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Exam 16: International Business Finance

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Question 31

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Exchange rate changes tend to reflect international differences in inflation rates.What is the name of this theory?

A) the purchasing power parity theory
B) the IMF effect
C) interest rate parity theory
D) the law of one price

E) A) and B)
F) All of the above

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Question 32

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Suppose the current spot rate in New York is .0119 dollars per yen.Inflation for the coming year in the United States is expected to be 3%,while inflation for the coming year is Japan is expected to be only 1%.Using the purchasing power parity theory,what is the expected spot rate at the end of the year should be

A) .0110147 dollars per yen.
B) .0108159 dollars per yen.
C) .0138373 dollars per yen.
D) .0121356 dollars per yen.

E) B) and D)
F) A) and B)

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Question 33

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You purchased 3,000,000 Indian rupees in London at an exchange rate of 54.86 to the dollar and simultaneously sold the rupees in Bahrain at an exchange rate of 55.12 to the dollar.What is the name for such a transaction?

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

A forward exchange contract

Problems of multinationals include

What is arbitrage? Assume that the dollar is quoted $1 = £0.625 in New York and the pound sterling is quoted as £1 = $1.63 in London.Is there an arbitrage opportunity? If so,what would an astute trader do? What will happen to the quotes as trades are made at current prices?

The spot exchange rate in New York is 1.600 dollars per British pound.The 360-day forward exchange rate is 1.680 dollars per pound.The one-year interest rate in Great Britain is 2% while the one-year interest rate in the United States is 4%. a.If the interest rate in Great Britain remains at 2%,what should the interest rate be in the United States according to the interest rate parity theory? b.An American investor with $40,000 decides to take advantage of the differences in rates.Ignoring transaction costs,how can the American investor exploit the disequilibrium? Compare the amount of money the investor will have at the end of the year if he or she invests in one-year U.S.securities versus one-year British securities.

Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.

Money-market hedges and forward market hedges rely on the

In order to profit from an expected near-term increase in the relative value of the British pound versus the U.S.dollar,an investor would be wise to maintain a short position in pounds,then sell when the pound rises in relative value.

The existence of a forward-spot differential creates an arbitrage opportunity that will eliminate the differential almost immediately.

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?

The bid-asked spread is much lower for currencies that are infrequently traded in order to compensate banks for providing the service.

Forward rates are all of the following EXCEPT

A U.S.-based multinational corporation has 100% owned subsidiary in Argentina.The subsidiary operates only domestically,that is,all transactions occur within Argentina.Therefore,the U.S.multinational corporation

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

Commercial centers for foreign exchange exist only in New York and London in order to make it possible for arbitrage to work.

With international investing,unlike domestic investing,exchange rate risk could cause a marginally-positive-NPV project to be rejected due to the additional risk.

Buying and selling in more than one market to make a riskless profit is called