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Unformatted text preview: CHAPTER 17
International Business Finance
Multiple Choice: Conceptual
International operations motivation
international operations? Answer: e
are reasons why companies a. To take advantage of lower production costs
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.
Multinational financial management
2. in Diff: E move regions Answer: e into of Diff: E Multinational financial management requires that
a. The effects of changing currency values be included in financial
b. Legal and economic differences be considered in financial decisions.
c. Political risk be excluded from multinational corporate financial
d. All of the above.
e. Only a and b above. Currency depreciation
3. Answer: a Diff: E If the inflation rate in the United States is greater than the
inflation rate in Sweden, other things held constant, the Swedish
e. Appreciate against the U.S. dollar.
Depreciate against the U.S. dollar.
Remain unchanged against the U.S. dollar.
Appreciate against other major currencies.
Appreciate against the dollar and other major currencies. Chapter 17 - Page 1 International bond markets
4. Answer: d Diff: M Which of the following statements is false?
a. Any bond sold outside the country of the borrower is called an
b. Foreign bonds and Eurobonds are two important types of international
c. Foreign bonds are bonds sold by a foreign borrower but denominated
in the currency of the country in which the issue is sold.
d. The term Eurobond specifically applies to any foreign bonds
denominated in U.S. currency.
e. None of the above. Interest rate parity
5. Answer: a Diff: M In Japan, 90-day securities have a 4 percent annualized return and 180day securities have a 5 percent annualized return.
In the United
States, 90- day securities have a 4 percent annualized return and 180day securities have an annualized return of 4.5 percent.
securities are of equal risk.
Japanese securities are denominated in
terms of the Japanese yen. Assuming that interest rate parity holds in
all markets, which of the following statements is most correct?
a. The yen-dollar spot exchange rate equals the yen-dollar exchange
rate in the 90-day forward market.
b. The yen-dollar spot exchange rate equals the yen-dollar exchange
rate in the 180-day forward market.
c. The yen-dollar exchange rate in the 90-day forward market equals the
yen-dollar exchange rate in the 180-day forward market.
d. Answers a and b are correct.
e. Answers b and c are correct. Multiple Choice: Problems
6. Answer: b Diff: E If one Swiss franc can purchase $0.71 U.S. dollars, how many Swiss
francs can one U.S. dollar buy?
0.50 Chapter 17 - Page 2 Exchange rates
Answer: c Diff: E
If one U.S. dollar buys 1.64 German deutsche marks, how many dollars
can you purchase for one German mark?
0.37 Currency appreciation
yen Eurobonds versus domestic bonds Answer: d Diff: E A foreign investor who holds tax exempt Eurobonds paying 9 percent
interest is considering investing in an equivalent risk domestic bond
in a country with a 28 percent withholding tax on interest paid to
foreigners. If 9 percent after-tax is the investor's required return,
what before-tax rate would the domestic bond need to pay to provide
that after-tax return?
13.57% Credit and exchange rate risk
10. Diff: E Suppose that 288 yen could be purchased in the foreign exchange market
for two U.S. dollars today. If the yen is expected to depreciate by 8
percent tomorrow, how many yen could two U.S. dollars buy tomorrow?
e. 9. Answer: a Answer: d Diff: E Solartech Corporation, a U.S. exporter, sold a solar heating station to
a Japanese customer at a price of 143.5 million yen, when the exchange
rate was 140 yen per dollar.
In order to close the sale, Solartech
agreed to make the bill payable in yen, thus agreeing to take on
exchange rate risk for the transaction. The terms were net 6 months.
If the yen fell against the dollar such that one dollar would buy 154.4
yen when the invoice was paid, what dollar amount would Solartech
actually receive after it exchanged yen for U.S. dollars?
Chapter 17 - Page 3 Inventory value and exchange rates
11. Answer: b Diff: M A year ago, MC Hammer Company had inventory in Britain valued at
The exchange rate for dollars to pounds was 1£ = 2
U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars.
The inventory in Britain is still valued at 240,000 pounds.
the gain or loss in inventory value in U.S. dollars as a result of the
change in exchange rates?
b. -$ 43,200
d. $ 43,200
e. $ 47,473 Currency depreciation
12. Answer: d One British pound can purchase 1.82 U.S. dollars today in the foreign
exchange market and currency forecasters predict that the U.S. dollar
will depreciate by 12 percent against the pound over the next 30 days.
How many dollars will a pound buy in 30 days?
1.63 Cross rates
13. Answer: e Diff: M Suppose exchange rates between U.S. dollars and Swiss francs is SF 1.41
= $1.00 and the exchange rate between the U.S. dollar and the German
mark is $1.00 = 1.64 DM.
