# Multiple Choice Questions on International Finance

Choose the best answer.

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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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.