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Exam 22: International Financial Management

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Question 21

True/False

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The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed.

A) True
B) False

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Question 22

Multiple Choice

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If the inflation rate in Canada is greater than the inflation rate in Britain, other things held constant, what will happen to the British pound?

A) It will appreciate against the Canadian dollar.
B) It will depreciate against the Canadian dollar.
C) It will remain unchanged against the Canadian dollar.
D) It will appreciate against other major currencies.

E) A) and B)
F) A) and C)

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Question 23

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A product sells for $750 in Canada. The exchange rate is $1 to 9.55 pesos. If the law of one price holds, what is the price of the product in Mexico?

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 what is the forward rate for the Israeli shekel selling at?

Suppose 6 months ago a British investor bought a 6-month Canadian Treasury bill at a price of $9,708.74, with a maturity value of $10,000. The exchange rate at that time was 1.9516 dollars per pound. Today, at maturity, the exchange rate is 2.0751 dollars per pound. What is the annualized rate of return to the British investor?

Exchange rate quotations consist solely of direct quotations.

Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

Suppose hockey skates sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals 0.9423 U.S. dollars. If absolute purchasing power parity (PPP) holds, what is the price of hockey skates in the United States?

Exchange rate risk refers to the risk that cash flows from a foreign project, when converted to the parent company's currency, will be worth less than was originally projected because of exchange rate fluctuations.

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In Canada, 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.96. If interest rate parity holds, what is the spot exchange rate?

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

Canada and most other major industrialized nations currently operate under a system of floating exchange rates.

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

If one Swiss franc can purchase $0.966 Canadian dollars, how many Swiss francs can one Canadian dollar buy?

Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?

On average, foreign currency will depreciate against the Canadian dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of Canada.

Suppose that currently 1 British pound equals 1.98 Canadian dollars and 1 Canadian dollar equals 1.04 Swiss francs. What is the cross exchange rate between the pound and the franc?

Suppose 104 yen could be purchased in the foreign exchange market for one Canadian dollar today. If the yen depreciates by 8.0% tomorrow, how many yen could one Canadian dollar buy tomorrow?

Due to advanced communications technology and the standardization of general procedures, working capital management for multinational firms is no more complex than it is for large domestic firms.

The interest rate paid on Eurocurrency deposits depends on the particular bank's lending rate and on rates available on its domestic money market instruments.