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Exam 21: International Corporate Finance

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Question 1

Multiple Choice

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Mr. Black has agreed to a currency exchange with Mr. White. The parties have agreed to exchange C$12,500 for $10,000 with the exchange occurring 4 months from now. This agreed-upon exchange rate is called the:

A) spot rate.
B) swap rate.
C) forward rate.
D) parity rate.
E) triangle rate.

F) C) and D)
G) C) and E)

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C

Question 2

Multiple Choice

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A risk-free asset in the U.S. is currently yielding 3 percent while a Canadian risk-free asset is yielding 2 percent. Assume the current spot rate is C$1.2103. What is the approximate three-year forward rate if interest rate parity holds?

A) C$1.1744
B) C$1.2108
C) C$1.2241
D) C$1.2295
E) C$1.2470

F) None of the above
G) B) and D)

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Question 3

Essay

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Describe the foreign currency and home currency approaches to capital budgeting for a foreign project. Which is better? Which approach would you recommend a U.S. firm use? Justify your answer.

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?

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:

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.7119. The expected inflation rate in Norway is 4 percent and in the U.S. 3 percent. A risk-free asset in the U.S. is yielding 4.5 percent. What approximate real rate of return should you expect on a risk-free Norwegian security?

Absolute purchasing power parity is most apt to exist for which one of the following items?

You want to invest in a project in Canada. The project has an initial cost of C$2.2 million and is expected to produce cash inflows of C$900,000 a year for 3 years. The project will be worthless after the first 3 years. The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S. The applicable interest rate for the project in Canada is 13 percent. The current spot rate is C$1 = $0.8158. What is the net present value of this project in Canadian dollars?

The LIBOR is primarily used as the basis for the rate charged on:

Suppose the Japanese yen exchange rate is ¥114 = $1, and the United Kingdom pound exchange rate is £1 = $1.83. Also suppose the cross-rate is ¥191 = £1. What is the arbitrage profit per one U.S. dollar?

A basic interest rate swap generally involves trading a:

Assume that $1 can buy you either ¥98.48 or £0.6211. If a TV in London costs £990, what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

A large U.S. company has £500,000 in excess cash from its foreign operations. The company would like to exchange these funds for U.S. dollars. In one of the following markets can this exchange be arranged?

Assume that ¥98.48 equal $1. Also assume that SKr7.7274 equal $1. How many Japanese yen can you acquire in exchange for 3,000 Swedish krone?

In the spot market, $1 is currently equal to £0.6211. Assume the expected inflation rate in the U.K. is 2.6 percent while it is 4.3 percent in the U.S. What is the expected exchange rate four years from now if relative purchasing power parity exists?

What is the relationship between the value of the dollar and the value of the euro in relation to the rate of inflation in the United States?

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?

You are expecting a payment of C$100,000 four years from now. The risk-free rate of return is 3.8 percent in the U.S. and 4.1 percent in Canada. The inflation rate is 2 percent in the U.S. and 3 percent in Canada. Suppose the current exchange rate is C$1 = $0.8273. How much will the payment four years from now be worth in U.S. dollars?

Spot trades must be settled:

Suppose the spot and three-month forward rates for the yen are ¥128.79 and ¥133.85, respectively. What is the approximate annual percent difference between the inflation rate in the U.S. and in Japan?