What is the cross-rate of Swiss francs to
0.86 Cross rates
14. Diff: M Answer: b Diff: M Currently, 1 British pound equals 1.62 U.S. dollars and 1 U.S. dollar
equals 1.62 German marks. What is the cross exchange rate between the
pound and the mark?
British Chapter 17 - Page 4 pound
marks Forward exchange rates
15. premium of 8%
premium of 18%
discount of 18%
discount of 8%
premium of 16% Exchange rates and asset value Answer: a Diff: M In 1985, a particular Japanese imported automobile sold for 1,476,000
yen or $8,200. If the car still sells for the same amount of yen today
but the current exchange rate is 144 yen per dollar, what is the car
selling for today in U.S. dollars?
$13,525 Forward market hedge
17. Diff: M If the spot rate of the French franc is 5.51 francs per dollar and the
180-day forward rate is 5.97 francs per dollar, then the forward rate
for the French franc is selling at a ________________ to the spot rate.
e. 16. Answer: d Answer: e Diff: M Sunware Corporation, a U.S. based importer, makes a purchase of crystal
glassware from a firm in Germany for 39,960 marks or $24,000, at the
spot rate of 1.665 marks per dollar. The terms of the purchase are net
90 days, and the U.S. firm wants to cover this trade payable with a
forward market hedge to eliminate its exchange rate risk. Suppose the
firm completes a forward hedge at the 90-day forward rate of 1.682
marks. If the spot rate in 90 days is actually 1.638 marks, how much
will the U.S. firm have saved in U.S. dollars by hedging its exchange
c. $ 0
e. $638 Purchasing power parity
18. Answer: d Diff: M A product sells for $750 in the United States.
The exchange rate is
such that $1 equals 1.65 German marks.
If purchasing power parity
(PPP) holds, what is the price of the product in Germany?
d. 1,237.50 marks
e. 1,650.00 marks
Chapter 17 - Page 5 Purchasing power parity
19. Answer: c Hockey skates sell in Canada for 105 Canadian dollars.
Canadian dollar equals 0.71 U.S. dollars.
If purchasing power parity
(PPP) holds, what is the price of hockey skates in the United States?
e. $ 14.79
$147.88 Purchasing power parity
20. Answer: e 1
1.44 Interest rate parity Swiss
Answer: a Diff: M 90-day investments in Britain have a 6 percent annualized return and a
1.5 percent quarterly (90-day) return. In the U.S., 90-day investments
of similar risk have a 4 percent annualized return and a 1 percent
quarterly (90-day) return.
In the 90-day forward market, 1 British
pound equals $1.65.
If interest rate parity holds, what is the spot
$0.8500 Interest rate parity
22. Diff: M A box of candy costs 28.80 Swiss francs in Switzerland and $20 in the
United States. Assuming that purchasing power parity (PPP) holds, what
is the current exchange rate?
e. 21. Diff: M Answer: d Diff: M In the spot market, 1 U.S. dollar equals 1.60 German marks.
German securities have an annualized return of 6 percent (and therefore
have a 6-month periodic return equal to 3 percent).
securities have an annualized return of 6.5 percent and a periodic
return of 3.25 percent.
If interest rate parity holds, what is the
dollar-mark exchange rate in the 180-day forward market?
dollar Chapter 17 - Page 6 =
marks CHAPTER 17
Answers and Solutions
1. International operations motivation Answer: e Diff: E 2. Multinational financial management Answer: e Diff: E 3. Currency depreciation Answer: a Diff: E 4. International bond markets Answer: d Diff: M 5. Interest rate parity Answer: a Diff: M 6. Exchange rates Answer: b Diff: E Dollars should sell for 1/0.71, or 1.41 Swiss francs per dollar.
7. Exchange rates Answer: c Diff: E Answer: a Diff: E You can get 1/1.64, or 0.61 dollars for one mark.
8. Currency appreciation If one gets 288 yen for two dollars, the exchange rate is 144 yen per
dollar. If the yen depreciates by 8 percent we would get more yen per
dollar. One U.S. dollar will equal 144 × 1.08 = 155.5 yen. Two dollars
yields 311 yen (2 × 155.5 yen = 311 yen).
9. Eurobonds versus domestic bonds Answer: d Diff: E Gross up the interest rate on the domestic bond:
kd(pretax) = 0.09/(1 - 0.28) = 12.5%.
After-tax return: 12.5% - 0.28(12.5%) = 12.5% - 3.5% = 9.0%.
