.8039/$1
E. €.7975/$1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
67. Currently, you can exchange €100 for $112.55. The inflation rate in Europe is expected to be 1.4 percent. In one year, it is expected that €100 can be exchanged for $113.50. Assume relative purchasing power parity exists. What is the expected inflation rate in the U.S.?
A. 2.69 percent
B. 2.98percent
C. 2.24 percent
D. 3.65 percent
E. 3.98 percent
AACSB: Analytical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
68. The spot rate on the Canadian dollar is 1.34. Interest rates in Canada are expected to average 3.4 percent while they are anticipated to be 3.9 percent in the U.S. What is the expected exchange rate three years from now?
A. C$1.37
B. C$1.32
C. C$1.36
D. C$1.29
E. C$1.28
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
69. The spot rate on the Norwegian kroner is 8.49. The exchange rate one year from now is expected to be 8.53 assuming that relative interest rate parity exists. Interest rates in Norway are 2 percent. What is the interest rate in the U.S.?
A. 1.53 percent
B. 2.0 percent
C. 1.77 percent
D. 1.04 percent
E. 1.24 percent
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
70. The spot rate on the Hong Kong dollar is 7.84. Interest rates in Hong Kong are expected to be 2.75 percent while they are anticipated to be 2.5 percent in the U.S. What is the expected exchange rate two years from now?
A. HK$7.9825
B. HK$7.1808
C. HK$7.8792
D. HK$8.3778
E. HK$8.4141
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
71. The spot rate between Canada and the U.S. is C$1.1381 = $1, while the one-year forward rate is Can$1.1407 = $1. The risk-free rate in Canada is 2.4 percent. The risk-free rate in the U.S. is 2.1 percent. How much profit can you earn on a loan of $1,000 by utilizing covered interest arbitrage?
A. $.81
B. $.67
C. $.36
D. $.49
E. $.57
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Covered interest arbitrage
72. Assume the spot rate between the UK and the U.S. is £.6789 = $1, while the one-year forward rate is £.6782 = $1. The risk-free rate in the UK is 3.1 percent. The risk-free rate in the U.S. is 2.9 percent. How much profit can you earn for the year on a loan of $1,500 by utilizing covered interest arbitrage?
A. $4.09
B. $2.78
C. $3.15
D. $4.60
E. $3.55
AACSB: Analytical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Covered interest arbitrage
73. Assume the one-year forward rate for the British pound is £.6381 = $1. The spot rate is £.6392 = $1. The interest rate on a risk-free asset in the UK is 4.4 percent. If interest rate parity exists, what is the one-year risk-free rate in the U.S.?
A. 4.68 percent
B. 4.58 percent
C. 4.77 percent
D. 4.63 percent
E. 4.67 percent
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
74. 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.
A. 4.21
B. 4.51
C. 3.98
D. 4.40
E. 4.31
AACSB: Analytical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
75. Assume the spot rate between Japan and the U.S. is ¥119.37 = $1, while the one-year forward rate is ¥119.07 = $1. A one-year risk-free security in the U.S. is yielding 4.2 percent. What is the rate of return on a one-year risk-free security in Japan assuming that interest rate parity exists?
A. 3.82 percent
B. 3.94 percent
C. 3.44 percent
D. 3.49 percent
E. 4.46 percent
AACSB: Analytical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
76. 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?
A. ¥120.41
B. ¥121.08
C. ¥119.80
D. ¥120.94
E. ¥119.03
AACSB: Analytical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
77. 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?
A. -$149,673.91
B. -$162,311.19
C. $162,311.19
D. $149,673.91
E. $0
AACSB: Analytical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.5 Exchange Rate Risk
Topic: Multinational corporations and operations
78. A U.S. firm has total assets valued at £318,000 located in London. This valuation did not change from last year. Last year, the exchange rate was £.61 = $1. Today, the exchange rate is £.63 = $1. By what amount did these assets change in value on the firm's U.S. financial statements?
A. -$16,549.57
B. -$13,511.03
C. -$12,248.91
D. $13,511.03
E. $0
AACSB: Analytical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-03 Identify the different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 18.5 Exchange Rate Risk
Topic: Multinational corporations and operations
79. Assume the USD equivalent of the Norwegian krone is .1425. If you have NKr5,500, how much do you have in US dollars?
A. $861.42
B. $42,608.14
C. $38,596.49
D. $783.75
E. $16,216.50
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
80. Assume $1 = €.8036 = A$1.1757. What is the cross-rate for Australian dollars in terms of euros?
A. A$1.1066/€1
B. A$1.2908/€1
C. A$1.3929/€1
D. A$1.4630/€1
E. A$1.5042/€1
AACSB: Analytical Thinking
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
81. Given the following exchange rates, which of the following currencies are selling at a premium against the dollar?
A. Japanese yen only
B. Swiss franc and Australian dollar only
C. UK pound only
D. Australian dollar, Swiss franc, and UK pound only
E. Japanese yen and Swiss franc only
AACSB: Analytical Thinking
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
82. Suppose the spot exchange rate for the Canadian dollar is C$1.34and the six-month forward rate is C$1.37. Assuming absolute PPP holds, what is the current cost in the United States of a hamburger if the price in Canada of an equivalent burger in Canada is C$5.80?
