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Exam 21: International Corporate Finance

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Question 51

Multiple Choice

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Lakonishok Equipment has an investment opportunity in Europe.The project costs €12 million and is expected to produce cash flows of €2.7 million in year 1,€3.1 million in year 2,and €2.8 million in year 3.The current spot exchange rate is $1.3/€.The current risk-free rate in the United States is 5 percent,compared to that in Europe of 3.5 percent.The appropriate discount rate for the project is estimated to be 18 percent,the U.S.cost of capital for the company.In addition,the subsidiary can be sold at the end of three years for an estimated €6.5 million.What is the NPV of the project?

A) -$2,448,215
B) -$1,920,596
C) -$1,878,787
D) $879,402
E) $2,316,519

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

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Question 52

Multiple Choice

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Triangle arbitrage: I.is a profitable situation involving three separate currency exchange transactions. II.helps keep the currency market in equilibrium. III.opportunities can exist in either the spot or the forward market. IV.is based solely on differences in exchange ratios between spot and futures markets.

A) I and IV only
B) II and III only
C) I, II, and III only
D) II, III, and IV only
E) I, II, III, and IV

F) A) and E)
G) A) and B)

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Question 53

Multiple Choice

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Assume the euro is selling in the spot market for $1.33.Simultaneously,in the 3-month forward market the euro is selling for $1.35.Which one of the following statements correctly describes this situation?

On Friday evening,Bank A loans Bank B Eurodollars that must be repaid the following Monday morning.Which one of the following is most likely the interest rate that will be charged on this loan?

A new coat costs 3,900 Russian rubles.How much will the identical coat cost in Euros if absolute purchasing power parity exists and the following exchange rates apply?

How well do you think relative purchasing power parity (PPP)and uncovered interest parity (UIP)behave? That is,do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?

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?

Spot trades must be settled:

George and Pat just made an agreement to exchange currencies based on today's exchange rate.Settlement will occur tomorrow.Which one of the following is the exchange rate that applies to this agreement?

Long-run exposure to exchange rate risk relates to:

Assume that an item costs $100 in the U.S.and the exchange rate between the U.S.and Canada is: $1 = C$1.27.Which one of the following concepts supports the idea that the item that sells for $100 in the U.S.is currently selling in Canada for $127?

Currently,$1 will buy C$1.2103 while $1.2762 will buy €1.What is the exchange rate between the Canadian dollar and the euro?

You just returned from some extensive traveling throughout the Americas.You started your trip with $20,000 in your pocket.You spent 3.4 million pesos while in Chile and 16,500 bolivares in Venezuela.Then on the way home,you spent 47,500 pesos in Mexico.How many dollars did you have left by the time you returned to the U.S.given the following exchange rates? (Note: Multiple symbols are used to designate various currencies.For example,the U.S.dollar is notated as "$" or as "USD".)

Based on the following information,the value of the U.S.dollar will _____ with respect to the yen and will _____ with respect to the Canadian dollar.

A risk-free asset in the U.S.is currently yielding 4 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?

Which one of the following formulas expresses the absolute purchasing power parity relationship between the U.S.dollar and the British pound?

The forward rate market is dependent upon:

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?

Interest rate parity: