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1 FINA521 International Financial Managemen...

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1 FINA521 International Financial Management Mid Term Exam Due Friday 12 November at 6:00 PM 1. Which of the following theories suggests that firms seek to penetrate new markets over time? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of the above 2. The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of: a. $1.47. b. $1.53. c. $1.43. d. $1.57. 3. Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market? a. 6% b. 3% c. 4% d. 2% Hint: (1 + .05)/(1 + .07) * ______ = $_______ ($100,000/A$______) * (1 + _____) = A$___________ 4. Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are the expected dollar cash flows of Live Co? 2 a. $200,000 b. $559,500 c. $582,500 d. $393,500 5. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is $.55. What is the net inflow or outflow as measured in U.S. dollars? a. $500,000 outflow. b. $500,000 inflow. c. $275,000 inflow. d. $275,000 outflow. 6. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast? a. $.131. b. $.226. c. $.262. d. $.140. e. $.174. Hint: (1.05)5/(1.08)5 - 1 = _________ 7. Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could've caused this decline in value? a. A weaker Mexican economy b. Lower Mexican interest rates c. Depreciation of the Mexican peso d. Appreciation of the Mexican peso. 8. A weak home currency may not be a perfect solution to correct a balance of trade deficit because: a. it reduces the prices of imports paid by local companies. b. it increases the prices of exports by local companies. c. it prevents international trade transactions from being prearranged. d. foreign companies may reduce the prices of their products to stay competitive. 3 9. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage spread is: a. about 4.44%. b. about 4.26%. c. about 4.03%. d. about 4.17%. 10. Assume the following information: You have $1,000,000 to invest: Current spot rate of pound = $1.30 90-day forward rate of pound = $1.28 3-month deposit rate in U.S. = 3% 3-month deposit rate in Great Britain = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? a. $1,024,000. b. $1,030,000. c. $1,040,000. d. $1,034,000. e.none of the above 11.The international Fisher effect (IFE) suggests that: a. a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate. b. a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate. c. a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate. d. a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate. 12, The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today? a. $1.365 b. $1.235 c. $1.330 d. $1.30 4 13. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of ?200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell ?200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the euros. a. 224,000 b. 220,000 c. 200,000 d. 230,000 14. Assume the following information: Current spot rate of New Zealand dollar = $.41 Forecasted spot rate of New Zealand dollar 1 year from now = $.43 One-year forward rate of the New Zealand dollar = $.42 Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars = 9% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%. a. about 11.97 b. about 9.63 c. about 11.12 d. about 11.64 e. about 10.63 Hint: $500,000/$.41 = NZ$_______ ? (1.08) = NZ$________ ? _______ = ___________ Yield = 15. Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market? a. 6% b. 3% c. 4% d. 2% Hint: (1 + .05)/(1 + .07) ? $0.689 = $0.676. ($100,000/________) ? (1 + .06) = A$_______ ? $_______ = $________ 5 16. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht? a. A$39.93. b. A$25,043.48. c. A$553.00. d. none of the above 17. Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore dollar should ____ by ____%. a. appreciate; 4.85 b. depreciate; 3,11 c. appreciate; 3.11 d. depreciate; 4.85 18. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent. a. discount; 1.9 b. discount; 1.8 c. premium; 1.9 d. premium; 1.8 19 .If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 in 90 days, it could: a. obtain a 90-day forward purchase contract on euros. b. obtain a 90-day forward sale contract on euros. c. purchase euros 90 days from now at the spot rate. d. sell euros 90 days from now at the spot rate. 6 20. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is: a. about .3621 Canadian dollars. b. about .3977 Canadian dollars. c. about 2.36 Canadian dollars. d. about 2.51 Canadian dollars. 21. A forward contract can be used to lock in the ____ of a specified currency for a future point in time. a. purchase price b. sale price c. A or B d. none of the above 22. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)? a. 73.75. b. 125. c. 1.69. d. 0.014. e. none of the above 23. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? 7 a. $10,003. b. $12,063. c. $14,441. d. $16,393. e. $18,219. 24.Assume the following information: Current spot rate of New Zealand dollar = $.41 Forecasted spot rate of New Zealand dollar 1 year from now = $.43 One-year forward rate of the New Zealand dollar = $.42 Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars = 9% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%. a. about 11.97 b. about 9.63 c. about 11.12 d. about 11.64 e. about 10.63 Hint: $500,000/$.41 = NZ$1,219,512 ? (1.08) = NZ$1,317,073 ? .42 = ________ Yield = ( ________ ? $500,000)/$500,000 = ___________ 25. Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the following question(s). What is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%? a. -0.5% b. -2.2% c. -1.5% d. -1.2% 26.According to interest rate parity (IRP): a. the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies. 8 b. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies. c. