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Exam 18: Multinational Financial Management

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Question 41

True/False

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When considering the risk of a foreign investment,a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.

A) True
B) False

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Question 42

Multiple Choice

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A product sells for $750 in the United States.The spot exchange rate is $1 to 1.54 Swiss francs.If purchasing power parity (PPP) holds,what is the price of the product in Switzerland?

A) 970.20
B) 1,270.50
C) 1,258.95
D) 1,155.00
E) 1,085.70

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

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Question 43

Multiple Choice

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Suppose 6 months ago a Swiss investor bought a 6-month U.S.Treasury bill at a price of $9,708.74,with a maturity value of $10,000.00.The exchange rate at that time was 1.323 Swiss francs per dollar.Today,at maturity,the exchange rate is 1.324 Swiss francs per dollar.What is the annualized rate of return to the Swiss investor? Do not round the intermediate calculations and round the final answer to two decimal places.

A box of candy costs 28.80 Swiss francs in Switzerland and $21.50 in the United States.Assuming that purchasing power parity (PPP) holds,how many Swiss francs are required to purchase one U.S.dollar? Do not round the intermediate calculations and round the final answer to four decimal places.

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.

A currency trader observes the following quotes in the spot market: 1 U.S.dollar =1.28 Japanese yen 1 British pound =2.25 Swiss francs 1 British pound =1.65 U.S.dollars Given this information,how many yen can be purchased for 1 Swiss franc? Do not round the intermediate calculations and round the final answer to four decimal places.

Legal and economic differences among countries,although important,do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations and subsidiaries.

A product sells for $750 in the United States.The spot exchange rate is $1 to 1.67 Swiss francs.If purchasing power parity (PPP) holds,what is the price of the product in Switzerland?

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

Legal and economic differences among countries,although important,do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations and subsidiaries.

Today in the spot market $1 = 1.82 Swiss francs and $1 = 130 Japanese yen.In the 90-day forward market,$1 = 1.84 Swiss francs and $1 = 127 Japanese yen.Assume that interest rate parity holds worldwide.Which of the following statements is most CORRECT?

If the inflation rate in the United States is greater than the inflation rate in Britain,other things held constant,the British pound will

One year ago,a U.S.investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share.The stock's total purchase cost was 315,000 yen.At the time of purchase,in the currency market 1 yen equaled $0.00952.Today,the stock is selling at a price of 3,465 yen per share,and in the currency market $1 equals 135 yen.The stock does not pay a dividend.If the investor were to sell the stock today and convert the proceeds back to dollars,what would be his realized return on his initial dollar investment from holding the stock?

If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market,then the forward currency is said to be selling at a premium to the spot rate.

Suppose a foreign investor who holds tax-exempt Eurobonds paying 7.25% is considering investing in an equivalent-risk domestic bond in a country with a 28.00% withholding tax on interest paid to foreigners.If 7.25% after-tax is the investor's required return,what before-tax rate would the domestic bond need to pay to provide the required after-tax return?

A Eurodollar is a U.S.dollar deposited in a bank outside the United States.

Suppose a U.S.firm buys $200,000 worth of television tubes from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received) .The rising U.S.deficit has caused the dollar to depreciate against the peso recently.The current exchange rate is 5.62 pesos per U.S.dollar.The 90-day forward rate is 5.45 pesos/dollar.The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation.Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S.dollar.How much in U.S.dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge? Do not round the intermediate calculations and round the final answer to the nearest cent. ​

If one British pound can purchase $2.30 U.S.dollars,how many British pounds can one U.S.dollar buy?

Suppose that currently,1 British pound equals 1.98 U.S.dollars and 1 U.S.dollar equals 1.90 Swiss francs.How many Swiss francs are needed to purchase 1 pound?

One year ago,a U.S.investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share.The stock's total purchase cost was 315,000 yen.At the time of purchase,in the currency market 1 yen equaled $0.00952.Today,the stock is selling at a price of 3,465 yen per share,and in the currency market $1 equals 90 yen.The stock does not pay a dividend.If the investor were to sell the stock today and convert the proceeds back to dollars,what would be his realized return on his initial dollar investment from holding the stock?