International Finance Review

6. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?
$15,385.
$15,625.
$22,136.
$31,250.

7. Assume the following bid and ask rates of the pound for two banks: Bank A Bid $1.41; Bank A Ask $1.42; Bank B Bid $1.39; Bank B Ask $1.40. As locational arbitrage occurs:
the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase.
the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease.
the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease.
the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

8. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?
2.0.
2.40.
.80.
.50.
none of the above

9. Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts _______ pressure on the pound's spot rate, and _______ pressure on the pound's forward rate.
downward; downward
downward; upward
upward; downward
upward; upward

10. Assume the following information: You have $1,000,000 to invest. Current spot rate of pound = $1.60; 90-day forward rate of pound = $1.57; 3-month deposit rate in U.S. = 3%; 3-month deposit rate in U.K. = 4%. If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?
$1,020,500.
$1,045,600.
$1,073,330.
$1,094,230.
$1,116,250.

19. You have an opportunity to invest in Australia at an interest rate of 8%. Moreover, you expect the Australian dollar (A$) to appreciate by 2%. Your effective return from this investment is:
8.00%.
6.00%.
10.16%.
5.88%.

24. Jacko Co. is a U.S.-based MNC with net cash inflows of Singapore dollars and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?
Jacko Co.
Kriner Co.
the firms have about the same level of exposure.
neither firm has any exposure.

25. According to the text, currency variability levels _______ perfectly stable over time, and currency correlations _______ perfectly stable over time.
are; are not
are; are
are not; are not
are not; are

26. Which of the following operations benefits from appreciation of the firm's local currency?
borrowing in a foreign currency and converting the funds to the local currency prior to the appreciation.
receiving earnings dividends from foreign subsidiaries.
purchasing supplies locally rather than overseas.
exporting to foreign countries.

27. Which of the following operations benefits from depreciation of the firm's local currency?
borrowing in a foreign country and converting the funds to the local currency prior to the depreciation.
purchasing foreign supplies.
investing in foreign bank accounts denominated in foreign currencies prior to depreciation of the local currency.
A and B

29. When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are _______ affected by translation exposure. When the dollar weakens, the reported consolidated earnings are __________ affected.
favorably; favorably affected but by a smaller degree
favorably; favorably affected by a higher degree
unfavorably; favorably affected
favorably; unfavorably affected

30. A firm produces goods for which substitute goods are produced in all countries. Depreciation of the firm's local currency should:
decrease local sales as foreign competition in local markets is reduced.
decrease the firm's exports denominated in the local currency.
decrease the returns earned on the firm's foreign bank deposits.
decrease the firm's cash outflow required to pay for imported supplies denominated in a foreign currency.
none of the above

31. Which of the following is not a form of exposure to exchange rate fluctuations?
transaction exposure.
credit exposure.
economic exposure.
translation exposure.

32. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:
positive.
negative.
positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
zero.

33. An example of cross-hedging is:
find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency.
use the forward market to sell forward whatever currencies you will receive.
use the forward market to buy forward whatever currencies you will receive.
B and C

34. Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?
purchase a currency put option in British pounds.
sell pounds forward.
sell a currency call option in British pounds.
borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
A and B

35. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
sell euros forward.
purchase euro currency put options.
purchase euro currency call options.
purchase euros forward.
remain unhedged.

36. If interest rate parity exists and transactions costs are zero, the hedging of payables in euros with a forward hedge will _______.
have the same result as a call option hedge on payables
have the same result as a put option hedge on payables
have the same result as a money market hedge on payables
require more dollars than a money market hedge
A and D

37. Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm's reported earnings (from the consolidated income statement) to _______. If a firm desired to protect against this possibility, it could stabilize its reported earnings by _______ euros forward in the foreign exchange market.
be reduced; purchasing
be reduced; selling
increase; selling
increase; purchasing

38. Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of goods sold attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's "earnings before interest and taxes" would _______ if the Canadian dollar appreciates; the dollar value of Whitewater's "earnings before taxes" would _______ if the Canadian dollar appreciates.
increase; increase
decrease; increase
decrease; decrease
increase; decrease
increase; be unaffected

39. Which of the following is an example of economic exposure but not an example of transaction exposure?
An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.
An increase in the pound's value increases the U.S. firm's cost of British pound payables.
A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables.
A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.

40. Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by _______. If its revenues are more sensitive than expenses, it could reduce economic exposure by _______.
decreasing foreign revenues; decreasing foreign expenses
decreasing foreign revenues; increasing foreign expenses
increasing foreign revenues; decreasing foreign revenues
decreasing foreign expenses; increasing foreign revenues