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Exam 21: International Corporate Finance

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Question 41

Multiple Choice

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You observe that the inflation rate in the United States is 3.5 percent per year and that T-bills currently yield 3.8 percent annually.What do you estimate the inflation rate to be in Australia,if short-term Australian government securities yield 4.5 percent per year?

A) 4.17 percent
B) 4.20 percent
C) 4.24 percent
D) 4.27 percent
E) 4.30 percent

F) All of the above
G) A) and B)

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Question 42

Multiple Choice

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Assume that ¥95.42 equal $1.Also assume that SKr7.7274 equal $1.How many Japanese yen can you acquire in exchange for 3,000 Swedish krone?

A) ¥235
B) ¥261
C) ¥37,045
D) ¥39,024
E) ¥39,520

F) B) and D)
G) A) and D)

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Question 43

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You have 100 British pounds.A friend of yours is willing to exchange 180 Canadian dollars for your 100 British pounds.What will be your profit or loss if you accept your friend's offer,given the following exchange rates?

Which one of the following supports the idea that real interest rates are equal across countries?

Assume that an item costs $100 in the U.S.and the exchange rate between the U.S.and Canada is: $1 = C$1.27.Which one of the following concepts supports the idea that the item that sells for $100 in the U.S.is currently selling in Canada for $127?

What is the relationship between the value of the dollar and the value of the euro in relation to the rate of inflation in the United States?

The forward rate market is dependent upon:

You want to invest in a riskless project in Sweden.The project has an initial cost of SKr3.8million and is expected to produce cash inflows of SKr1.75 million a year for three years.The project will be worthless after three years.The expected inflation rate in Sweden is 3.2 percent while it is 4.3 percent in the U.S.A risk-free security is paying 5.5 percent in the U.S.The current spot rate is $1 = SKr7.7274.What is the net present value of this project in Swedish kroner? Assume the international Fisher effect applies.

You are analyzing a project with an initial cost of £48,000.The project is expected to return £11,000 the first year,£36,000 the second year and £38,000 the third and final year.There is no salvage value.The current spot rate is £0.6211.The nominal return relevant to the project is 12 percent in the U.S.The nominal risk-free rate in the U.S.is 4 percent while it is 5 percent in the U.K.Assume that uncovered interest rate parity exists.What is the net present value of this project in U.S.dollars?

Which of the following conditions are required for absolute purchasing power parity to exist? I.goods must be identical II.goods must have equal economic value III.transaction costs must be zero IV.there can be no barriers to trade

The unbiased forward rate is a:

The home currency approach:

You are expecting a payment of C$100,000 four years from now.The risk-free rate of return is 3.8 percent in the U.S.and 4.1 percent in Canada.The inflation rate is 2 percent in the U.S.and 3 percent in Canada.Suppose the current exchange rate is C$1 = $0.8273.How much will the payment four years from now be worth in U.S.dollars?

In the spot market,$1 is currently equal to A$1.4910.Assume the expected inflation rate in Australia is 3.5 percent and in the U.S.4.0 percent.What is the expected exchange rate one year from now if relative purchasing power parity exists?

Assume that $1 can buy you either ¥95.42 or £0.6211.If a TV in London costs £990,what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

Interest rate parity:

You are planning a trip to Australia.Your hotel will cost you A$145 per night for seven nights.You expect to spend another A$2,800 for meals,tours,souvenirs,and so forth.How much will this trip cost you in U.S.dollars given the following exchange rates? $\begin{array} { l l l } \frac { \text { Country } } { \text { Australia } } & \frac { \text { U.S. \$ Equivalent } } { 0.6707 } \quad \frac { \text { Currency per U.S. } \$ } { 1.4910 }\end{array}$

Suppose your company imports computer motherboards from Singapore.The exchange rate is currently 1.5803S$/US$.You have just placed an order for 30,000 motherboards at a cost to you of 170.90 Singapore dollars each.You will pay for the shipment when it arrives in 120 days.You can sell the motherboards for $148 each.What will your profit be if the exchange rate goes up by 8 percent over the next 120 days?

The foreign currency approach to capital budgeting analysis: I.is computationally easier to use than the home currency approach. II.produces the same results as the home currency approach. III.requires an exchange rate for each time period for which there is a cash flow. IV.computes the NPV of a project in both the foreign and the domestic currency.

International bonds issued in multiple countries but denominated solely in the issuer's currency are called: