QUIZ UNIT 9

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

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

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

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

       All of the above.

2. A European quote is the same as (Points : 1)       an American quote.       an indirect quote.       a direct quote.       a cross quote.

3. Which one of the following statements about Eurobonds is NOT true? (Points : 1)        Multinational firms can use Eurobonds to finance international or domestic projects.        Eurobonds are bearer bonds and do not have to be registered.        Eurobonds are bonds that have to be registered.        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)        Eurobond.       municipal bond.       foreign bond.       currency bond.

5. The major participants in the foreign exchange markets are (Points : 1)       multinational commercial banks, large investment banking firms, and domestic firms.       multinational commercial banks, local banks and domestic firms.       multinational commercial banks, large investment banking firms, and small currency boutiques that specialize in foreign exchange transactions.        None of the above

6. The ways that a foreign government can adversely affect the risk of a foreign project include allEXCEPT: (Points : 1)        Change tax laws in a way that adversely impacts the firm.        Impose laws related to labor, wages, and prices that are more restrictive than those applicable for domestic firms.        Remove tariffs and quotas on any imports.        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)        $24,687        $803,838        $779,152        $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)       the U.S. dollar is at a forward premium against the yen.      the yen is at a forward premium against the U.S. dollar.       the yen is at a forward discount against the U.S. dollar.       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)        $124,687        $118,418        $159,023        $131,278

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

A mechanism to transfer purchasing power via exports and imports.

A mechanism for hedging the risk associated with currency fluctuations.

A channel for businesses to acquire credit for international transactions.

All of these.

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

a European quote

an indirect quote

a direct quote

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?

SK3.1116/SF

SK0.3214/SF

SK2.1467/SF

SK0.4183/SF

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

the dollar is at neither a premium nor a discount against the euro

the U.S. dollar is at a forward discount against the euro

the euro is at a forward premium against the U.S. dollar

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

many Eurobonds are sold without credit ratings.

Eurobonds pay coupon interest annually.

Eurobonds are issued as bearer bonds and do not have to be registered.

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?

Demand for British goods will decrease.

None of these.

Demand for British goods will increase.

British demand for US goods will decrease.

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

The forward rate is what one party agrees to pay for money in the future.

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.

Forward rates are important because business transactions may extend over long periods.

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

Eurobonds pay coupon interest annually.

investors in Eurobonds regularly pay taxes on the interest they receive.

Eurobonds are issued as bearer bonds and do not have to be registered.

many Eurobonds are sold without credit ratings. DOWNLOAD