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Exam 30: International Corporate Finance

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Question 31

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What is triangle arbitrage? Using the U.S.dollar, the Canadian dollar, and the euro, construct an example in which triangle arbitrage exists, and then show how to exploit it.

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Students should construct an e...

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Question 32

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You are analyzing a very low-risk project with an initial cost of £120,000.The project is expected to return £40,000 the first year, £50,000 the second year and £60,000 the third and final year.The Current spot rate is £.54.The nominal return relevant to the project is 4 percent in the U.K.and 3 Percent in the U.S.Assume that uncovered interest rate parity exists.What is the net present value Of this project in U.S.dollars?

A) $33,232
B) $34,040
C) $34,067
D) $34,422
E) $35,009

F) C) and E)
G) C) and D)

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Question 33

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An international firm which imports raw materials can reduce its _____ exposure to _____ rate risk by entering into a forward contract.

A new sweater costs 1,449.95 Russian rubles.How much will the identical sweater cost in Euros if absolute purchasing power parity exists and the following exchange rates apply? $\begin{array} { | l | l | l | } \hline \text { Country } & \text { U.S. \$ Equivalent } & \text { Currency per U.S. \$ } \\\hline \text { Russia } & ? & 29.0190 \\\hline \text { Euro } & 1.2159 & ? \\\hline\end{array}$

Interest rate parity:

In the spot market, $1 is currently equal to A$1.42.The expected inflation rate is 3 percent in Australia and 2 percent in the U.S.What is the expected exchange rate one year from now if relative Purchasing power parity exists?

The idea that commodities have the same value no matter where they are purchased or what currency is used is known as _____ parity.

You are considering a project in Poland which has an initial cost of 250,000PLN.The project is expected to return a one-time payment of 400,000PLN 5 years from now.The risk-free rate of return is 3 percent in the U.S.and 4 percent in Poland.The inflation rate is 2 percent in the U.S.and 5 percent in Poland.Currently, you can buy 375PLN for 100USD.How much will the payment 5 Years from now be worth in U.S.dollars?

The home currency approach:

"The rate of change in commodity price levels between two countries determines the rate of change in exchange rates between the two countries." This is a statement of:

How many euros can you get for $2,500 given the following exchange rates? $\begin{array} { | l | l | l | } \hline \text { Country } & \text { U.S. \$ Equivalent } & \text { Currency per U.S. \$ } \\\hline \text { Euro } & 1.0606 & 9426 \\\hline\end{array}$

You want to import €45,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth €.0218?

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

When the US dollar is quoted as £.52 this quote is a(n) :

Are exchange rate changes between the U.S.dollar and the Japanese yen necessarily good or bad for Japanese automakers? Explain your reasoning.

Currently, £1 will buy C$1.36 while £1.10 will buy €1.What is the exchange rate between the Canadian dollar and the euro?

The camera you want to buy costs $399 in the U.S.If absolute purchasing power parity exists, the identical camera will cost _____ in Canada if the exchange rate is C$1 = $.7349.

_____ holds because of the possibility of covered interest arbitrage.

International bonds issued in a single country and denominated in that country's currency are called:

You are expecting a payment of 500,000PLN 3 years from now.The risk-free rate of return is 4 percent in the U.S.and 2 percent in Poland.The inflation rate is 4 percent in the U.S.and 1 percent in Poland.Currently, you can buy 380PLN for 100USD.How much will the payment 3 years from now be worth in U.S.dollars?