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Exam 19: International Diversification

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Question 31

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The present exchange rate is 1 Nigerian Niara (NGN) = U.S. $0.002896. The 1-year future rate is NGN = U.S. $0.002774. The yield on a 1-year U.S. bill is 3.2%. A yield of ________ on a 1-year Nigerian bill will make an investor indifferent between investing in the U.S. bill and the Nigerian bill (NTB) .

A) 2.94%
B) 1.73%
C) 6.04%
D) 7.74%
E) None of the options are correct

F) A) and D)
G) A) and E)

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Question 32

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Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return of your portfolio would be

A) 12.53%.
B) 15.21%.
C) 17.50%.
D) 18.75%.

E) B) and D)
F) None of the above

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Question 33

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The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ = US $0.78. The 1-year forward rate is C$ = US $0.76. The return (denominated in U.S. $) that a U.S. investor can earn by investing in the Canadian security is

Suppose the 1-year risk-free rate of return in the U.S. is 3.5%. The current exchange rate is 1 pound = U.S. $1.70. The 1-year forward rate is 1 pound = $1.65. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?

You are a U.S. investor who purchased British securities for 2,340 pounds one year ago when the British pound cost $1.52. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was ________ if the value of the securities is now 2,440 pounds and the pound is worth $1.61.

The interplay between interest rate differentials and exchange rates, such that each adjusts until the foreign exchange market and the money market reach equilibrium, is called the

The yield on a 1-year bill in the U.K. is 8%, and the present exchange rate is 1 pound = U.S. $1.60. If you expect the exchange rate to be 1 pound = U.S. $1.50 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is

The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called

Suppose the 1-year risk-free rate of return in the U.S. is 4%, and the 1-year risk-free rate of return in Britain is 7%. The current exchange rate is 1 pound = U.S. $1.65. A 1-year future exchange rate of ________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.

________ refers to the possibility of expropriation of assets, changes in tax policy, and the possibility of restrictions on foreign exchange transactions.