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Multinational Corporate Finance

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1. Assume that a bank's bid rate on Swiss francs is \$.45 and its ask rate is \$.47. Its

a) 4.44%.
b) 4.26%.
c) 4.03%.
d) 4.17%.

2. Assume the Canadian dollar is equal to \$.88 and the Peruvian Sol is equal to \$.35.
The value of the Peruvian Sol in Canadian dollars is:

3. The ADR of a British firm is convertible into 3 shares of stock. The share price of the
firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth \$1.63. The price of this ADR should be \$_______.

a) 48.90
b) 146.70
c) 55.21
d) none of the above

4. The value of the Australian dollar (A\$) today is \$0.73. Yesterday, the value of the
Australian dollar was \$0.69. The Australian dollar ________ by _______%.

a) depreciated; 5.80
b) depreciated; 4.00
c) appreciated; 5.80
d) appreciated; 4.00

5. The 90-day forward rate for the euro is \$1.07, while the current spot rate of the euro
is \$1.05. What is the annualized forward premium or discount of the euro?

a) 1.9 percent discount.
d) 7.6 percent discount.

6. You are a speculator who sells a put option on Canadian dollars for a premium of
\$.03 per unit, with an exercise price of \$.86. The option will not be exercised until
the expiration date, if at all. If the spot rate of the Canadian dollar is \$.78 on the
expiration date, your net profit per unit is:

a) \$.08
b) \$.03
c) \$.05
d) \$.08
e) none of the above

7. Carl is an option writer. In anticipation of a depreciation of the British pound from its
current level of \$1.50 to \$1.45, he has written a call option with an exercise price of
\$1.51 and a premium of \$.02. If the spot rate at the option's maturity turns out to be
\$1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts
rationally)?

a) -\$0.01
b) \$0.01
c) -\$0.04
d) \$0.04
e) -\$0.03

8. Assume the spot rate of the Swiss franc is \$.62 and the one-year forward rate is
\$.66. The forward rate exhibits a _______ of _______.

9. Assume the following information:

U.S. investors have \$1,000,000 to invest
1-year deposit rate offered on U.S. dollars = 12%
1-year deposit rate offered on Singapore dollars = 10%
1-year forward rate of Singapore dollars = \$.412
Spot rate of Singapore dollar = \$.400

Given this information:
a) interest rate parity exists and covered interest arbit¬rage by U.S investors
results in the same yield as investing domestically.
b) interest rate parity doesn't exist and covered interest arbitrage by U.S.
investors results in a yield above what is possible domestically.
c)interest rate parity exists and covered interest arbit¬rage by U.S. investors
results in a yield above what is possible domesti¬cally.
d) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

10. 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 informa¬tion, 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?

a) \$15,385.
b) \$15,625.
c) \$22,136.
d) \$31,250.

11. Assume the bid rate of a Singapore dollar is \$.40 while the ask rate is \$.41 at Bank X. Assume the bid rate of a Singapore dollar is \$.42 while the ask rate is \$.425 at Bank Z. Given this information, what would be your gain if you use \$1,000,000 and execute loca¬tional arbitrage? That is, how much will you end up with over and above the \$1,000,000 you started with?

a) \$11,764.
b) \$11,964.
c) \$36,585.
d) \$24,390.
e) \$18,219.

12. 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?

a) 2.00
b) 2.40
c) .80
d) .50
e) none of the above

13.According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one year, and a 2% rate of inflation in European countries that use the euro, and require a 3% real return on invest¬ments over one year, the nominal interest rate on one year U.S. Treasury securities would be:

a) 9%.
b) 3%.
c) 2%.
d) 5%.
e) 8%.

14.Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will _______ by about _______.

a) appreciate; 3%
b) appreciate; 1%
c) depreciate; 3%
d) appreciate; 2%

15.The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 1.3%. The
current exchange rate for the Japanese yen (¥) is \$0.0075. After supply and
demand for the Japanese yen has adjusted in the manner suggested by purchasing
power parity, the new exchange rate for the yen will be:

a) \$0.0076
b) \$0.0075
c) \$0.0074
d) \$0.0131
e) none of the above

16.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:

a) 8.00%.
b) 6.00%.
c) 10.16%.
d) 5.88%.

