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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.

    $2.19

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