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Exam 17: Multinational Financial Management

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Question 1

True/False

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A Eurodollar is a U.S.dollar deposited in a bank outside the United States.

A) True
B) False

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True

Question 2

Multiple Choice

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Suppose hockey skates sell in Canada for 113 Canadian dollars,and 1 Canadian dollar equals 0.71 U.S.dollar.If purchasing power parity (PPP) holds,what is the price of hockey skates in the United States?

A) $60.17
B) $90.66
C) $82.64
D) $93.07
E) $80.23

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

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Question 3

Multiple Choice

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If the inflation rate in the United States is greater than the inflation rate in Britain,other things held constant,the British pound will

A foreign currency will,on average,depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market,then the forward currency is said to be selling at a premium to the spot rate.

A product sells for $750 in the United States.The spot exchange rate is $1 to 1.56 Swiss francs.If purchasing power parity (PPP) holds,what is the price of the product in Switzerland?

Suppose a U.S.firm buys $200,000 worth of television tubes from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received) .The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.68 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge? Do not round the intermediate calculations and round the final answer to the nearest cent. ​

Blenman Corporation,based in the United States,arranged a 2-year,$1,000,000 loan to fund a project in Mexico.The loan is denominated in Mexican pesos,carries a 6.5% nominal rate,and requires equal semiannual payments.The exchange rate at the time of the loan was 5.75 pesos per dollar,but it dropped to 5.10 pesos per dollar before the first payment came due.The loan was not hedged in the foreign exchange market.Thus,Blenman must convert U.S.funds to Mexican pesos to make its payments.If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period,what effective annual interest rate will Blenman end up paying on the loan? Do not round the intermediate calculations and round the final answer to two decimal places.

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

Today in the spot market $1 = 1.82 Swiss francs and $1 = 130 Japanese yen.In the 90-day forward market,$1 = 1.84 Swiss francs and $1 = 127 Japanese yen.Assume that interest rate parity holds worldwide.Which of the following statements is most CORRECT?

Suppose DeGraw Corporation,a U.S.exporter,sold a solar heating station to a Japanese customer at a price of 130.5 million yen,when the exchange rate was 140 yen per dollar.In order to close the sale,DeGraw agreed to make the bill payable in yen,thus agreeing to take some exchange rate risk for the transaction.The terms were net 6 months.If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid,what dollar amount would DeGraw actually receive after it exchanged yen for U.S.dollars?

Exchange rate quotations consist solely of direct quotations.

LIBOR is an acronym for London Interbank Offered Rate,which is an average of interest rates offered by London banks to smaller U.S.corporations on all deposits.

When the value of the U.S.dollar appreciates against another country's currency,we may purchase more of the foreign currency with the U.S.dollar.

Suppose 144 yen could be purchased in the foreign exchange market for one U.S.dollar today.If the yen depreciates by 13.0% tomorrow,how many yen could one U.S.dollar buy tomorrow?

The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

The cash flows relevant for a foreign investment should,from the parent company's perspective,include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return.In the U.S. ,90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return.In the 90-day forward market,1 British pound equals $1.70.If interest rate parity holds,what is the spot exchange rate ($/£) ? Do not round the intermediate calculations and round the final answer to four decimal places.

Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.

Currently,a U.S.trader notes that in the 6-month forward market,the Japanese yen is selling at a premium (that is,you receive more dollars per yen in the forward market than you do in the spot market) ,while the British pound is selling at a discount.Which of the following statements is CORRECT?