A. $55.36
B. $5.15
C. $4.33
D. $54.99
E. $44.23
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
83. Suppose the Swiss franc exchange rate is SF.9703 = $1, and the euro exchange rate is €.8024 = $1. What is the cross-rate in terms of Swiss francs per euro?
A. SF.7692/€1
B. SF.7786/€1
C. SF1.1054/€1
D. SF1.1832/€1
E. SF1.2092/€1
AACSB: Analytical Thinking
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
84. 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 ____.
A. US; $131,072.23
B. US;$125,722.20
C. UK; $9,418.02
D. UK; $38,522.47
E. UK; $121,510.67
AACSB: Analytical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rates
85. Suppose the spot exchange rate for the Hungarian forint is HUF246. Interest rates in the United States are 4.3 percent per year. They are 3.4 percent in Hungary. What do you predict the exchange rate will be in four years?
A. HUF237.26
B. HUF236.90
C. HUF241.59
D. HUF254.98
E. HUF261.19
AACSB: Analytical Thinking
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Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
86. Assume a Big Mac sells for $4.39 in the United States and Ps62.5 in Mexico, what is the Ps/$ exchange rate according to the purchasing power parity theory?
A. Ps.0702/$1
B. Ps.0752/$1
C. Ps13.29/$1
D. Ps14.24/$1
E. Ps14.32/$1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
NEW
87. Assume the exchange rate is 0.98 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 1,750 Swiss francs?
A. $1,715.79
B. $1,785.71
C. $1,728.80
D. $1,740.00
E. $1,818.46
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
88. You are going to London and plan on spending £4,200. How many dollars will this trip cost you if the currency per $1 is £.82?
A. $5,875.95
B. $5,892.16
C. $5,121.95
D. $5,890.01
E. $6,044.04
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
89. You just returned from a trip to Germany and have 523 euros in your pocket. How many dollars will you receive when you exchange this money if .95 U.S. dollars equal one euro?
A. $502.56
B. $496.85
C. $504.35
D. $497.18
E. $562.56
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Exchange rates
90. Assume you can exchange $1 for ¥110.23 or €0.86 in New York. In Tokyo, the exchange rate is ¥1 = €0.009. If you have $900, how much profit can you earn using triangle arbitrage?
A. $130.58
B. $127.56
C. $138.21
D. $129.87
E. $135.88
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Triangle arbitrage
91. Assume that in New York, you can exchange $1 for €0.81 or £.0.62 In Berlin, £1 costs €1.22. How much profit can you earn on $1,250 using triangle arbitrage?
A. $91.81
B. $98.56
C. $88.58
D. $83.75
E. $87.47
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-01 Explain how exchange rates are quoted, assess what they mean, and differentiate between spot and forward exchange rates.
Section: 18.2 Foreign Exchange Markets and Exchange Rates
Topic: Triangle arbitrage
92. Assume the current spot rate between the UK and the U.S. is £0.6058 per $1, the expected inflation rate in the U.S. is 2.2 percent, and the expected inflation rate in the UK is 3 percent. If relative purchasing power parity exists, what will the exchange rate be next year?
A. £.6389/$1
B. £.6106/$1
C. £.6223/$1
D. £.6022/$1
E. £.6336/$1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
93. Assume the current spot rate between the UK and the U.S. is £.6402 per $1. The expected inflation rate in the U.S. is 2.8 percent. The expected inflation rate in the UK is 2.4 percent. If relative purchasing power parity exists, what will the exchange rate be two years from now?
A. £.6349/$1
B. £.6204/$1
C. £.6351/$1
D. £.6182/$1
E. £.6253/$1
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
94. Currently, you can exchange €100 for $112.55. The inflation rate in Europe is expected to be 1.4 percent. In one year, it is expected that €100 can be exchanged for $113.50. Assume relative purchasing power parity exists. What is the expected inflation rate in the U.S.?
A. 4.99 percent
B. 5.92 percent
C. 5.05 percent
D. 5.69 percent
E. 5.48 percent
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity
95. The spot rate on the Canadian dollar is 1.21. Interest rates in Canada are expected to average 2.8 percent while they are anticipated to be 3.2 percent in the U.S. What is the expected exchange rate three years from now?
A. C$1.31
B. C$1.20
C. C$1.29
D. C$1.26
E. C$1.28
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.4 Exchange Rates and Interest Rates
Topic: Interest rate parity
96. Suppose the spot exchange rate for the Canadian dollar is C$1.22 and the six-month forward rate is C$1.27. Assuming absolute PPP holds, what is the current cost in the United States of a hamburger if the price in Canada of an equivalent burger in Canada is C$6.00?
A. $5.36
B. $5.15
C. $4.92
D. $4.99
E. $4.23
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-02 Discuss purchasing power parity and interest rate parity and analyze their implications for exchange rate changes.
Section: 18.3 Purchasing Power Parity
Topic: Purchasing power parity