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Exam 21: Options and Corporate Finance

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Question 21

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Suppose the spot exchange rate for the Canadian dollar is C$1.28 and the six-month forward rate is C$1.33.The U.S.dollar is selling at a _____ relative to the Canadian dollar and the U.S.dollar is expected to _____ relative to the Canadian dollar.

A) discount; appreciate
B) discount; depreciate
C) premium; appreciate
D) premium; depreciate
E) premium; remain constant

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

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Question 22

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Which one of the following is a suggested method of reducing a U.S.importer's short-run exposure to exchange rate risk?

A) entering a forward exchange agreement timed to match the invoice date
B) investing U.S.dollars when an order is placed and using the investment proceeds to pay the invoice
C) exchanging funds on the spot market at the time an order is placed with a foreign supplier
D) exchanging funds on the spot market at the time an order is received
E) exchanging funds on the spot market at the time an invoice is payable

F) A) and D)
G) A) and C)

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Question 23

Multiple Choice

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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?

Which one of the following statements is correct given the following exchange rates?

Which one of the following formulas correctly describes the relative purchasing power parity relationship?

The type of exchange rate risk known as translation exposure is best described as:

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?

You have 100 British pounds.A friend of yours is willing to exchange 180 Canadian dollars for your 100 British pounds.What will be your profit or loss if you accept your friend's offer, given the following exchange rates?

You are planning a trip to Australia.Your hotel will cost you A$145 per night for seven nights.You expect to spend another A$2,800 for meals, tours, souvenirs, and so forth.How much will this trip cost you in U.S.dollars given the following exchange rates?

Assume that $1 can buy you either ¥95.42 or £0.6211.If a TV in London costs £990, what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

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

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?

What conditions are necessary for absolute purchasing power parity (PPP) to exist? Is it realistic to believe PPP can exist within a country let alone across national borders?

Assume that ¥95.42 equal $1.Also assume that SKr7.7274 equal $1.How many Japanese yen can you acquire in exchange for 3,000 Swedish krone?

Which one of the following is the risk that a firm faces when it opens a facility in a foreign country, given that the exchange rate between the firm's home country and this foreign country fluctuates over time?

You are analyzing a project with an initial cost of £48,000.The project is expected to return £11,000 the first year, £36,000 the second year and £38,000 the third and final year.There is no salvage value.The current spot rate is £0.6211.The nominal return relevant to the project is 12 percent in the U.S.The nominal risk-free rate in the U.S.is 4 percent while it is 5 percent in the U.K.Assume that uncovered interest rate parity exists.What is the net present value of this project in U.S.dollars?

Using currencies A, B, and C construct an example in which triangle arbitrage exists and then show how to exploit it.

Today, you can exchange $1 for £0.6522.Last week, £1 was worth $1.6104.How much profit or loss would you now have if you had converted £100 into dollars last week?

You are expecting a payment of 450,000PLN three years from now.The risk-free rate of return is 3 percent in the U.S.and 4 percent in Poland.The inflation rate is 2.5percent in the U.S.and 3 percent in Poland.Currently, you can buy 277PLN for 100USD.How much will the payment three years from now be worth in U.S.dollars?

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?