QUIZ UNIT 9

1. When performing capital budgeting analysis on international projects, managers (Points : 1)

[removed]find it more difficult to estimate the incremental cash flows for foreign projects

[removed] have to deal with foreign exchange rate risk on international capital investments.

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[removed]must incorporate a country risk premium when evaluating foreign business activities.

[removed] All of the above.

 

2. A European quote is the same as (Points : 1)

[removed]an American quote.

[removed]an indirect quote.

[removed]a direct quote.

[removed]a cross quote.

 

3. Which one of the following statements about Eurobonds is NOT true? (Points : 1)

[removed] Multinational firms can use Eurobonds to finance international or domestic projects.

[removed] Eurobonds are bearer bonds and do not have to be registered.

[removed] Eurobonds are bonds that have to be registered.

[removed] Eurobonds also pay interest annually.

 

4. Long-term debt sold by a foreign firm to investors in a foreign country and denominated in that country’s currency is called a (Points : 1)

[removed] Eurobond.

[removed]municipal bond.

[removed]foreign bond.

[removed]currency bond.

 

5. The major participants in the foreign exchange markets are (Points : 1)

[removed]multinational commercial banks, large investment banking firms, and domestic firms.

[removed]multinational commercial banks, local banks and domestic firms.

[removed]multinational commercial banks, large investment banking firms, and small currency boutiques that specialize in foreign exchange transactions.

[removed] None of the above

 

6. The ways that a foreign government can adversely affect the risk of a foreign project include allEXCEPT: (Points : 1)

[removed] Change tax laws in a way that adversely impacts the firm.

[removed] Impose laws related to labor, wages, and prices that are more restrictive than those applicable for domestic firms.

[removed] Remove tariffs and quotas on any imports.

[removed] Disallow any remittance of funds from the subsidiary to the parent firm for either a limited period of time or the duration of the project.

 

7. Hedging:Tamcon Industries has purchased equipment from a Brazilian firm for a total cost of 1,272,500 Brazilian reals (BR). The firm has to pay in 30 days. Citicorp has given the firm a 30-day forward quote of $0.6123/real. Assume that on the day the payment is due, the spot rate is at $0.6317/BR. How much would Tamcon save by hedging with a forward contract? Round to the nearest dollar. (Points : 3)

[removed] $24,687

[removed] $803,838

[removed] $779,152

[removed] $31,278

 

8. Spot rate: Given that the spot rate is ¥106.74/$ and the 180-day forward quote is ¥100.37/$, we can say that (Points : 3)

[removed]the U.S. dollar is at a forward premium against the yen.

[removed]the yen is at a forward premium against the U.S. dollar.

[removed]the yen is at a forward discount against the U.S. dollar.

[removed]the dollar is at neither a premium nor a discount against the yen.

 

9. Hedging: Palermo Corp. sold equipment to a French firm. Payment of €4,275,000 will be due in 90 days. Palermo has the option of selling the euros at a 90-day forward rate of $1.5922/€. If it waits 90 days to sell the euros, the expected spot rate is $1.5645/€. How much dollar revenue will Palermo lose by not selling forward the euros? Round to the nearest dollar. (Points : 3)

[removed] $124,687

[removed] $118,418

[removed] $159,023

[removed] $131,278

Which of the following economic benefits do the foreign exchange markets provide?

[removed] A mechanism to transfer purchasing power via exports and imports.
[removed] A mechanism for hedging the risk associated with currency fluctuations.
[removed] A channel for businesses to acquire credit for international transactions.
[removed] All of these.

If the foreign exchange rate is the price in dollars for a foreign currency, then the exchange rate quote is called:

[removed] a European quote
[removed] an indirect quote
[removed] a direct quote
[removed] a cross quote

Bartman Corporation observes that the Swiss franc (SF) is being quoted at $0.6164/SF, while the Swedish krona (SK) is quoted at $0.1981/SK. What is the SK/SF cross rate?

[removed] SK3.1116/SF
[removed] SK0.3214/SF
[removed] SK2.1467/SF
[removed] SK0.4183/SF

Given that the spot rate is $1.5276/€ and the 90-day forward quote is $1.5174/€, we can say that:

[removed] the dollar is at neither a premium nor a discount against the euro
[removed] the U.S. dollar is at a forward discount against the euro
[removed] the euro is at a forward premium against the U.S. dollar
[removed] the U.S. dollar is at a forward premium against the euro

All of the following represent differences between Eurobonds and domestic US bonds except that

[removed] many Eurobonds are sold without credit ratings.
[removed] Eurobonds pay coupon interest annually.
[removed] Eurobonds are issued as bearer bonds and do not have to be registered.
[removed] investors in Eurobonds regularly pay taxes on the interest they receive.

 

All other things remaining constant, if the US$/£ exchange rate changes from $1.65/£ to $1.45/£ , which of the following will occur?

[removed] Demand for British goods will decrease.
[removed] None of these.
[removed] Demand for British goods will increase.
[removed] British demand for US goods will decrease.

Which of the following statements regarding the forward rate is false?

[removed] The forward rate is what one party agrees to pay for money in the future.
[removed] The forward rate is established on the day that the agreement is made and defines the exchange rate that will be used in the future.
[removed] Forward rates are important because business transactions may extend over long periods.
[removed] The forward rate quoted on a particular date is very often equal to the spot rate on the same day.

All of the following represent differences between Eurobonds and domestic US bonds except that

[removed] Eurobonds pay coupon interest annually.
[removed] investors in Eurobonds regularly pay taxes on the interest they receive.
[removed] Eurobonds are issued as bearer bonds and do not have to be registered.
[removed] many Eurobonds are sold without credit ratings.

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