17. If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then
the British pound (£) is expected to ____________ by about _________%,
according to the international Fisher effect (IFE).

a) depreciate; 2.9
b) appreciate; 2.9
c) depreciate; 1.0
d) appreciate; 1.0

18. Silicon Co. has forecasted the Canadian dollar for the most recent period to be \$0.73. The realized value of the Canadian dollar in the most recent period was \$0.80. Thus, the absolute forecast error as a percentage of the realized value was ______%.

a) 9.6
b) -9.6
c) 8.8
d) -8.8

19. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today's spot rate of the Canadian dollar is \$.80. The spot rate forecasted for one year ahead is:

a) \$.860
b) \$.848
c) \$.740
d) \$.752
e) none of the above

20. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another
subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the
parent company. The German subsidiary generated a net outflow of ?2,000,000 this
year, while the Greek subsidiary generated a net inflow of ?1,500,000. What is the
net inflow or outflow as measured in U.S. dollars this year? The exchange rate for
the euro is \$1.05.

a) \$3,675,000 outflow
b) \$525,000 outflow
c) \$525,000 inflow
d) \$210,000 outflow

21. Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to
the Netherlands. Cerra estimates the standard deviation of daily percentage
changes of the euro to be 1 percent over the last 100 days. Assume that these
percentage changes are normally distributed. Using the value-at-risk (VAR) method
based on a 95% confidence level, what is the maximum one-day loss in dollars if the
expected percentage change of the euro tomorrow is 0.5%? The current spot rate of
the euro (before considering the maximum one-day loss) is \$1.01.

a) -\$ 75,750
b) -\$ 60,600
c) -\$111,100
d) -\$ 25,250

22. Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments
denominated in both euros and Canadian dollars in one month. Based on today's
spot rates, the dollar value of the funds to be received is estimated at \$500,000 for
the euros and \$300,000 for the Canadian dollars. Based on data for the last fifty
months, Volusia estimates the standard deviation of monthly percentage changes to
be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation
coefficient between the euro and the Canadian dollar is 0.30. Assuming an expected
percentage change of 0 percent for each currency during the next month, what is the
maximum one-month loss of the currency portfolio? Use a 95 percent confidence
level and assume the monthly percentage changes for each currency are normally
distributed.

a) -9.00%.
b) -30.00%.
c) -5.00%.
d) none of the above

23. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to
determine the total dollar amount received (after accounting for the option premium)
if the firm purchases and exercises a put option:

Exercise price = \$.61
Spot rate = \$.60
Expected spot rate in 30 days = \$.56
30 day forward rate = \$.62

a) \$630,000
b) \$610,000
c) \$600,000
d) \$590,000
e) \$580,000

24. The forward rate of the Swiss franc is \$.50. The spot rate of the Swiss franc is \$.48. The following interest rates exist:

U.S. Switzerland
360 day borrowing rate 7% 5%
360 day deposit rate 6% 4%

You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:

a) \$101,904
b) \$101,923
c) \$ 98,770
d) \$ 96,914
e) \$ 92,307.

Solution Preview

1. Assume that a bank's bid rate on Swiss francs is \$.45 and its ask rate is \$.47. Its

b) 4.26%.

2. Assume the Canadian dollar is equal to \$.88 and the Peruvian Sol is equal to \$.35.
The value of the Peruvian Sol in Canadian dollars is:

\$.35/\$.88 = .3977

3. The ADR of a British firm is convertible into 3 shares of stock. The share price of the
firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth \$1.63. The price of this ADR should be \$_______.

b) 146.70

3 × 30 × \$1.63 = \$146.70

4. The value of the Australian dollar (A\$) today is \$0.73. Yesterday, the value of the
Australian dollar was \$0.69. The Australian dollar ________ by _______%.

c) appreciated; 5.80

(\$0.73 - \$0.69)/\$0.69 = 5.80%

5. The 90-day forward rate for the euro is \$1.07, while the current spot rate of the euro
is \$1.05. What is the annualized forward premium or discount of the euro?

[(F/S) - 1] × 360/90 = 7.6 percent

6. You are a speculator who sells a put option on Canadian dollars for a premium of
\$.03 per unit, with an exercise price of \$.86. The option will not be exercised until
the expiration date, if at all. If the spot rate of the Canadian dollar is \$.78 on the
expiration date, your net profit per unit is:

e) none of the above

Net profit = \$.78 + \$.03 - \$.86 = -\$.05.

7. Carl is an option writer. In anticipation of a depreciation of the British pound from its
current level of \$1.50 to \$1.45, he has written a call option with an exercise price of
\$1.51 and a premium of \$.02. If the spot rate at the option's maturity turns out to be
\$1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts
rationally)?

a) -\$0.01

The net profit per unit is \$1.51 + \$.02 - \$1.54 = -\$.01.

8. Assume the spot rate of the Swiss franc is \$.62 and the one-year forward rate is
\$.66. The forward rate exhibits a _______ of _______.