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Exam 19: Multinational Financial Management

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Question 1

Multiple Choice

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Suppose 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 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days?

A) $1.4860
B) $1.6511
C) $1.8346
D) $2.0384
E) $2.2422

F) A) and E)
G) D) and E)

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D

Question 2

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A Eurodollar is a U.S. dollar deposited in a bank outside the United States.

A) True
B) False

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Question 3

Multiple Choice

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If one U.S. dollar buys 1.64 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?

If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will

When the value of the U.S. dollar appreciates against another country's currency, we may purchase more of the foreign currency with a dollar.

Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 0.64 euros. What is the cross rate of Swiss francs to euros?

Exchange rate quotations consist solely of direct quotations.

In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and 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 foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate.

A currency trader observes the following quotes in the spot market: 1 U.S. dollar = 10.875 Mexican pesos 1 British pound = 6.205 Danish krone 1 British pound = 1.98 U.S. dollars Given this information, how many Mexican pesos can be purchased for 1 Danish krone?

Multinational financial management requires that

If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ______________ to the spot rate.

If one U.S. dollar sells for 0.60 British pound, how many dollars should one British pound sell for?

Which of the following statements is NOT CORRECT?

Suppose one year ago, Hein Company had inventory in Britain valued at 240,000 pounds. 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. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates?

Multinational financial management requires that financial analysts consider the effects of changing currency values.

If one British pound can purchase $1.98 U.S. dollars, how many British pounds can one U.S. dollar buy?

Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs 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 francs. If the spot rate in 90 days is actually 1.64 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?

Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.