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies. d. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies. 27. Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____. a. 3.43% b. 5.68% c. 6.5% d. 7.3% 28. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could: a. obtain a 90-day forward purchase contract on Canadian dollars. b. obtain a 90-day forward sale contract on Canadian dollars. c. purchase Canadian dollars 90 days from now at the spot rate. d. sell Canadian dollars 90 days from now at the spot rate. 29. Assume the following information: Quoted Bid Price Quoted Ask Price Value of an Australian dollar (A$) in $ $0.67 $0.69 Value of Mexican peso in $ $.074 $.077 Value of an Australian dollar in Mexican pesos 8.2 8.5 Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy? a. $6,133 b. $2,368 9 c. $6,518 d. $13,711 30. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000 and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of won is $.0012. What are the expected dollar cash flows of Livingston Co.? a. $100,000 b. $200,000 c. $160,000 d. $60,000 31. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should: a. exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars. b. exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars. c. exchange dollars for foreign currencies, and buy existing Treasury securities with dollars. d. exchange foreign currencies for dollars, and buy existing Treasury securities with dollars. 32. A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally? a. $33,600. b. $46,900. c. $44,100. d. $36,400. Hint: Dollars paid when exercising the option = ?________ ? $.50 = $35,000. Premium paid for options = ?70,000 ? $.02 = Amount of dollars paid = ____________ 33. Jensen Co. expects to pay ?50,000 in one month for its imports from France. It also expects to receive ?200,000 for its exports to Belgium in one month. Jensen estimates the standard 10 deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 97.5% confidence level, what is the maximum one month loss in dollars if the expected percentage change of the euro during next month is 2%? Assume that current spot rate of the euro (before considering the maximum one-month loss) is $1.35. a. -$4,303 b. -$7,830 c. -$5,873 d. -$1,958 Hint: Net exposure = ?200,000 - ?50,000 = ?150,000 34. Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place ____ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place ____ pressure on the value of the British pound. a. upward; downward b. upward; upward c. downward; upward d. downward; downward 35. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal. a. increase; U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; U.S. dollar 36.Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply: Currency Lending Rate Borrowing Rate Dollars 7.10% 7.50% New Zealand dollar (NZ$) 6.80% 7.25% Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)? a. $521,325. b. $500,520. 11 c. $104,262. d. $413,419. e. $208,044. Hint: 1. Borrow $5 million. 2. Convert to NZ$: $5,000,000/$.48 = NZ$ __________ 3. Invest the NZ$ at an annualized rate of 6.80% over five days. NZ$________ * [1 + 6.80% (5/360)] 4. Convert the NZ$ back to dollars: 5. Repay the dollars borrowed. 6. After repaying the loan, the remaining dollar profit is: 37.A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)? a. $6,875,000. b. $7,250,000. c. $7,000,000. d. $6,500,000. e. none of the above 38. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) a. $1.63; $1.63 b. $1.63; $1.60 c. $1.63; $1.57 d. $1.57; $1.63 e. none of the above 12 39. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)? a. -$0.01. b. $0.01. c. -$0.04. d. $0.04. e. -$0.03. 40.Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now? a. $44,500. b. $45,000. c. $526 million. d. $47,500. 41. The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange rate for the Japanese yen (?) is $0.0080. After supply and demand for the Japanese yen has adjusted according to purchasing power parity, the new exchange rate for the yen will be a. $0.0078. b. $0.0082. c. $0.0111. d. $0.00492. e. None of the above 42. The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____ for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the 13 buyer and seller of the put option are speculators.) a. $1.30; $1.30 b. $1.34; $1.30 c. $1.30; $1.34 d. $1.34; $1.34 43. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of ?2,000,000 this year, while the Greek subsidiary generated a net inflow of ?1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.05. a. $3,675,000 outflow b. $525,000 outflow c. $525,000 inflow d. $210,000 outflow 44.A strong dollar is normally expected to cause: a. high unemployment and high inflation in the U.S. b. high unemployment and low inflation in the U.S. c. low unemployment and low inflation in the U.S. d. low unemployment and high inflation in the U.S. 45. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario? a. Sell dollars for foreign currency b. Buy dollars with foreign currency c. Lower interest rates d. None of the above 46.Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast? a. $.131. b. $.226. 14 c. $.262. d. $.140. e. $.174. 47. A weak dollar is normally expected to cause: a. high unemployment and high inflation in the U.S. b. high unemployment and low inflation in the U.S. c. low unemployment and low inflation in the U.S. d. low unemployment and high inflation in the U.S. 48. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward? a. $44,500 b. $45,000 c. $526 million d. $47,500 e. $556 million 49. Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____. a. appreciate; 3% b. appreciate; 1% c. depreciate; 3% d. depreciate; 2% e. appreciate; 2%

 

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