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Exam 17: International Business Finance

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Question 1

True/False

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Purchasing power parity suggests that interest rates in different countries will adjust so that each currency will have the same purchasing power.

A) True
B) False

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Question 2

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A U.S.-based multinational corporation with 200,000,000 yen of net exposed assets in Japan will realize exchange rate gains if the yen appreciates in value relative to the dollar.

A) True
B) False

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Question 3

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An American manufacturer with its corporate headquarters in New York City is purchasing goods from a French supplier.Which of the following statements is true regarding the exchange rate risk for this contract?

A currency swap is the exchange of principal and interest in one currency for the same in another currency for an agreed period of time.

A multinational with a large number of receivables runs the risk of transaction exposure.

A British-made component costs 45 U.K.pounds.A company in the United States needs to buy these components and the current indirect quote indicates that one dollar will buy .6250 pounds.Ignoring transactions costs,how much will one component cost in U.S.dollars?

All of the following exchange rate exposures involve direct cash flow effects except:

A direct quote is always denominated in U.S.dollars,since the dollar is the medium of exchange in international business.

Exchange rate risk exists for a party to a contract if the contract is denominated in a foreign currency.

A U.S.Company has a 40,000 euro loan in Germany that must be paid in 30 days.Assume the 30-day money market rates in the U.S.and Germany are both 2% for lending and 3.5% for borrowing.The current exchange rate is 1.55 dollars per euro.If the company wants to complete a money-market hedge,how many euros will be invested in the German money market?

A forward exchange contract

A U.S.-based multinational corporation (MNC) currently has an investment portfolio that includes Japanese securities valued at 10,000,000 yen.The company also owes its Japanese suppliers 12,000,000 yen.Which of the following statements is most correct?

Covered interest arbitrage can be taken advantage of when premiums in forward rates are not exactly equal to the interest rate differential between two countries.

Three types of arbitrage are simple arbitrage,rectangular arbitrage,and covered-expense arbitrage.

Which of the following parity conditions is (are) correct?

What is direct foreign investment? What are the additional risks that a multinational corporation must consider before undertaking direct investment in a foreign country?

Exchange rate fluctuations do not increase the riskiness of foreign portfolio investments because changes in exchange rates are compensated for by changes in interest rates and investment returns.

A U.S.corporation investing in a foreign corporation by purchasing stock on a foreign stock exchange is an example of direct foreign investment.

The cost of debt used in the international investment decision is the lesser of the parent's or the subsidiary's cost of debt.

Forward rates,like spot rates,are quoted in both direct and indirect form.