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Exam 21: Options and Corporate Finance

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Question 1

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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?

A) A$1.4810
B) A$1.4835
C) A$1.4875
D) A$1.4985
E) A$1.5005

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

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Question 2

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Assume the spot rate on the Canadian dollar is C$1.1847.The risk-free nominal rate in the U.S.is 5 percent while it is only 4 percent in Canada.What one-year forward rate will create interest rate parity?

A) C$1.1362
B) C$1.1429
C) C$1.1734
D) C$1.1799
E) C$1.1961

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

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Question 3

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A trader has just agreed to exchange $2 million U.S.dollars for $1.55 million Euros six months from today.This exchange is an example of a:

Where does most of the trading in Eurobonds occur?

The forward rate market is dependent upon:

The home currency approach:

Based on the following information, the value of the U.S.dollar will _____ with respect to the yen and will _____ with respect to the Canadian dollar.

Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates?

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

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.

You are considering a project in Poland which has an initial cost of 275,000PLN.The project is expected to return a one-time payment of 390,000PLN four years from now.The risk-free rate of return is 4.5 percent in the U.S.and 3 percent in Poland.The inflation rate is 4 percent in the U.S.and 2 percent in Poland.Currently, you can buy 277PLN for 100USD.How much will the payment of 390,000PLN be worth in U.S.dollars four years from now?

The price of one Euro expressed in U.S.dollars is referred to as a(n) :

Assume the spot exchange rate for the Hungarian forint is HUF 215.Also assume the inflation rate in the United States is 4 percent per year while it is 9.5 percent in Hungary.What is the expected exchange rate 5 years from now?

Triangle arbitrage: I.is a profitable situation involving three separate currency exchange transactions. II.helps keep the currency market in equilibrium. III.opportunities can exist in either the spot or the forward market. IV.is based solely on differences in exchange ratios between spot and futures markets.

Which of the following statements are correct? I.The usage of forward rates increases the short-run exposure to exchange rate risk. II.Accounting translation gains and losses are recorded in the equity section of the balance sheet. III.The long-run exchange rate risk faced by an international firm can be reduced if a firm borrows money in the foreign country where the firm has operations. IV.Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

Assume the spot rate for the Japanese yen currently is ¥99.31 per $1 and the one-year forward rate is ¥97.62 per $1.A risk-free asset in Japan is currently earning 2.5 percent.If interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S.security?

Which one of the following formulas expresses the absolute purchasing power parity relationship between the U.S.dollar and the British pound?

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

You just returned from some extensive traveling throughout the Americas.You started your trip with $20,000 in your pocket.You spent 3.4 million pesos while in Chile and 16,500 bolivares in Venezuela.Then on the way home, you spent 47,500 pesos in Mexico.How many dollars did you have left by the time you returned to the U.S.given the following exchange rates? (Note: Multiple symbols are used to designate various currencies.For example, the U.S.dollar is notated as "$" or as "USD".)

Based on the information below, what is the cross-rate for Australian dollars in terms of Swiss francs?