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Questions on Finance Concepts: ADR, Exchange Risk, etc

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I need help with these 10 questions. Thanks.

Choose the best answer.

1. You live in the U.S. and want to invest in a Japanese company because you believe its stock is uniquely positioned to be unusually profitable over the next 2 years. However, you do not have access to the Japanese financial markets. You could still invest in this stock if the company:
a trades as an ADR.
b issues Samurai bonds.
c issues gilts.
d will agree to a swap.
e issues Eurobonds.

Question 2
2. Which one of the following statements is accurate concerning the foreign exchange market?

a The euro has yet to be adopted as a key currency in the foreign exchange market.
b As a financial market, the foreign exchange market is second in size only to the New York Stock Exchange.
c The Foreign Exchange Market has physical trading floors in London, Tokyo, and New York City.
d Parties are only permitted to participate in the foreign exchange market if they physically exchange goods or services across international boundaries.
e The foreign exchange market is an over-the-counter market.

Question 3
3. The U.S. dollar equivalent is 0.3841 for the Brazilian real and 1.8759 for the U.K. pound. This means that:
a one U.S. dollar will buy 1.8759 U.K. pounds.
b 0.3841 Brazilian reals are worth 1.8759 U.K. pounds.
c one Brazilian real will buy 1.8759 U.K. pounds.
d one U.S. dollar will buy 0.3841 Brazilian reals.
e one U.K. pound will buy 1.8759 U.S. dollars.

Question 4
4. Assume that a canned soft drink costs $1 in the U.S. and $1.25 in Canada. At the same time, the currency per U.S. dollar is C$1.25. In this case:
a absolute purchasing power parity exists.
b the Fisher formula applies.
c relative purchasing power parity exists.
d interest rate parity exists.
e spot rates and future rates are equal.

Question 5
5. Currently, you can exchange $1 for £.53. Assume that the average inflation rate in the U.S. over the next four years will be 4 percent annually as compared to 5 percent in the U.K. Based on relative purchasing power parity, you should expect the _____ over the next 4 years.
a British pound to appreciate against the U.S. dollar
b U.S. dollar to appreciate against the British pound
c British pound to appreciate against all currencies
d both the U.S. dollar and the British pound to appreciate against all other currencies
e U.S. dollar to appreciate against all currencies

Question 6
6. Suppose that you could buy 27 Russian rubles or 108 Japanese yen last year for $1. Today, $1 will buy you 28 rubles or 104 yen. Over the past year, the:
a U. S. dollar depreciated against the Russian ruble.
b U.S. dollar appreciated against both the ruble and the yen.
c U.S. dollar appreciated against the Japanese yen.
d Russian ruble depreciated against the U.S. dollar.
e Japanese yen depreciated against the U.S. dollar.

Question 7
7. Translation exposure to exchange rate risk is primarily associated with the:
a daily fluctuations in the exchange rate and a firm's accounts payable.
b actual operations of a firm.
c cash investments of a firm.
d accounting for a firm's overseas ventures.
e daily exchange of a firm's cash receipts.

Question 8
8. If interest rate parity exists between country A and country B, then:
a significant covered interest arbitrage opportunities exist between currency A and currency B.
b investors will prefer the risk-free investment of one country over the risk-free investment of the other country.
c the percentage difference between the spot and forward rates is equal to the interest rate differential between country A and country B.
d the spot and forward exchange rates between the two countries must be equal.
e the interest rate in country B must equal the interest rate in country A.

Question 9
9. Which of the following is (are) an example of short-run exposure to exchange rate risk? (I. A few years ago, you built a factory overseas to take advantage of the lower raw materials cost. Today, those costs have increased such that your overseas factory no longer provides a cost advantage to your firm. II. Your firm owns land in Canada valued at C$1 million. That value has remained constant in Canadian dollars for the past two years. However, the financial statements of your firm, which are expressed in U.S. dollars, reflect a 5 percent increase in the value of that property over the past year. III. You order a shipment of diamonds from South Africa at a cost of 5 million South African rand. You wait until the shipment arrives to pay for the order. When you pay the invoice, your cost in U.S. dollars has increased by $1,500 since the order date. IV. You sold some equipment to a firm in the U.K. at an invoice price of £300,000. At the time of the sale, the invoice price was worth $565,000. However, when the firm paid the invoice and you exchanged the funds into dollars, you only received $558,000.)
a III only
b II and IV only
c I and II only
d I only
e III and IV only

Question 10
10. Suppose that a firm builds a factory overseas, staffs it with foreign workers, uses materials supplied by foreign companies, and finances the entire operations with a loan from a foreign bank located in the same town as the factory. This firm is probably trying to greatly reduce, or eliminate, any:
a interest rate disparities.
b translation exposure to exchange rate risk.
c short-run exposure to exchange rate risk.
d political risk associated with the foreign operation.
e long-run exposure to exchange rate risk.

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Solution Preview

Question 1
1. You live in the U.S. and want to invest in a Japanese company because you believe its stock is uniquely positioned to be unusually profitable over the next 2 years. However, you do not have access to the Japanese financial markets. You could still invest in this stock if the company:

a trades as an ADR.

Ref: http://en.wikipedia.org/wiki/American_Depositary_Receipt

The stock of many non-US companies trades on US exchanges through the use of ADRs. ADRs enable US investors to buy shares in foreign companies without undertaking cross-border transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.

Question 2
2. Which one of the following statements is accurate concerning the foreign exchange market?

e. The foreign exchange market is an over-the-counter market.

Ref:

Question 3
3. The U.S. dollar equivalent is 0.3841 for the Brazilian real and 1.8759 for the U.K. pound. This means that:

e one U.K. pound will buy 1.8759 U.S. dollars.

Since 1 UK Pound = 1.8759 * USD

Question 4
4. Assume that a canned soft drink costs $1 in the U.S. and $1.25 in Canada. At the same time, the currency per ...

Solution Summary

Solution explains the concepts of ADR, Exchange Risk, Currency Conversion Calculation, etc..

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