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Multiple Choice Questions on International Finance

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Question 11
11. You can exchange $1 for either .7707 euros or .5331 British pounds. What is the cross rate between the pound and the euro?
a £.5331/?1
b £.5431/?1
c £.6809/?1
d £.6917/?1
e £.5505/?1

Question 12
12. Currently, you can exchange $1 for 105 yen or ?.74 in New York. In Tokyo, the exchange rate is ¥1 = .0075?. If you have $1,000, how much profit can you earn using triangle arbitrage?
a $64.19
b $76.12
c $38.21
d $74.09
e $84.05

Question 13
13. The spot rate on the Canadian dollar is 1.24. Interest rates in Canada are expected to average 2.8 percent while they are anticipated to be 3.1 percent in the U.S. What is the expected exchange rate five years from now?
a 1.20
b 1.24
c 1.25
d 1.22
e 1.16

Question 14
14. A steak dinner in the U.S. costs $25, while the exact meal costs 300 pesos across the border in Mexico. Purchasing power parity implies that the Peso/$ exchange rate is:
a Ps11.50/$1
b Ps11.25/$1
c Ps12.00/$1
d Ps12.75/$1
e Ps12.50/$1

Question 15
15. The current spot rate between the U.K. and the U.S. is £.5331 per $1. The expected inflation rate in the U.S. is 4.5 percent. The expected inflation rate in the U.K. is 3.6 percent. If relative purchasing power parity exists, the exchange rate next year will be:
a £.5283/$1
b £.5379/$1
c £.5192/$1
d £1.8589/$1
e £1.8927/$1

Question 16
16. Currently, you can exchange ?100 for $126.48. The inflation rate in Euroland is expected to be 2.8 percent as compared to 3.4 percent in the U.S. Assuming that relative purchasing power parity exists, the exchange rate 2 years from now should be:
a ?1.2497/$1
b ?.7903/$1
c ?1.1414/$1
d ?.7811/$1
e ?.7827/$1

Question 17
17. The spot rate between Canada and the U.S. is C$1.2378 = $1, while the 1-year forward rate is C$1.2240 = $1. The risk-free rate in Canada is 3.6 percent. The risk-free rate in the U.S. is 4.5 percent. How much profit can you earn on a loan of $10,000 by utilizing covered interest arbitrage?
a $471.50
b $21.50
c $90.00
d $26.80
e $476.80

Question 18
18. The 1-year forward rate for the British pound is £.5429 = $1. The spot rate is £.5402 = $1. The interest rate on a risk-free asset in the U.K. is 3 percent. If interest rate parity exists, a 1 year risk-free security in the U.S. is yielding _____ percent.
a 2.67 percent
b 2.91 percent
c 2.49 percent
d 2.83 percent
e 2.25 percent

Question 19
19. The spot rate between Japan and the U.S. is ¥104.02 = $1, while the 1-year forward rate is ¥105.13 = $1. A 1-year risk-free security in the U.S. is yielding 4.2 percent. What is the rate of return on a 1-year risk-free security in Japan assuming that interest rate parity exists?
a 1.88 percent
b 5.31 percent
c 2.09 percent
d 5.08 percent
e 4.67 percent

Question 20
20. A U.S. firm has total assets valued at ?125,000 located in Germany. This valuation did not change from last year. Last year, the exchange rate was ?1.1 = $1. Today, the exchange rate is ?.8 = $1. By what amount did these assets change in value on the firm's U.S. financial statements?
a $42,024.43
b $43,318.17
c $42,613.64
d $44,200.16
e $41,666.67

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Solution Preview

Please see attached file

Question 11  
  11. You can exchange $1 for either .7707 euros or .5331 British pounds. What is the cross rate between the pound and the euro?  
  a  £.5331/?1  
b   £.5431/?1  
c  £.6809/?1  
d  £.6917/?1  
  e £.5505/?1  

Answer: d  £.6917/?1  
0.7707 Euros= 0.5331 British pound
or 1 Euro= 0.6917 British pound =0.5331/0.7707

   Question 12     
  12. Currently, you can exchange $1 for 105 yen or ?.74 in New York. In Tokyo, the exchange rate is ¥1 = .0075?. If you have $1,000, how much profit can you earn using triangle arbitrage?  
a   $64.19  
b  $76.12  
c  $38.21  
  d $74.09  
  e $84.05  

Answer: a   $64.19  

Cross rate for Euro Yen= 0.0070 Euro/Yen =0.74/105

Therefore Yen is overvalued against Euro as it is priced at 0.0075 Euro/Yen

For triangular arbitrage convert Yen to Euro

Dollar

Yen Euro

Convert $1,000 to Yen @ 105 Yen/Dollar
Yen received= 105,000 Yen =1000*105

Convert $105,000 Yen to Euro @ 0.0075 Euro/Yen
Euro received= 787.50 Euro =105000*0.0075

Convert 787.50 Euro to $ @ 0.74 Euro/$
$ received= $1,064.19 =787.5/0.74

Therefore, arbitrage profit= $64.19 =1064.19-1000

   Question 13    
  13. The spot rate on the Canadian dollar is 1.24. Interest rates in Canada are expected to average 2.8 percent while they are anticipated to be 3.1 percent in the U.S. What is the expected exchange rate five years from now?  
a    1.20  
b   1.24  
c  1.25  
d   1.22  
e  1.16  

Answer: d   1.22  

Interest rate parity
Forward rate / Spot rate = (1+ Canadian interest rate)^5/ (1+ US interest rate)^5
(^stands for raised to the power of

Forward rate / 1.24 = (1+ 2.8%)^5/ (1+ 3.1)^5
or Forward rate= 1.24 x (1+ 2.8%)^5/ (1+ ...

Solution Summary

Answers multiple choice questions on International Finance: cross rate, triangle arbitrage, expected exchange rate, purchasing power parity, covered interest arbitrage, interest rate parity.

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International Finance Multiple Choice Questions

International Finance Multiple Choice

1. If interest rate parity exists and transactions costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

a. Less than the domestic interest rate.

b. Greater than the domestic interest rate.

c. Equal to the domestic interest rate.

d. Greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount.

2. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:

a. Sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.

b. Sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.

c. Sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

d. Sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

3. A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by:

a. Buying an identical futures contract.

b. Selling an identical futures contract.

c. Buying a futures contract with a different settlement date.

d. Selling a futures contract for a different amount of currency.

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