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Exam 22: International Financial Management

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Question 1

True/False

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The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

A) True
B) False

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Question 2

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Which of the following statements is NOT correct?

A) Any bond sold outside the country of the borrower is called an international bond.
B) Foreign bonds and Eurobonds are two important types of international bonds.
C) Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
D) The term "Eurobond" applies only to foreign bonds denominated in U.S. currency.

E) B) and D)
F) A) and D)

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Question 3

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The Eurocurrency market is essentially a long-term market; most loans and deposits in this market have maturities longer than 1 year.

Suppose DeGraw Corporation, a Canadian exporter, sold a solar heating station to a Japanese customer at a price of 106.0875 million yen, when the exchange rate was 103.5 yen per dollar. In order to close the sale, DeGraw agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 110.2 yen when the invoice was paid, what dollar amount would DeGraw actually receive after it exchanged yen for Canadian dollars?

If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the foreign currency is said to be selling at a discount to the spot rate.

If Canada is running a deficit trade balance with China, then in a free market we would expect the value of the Chinese yuan to depreciate against the Canadian dollar.

If one U.S. dollar buys 1.0613 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?

Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.

In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In Canada, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which statement about the exchange rate is true?

Which of the following is NOT likely to be a reason that companies move into international operations?

Because political risk is seldom negotiable, it cannot be explicitly addressed in international corporate financial analysis.

What is NOT one of the requirements of international financial management?

Suppose the exchange rate between Canadian dollars and Swiss francs is SF 1.10 = $1.00, and the exchange rate between the Canadian dollar and the euro is $1.00 = 0.68 euros. What is the cross-rate of Swiss francs to euros?

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

In 1997, a certain Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still sold for the same amount of yen today but the current exchange rate is 110 yen per dollar, what would the car be selling for today in Canadian dollars?

Blenman Corporation, based in Canada, arranged a 2-year, $1,000 loan to fund a project in Mexico. The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 10.1366 pesos per dollar, but it dropped to 9.5511 pesos per dollar before the first payment came due. The loan was not hedged in the foreign exchange market. Thus, Blenman must convert Canadian dollars into Mexican pesos to make its payments. If the exchange rate remains at 9.5511 pesos per dollar through the end of the loan period, what effective interest rate will Blenman end up paying on the loan?

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller North American corporations.

Suppose one British pound can purchase 1.82 US dollars today in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days?

Suppose a Canadian firm buys $200,000 worth of television tubes from a Norwegian manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received) . The rising Canadian deficit has caused the dollar to depreciate against the krone recently. The current exchange rate is 5.50 krones per Canadian dollar. The 90-day forward rate is 5.45 krones/dollar. The firm goes into the forward market today and buys enough Norwegian krones at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 krones per Canadian dollar. How much in Canadian dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?