10. Credit and exchange rate risk
| Answer: d Diff: E 6 months
143.5 million yen At spot rate 140.0 yen/$ →
spot rate = 154.4 yen/$
Calculate the amount received in US dollars after the 143,500,000 yen
are exchanged for dollars at the spot rate of 154.4 yen, when the
invoice is paid.
143,500,000/154.4 = $929,404.15 ≈ $929,404. Chapter 17 - Page 7 11. Inventory value and exchange rates Answer: b Diff: M Answer: d Diff: M Inventory, this year = 240,000£ × $1.82 = $436,800
Inventory, last year = 240,000£ × $2.00 =
Loss = ($ 43,200 )
12. Currency depreciation The British pound will appreciate against the dollar by 12 percent.
1£ = 1.82 US$ × 1.12 = 2.04 US$.
13. Cross rates Answer: e Diff: M Answer: b Diff: M SF/DM = (1.41/1) × (1/1.64) = 1.41/1.64 = 0.86 SF/DM.
14. Cross rates 1 British pound can be exchanged for 1.62 U.S. dollars. 1.62 U.S.
dollars can then be exchanged for 2.6244 [(1.62)(1.62)] German marks.
It follows that 1 pound is worth 2.6244 marks.
15. Forward exchange rates Answer: d Diff: M (5.97 - 5.51)/5.51 = 0.083 ≈ 8%.
Because one can obtain more French
francs for a dollar in the forward market, the forward currency is
selling at an 8 percent discount to the spot rate.
16. Exchange rates and asset value Answer: a Diff: M Exchange rate in 1985 = 1,476,000/$8,200 = 180 yen per dollar.
Today's exchange rate = 144 yen per dollar; 144/180 = 0.80.
Today's price = $8,200/0.8 = $10,250.
Alternatively, 1,476,000/144 = $10,250.
17. Forward market hedge Answer: e Diff: M Time line:
Forward rate 1.682 DM/US$ 60
| 90 Days
1.638 spot rate
90-day forward contract: $23,757.43 Calculate the cost of the forward contract at the forward rate:
39,960 DM/(1.682 DM/US$) = $23,757.43.
Calculate the cost of purchasing exchange currency at the spot rate in
90 days to satisfy the payable:
39,960 DM/1.638 DM/US$ = $24,395.60.
Calculate the savings from the forward market hedge:
$24,395.60 - $23,757.43 = $638.17 ≈ $638. Chapter 17 - Page 8 18. Purchasing power parity
$750 equals 1,237.50 [(750)(1.65)] marks.
should cost the same in both markets. 19. Diff: M If PPP holds, the product Answer: c Diff: M 105 Canadian dollars equals 74.55 [(105)(0.71)] U.S. dollars.
holds the skates should cost the same in both markets.
20. Purchasing power parity Answer: d If PPP Purchasing power parity Answer: e Diff: M If PPP holds, the candy should cost the same in each country, so that
28.80 Swiss francs equals 20 U.S. dollars.
This relationship implies
that 1 U.S. dollar equals 1.44 Swiss francs.
21. Interest rate parity Answer: a Diff: M From the interest rate parity formula it follows that e 0 = (ft)(1 +
kf)/(1 + kh) = (1.65 dollars/pound)(1.015)/(1.01) = 1.6582 dollars/
pound. Another way to think of this is $1 invested today in the United
States yields $1.01 90 days from now.
Alternatively, investors could
put their money in British securities.
In this case, the investor
would exchange today $1 for (1/1.6582) or 0.6031 pounds in the spot
market. This money could be invested in Britain—after 90 days this
investment would be worth 0.6031(1.015) = 0.6121 pounds.
forward exchange rate, 0.6121 pounds is worth $1.01 90 days from now.
(0.6121 × 1.65 = $1.01.)
22. Interest rate parity Answer: d Diff: M From the interest rate parity formula it follows that f t = (eo)(1 +
kh)/(1 + kf) = (0.6250 dollars/mark)(1.0325)/(1.03) = 0.6265 dollars/
mark, or 1.5961 marks per dollar. Another way to think of this is $1
invested today in the United States yields $1.0325 six months from now.
Alternatively, investors could put their money in German securities.
In this case, the investor would exchange $1 today for 1.6 marks. This
money could be invested in Germany—after six months this investment
would be worth 1.6480 marks [(1.6)(1.03)]. At a forward exchange rate
of 1 dollar equals 1.5961 marks, 1.6480 marks would be worth $1.0325.
Since the two investments produce the same return, interest rate parity
holds. Chapter 17 - Page 9 ...
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