question

Which one of the following securities is used as a means of investing in a foreign stock that otherwise could not be traded in the United States?

answer

American Depository Receipt

question

Assume that $1 is equal to ¥98 and also equal to C$1.21. Based on this, you could say that C$1 is equal to: C$1(¥98/C$1.21) = ¥80.99. The exchange rate of C$1 = ¥80.99 is referred to as the:

answer

cross-rate.

question

International bonds issued in multiple countries but denominated solely in the issuer's currency are called:

answer

Eurobonds.

question

U.S. dollars deposited in a bank in Switzerland are called:

answer

Eurocurrency.

question

International bonds issued in a single country and denominated in that country's currency are called:

answer

foreign bonds.

question

You would like to purchase a security that is issued by the British government. Which one of the following should you purchase?

answer

gilt

question

On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following Monday morning. Which one of the following is most likely the interest rate that will be charged on this loan?

answer

London Interbank Offer Rate

question

Party A has agreed to exchange $1 million U.S. dollars for $1.21 million Canadian dollars. What is this agreement called?

answer

swap

question

A large U.S. company has £500,000 in excess cash from its foreign operations. The company would like to exchange these funds for U.S. dollars. In one of the following markets can this exchange be arranged?

answer

foreign exchange market

question

The price of one Euro expressed in U.S. dollars is referred to as a(n):

answer

exchange rate.

question

Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £0.62. The traders agree to settle this trade within two business day. What is this exchange called?

answer

spot trade

question

George and Pat just made an agreement to exchange currencies based on today's exchange rate. Settlement will occur tomorrow. Which one of the following is the exchange rate that applies to this agreement?

answer

spot exchange rate

question

A trader has just agreed to exchange $2 million U.S. dollars for $1.55 million Euros six months from today. This exchange is an example of a:

answer

forward trade.

question

Mr. Black has agreed to a currency exchange with Mr. White. The parties have agreed to exchange C$12,500 for $10,000 with the exchange occurring 4 months from now. This agreed-upon exchange rate is called the:

answer

forward rate.

question

Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127?

answer

purchasing power parity

question

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

answer

interest rate parity.

question

Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate?

answer

unbiased forward rates

question

Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates?

answer

uncovered interest parity

question

Which one of the following supports the idea that real interest rates are equal across countries?

answer

international Fisher effect

question

Which one of the following is the risk that a firm faces when it opens a facility in a foreign country, given that the exchange rate between the firm's home country and this foreign country fluctuates over time?

answer

exchange rate risk

question

The market value of the Blackwell Corporation just declined by 5 percent. Analysts believe this decrease in value was caused by recent legislation passed by Congress. Which type of risk does this illustrate?

answer

political risk

question

Where does most of the trading in Eurobonds occur?

answer

London

question

Which one of the following names matches the country where the bond is issued?

answer

Rembrandt: Netherlands

question

The LIBOR is primarily used as the basis for the rate charged on:

answer

Eurodollar loans in the London market.

question

A basic interest rate swap generally involves trading a:

answer

fixed rate for a variable rate.

question

Which one of the following statements is correct concerning the foreign exchange market?

answer

Importers, exporters, and speculators are key players in the foreign exchange market.

question

Triangle arbitrage: I. is a profitable situation involving three separate currency exchange transactions. II. helps keep the currency market in equilibrium. III. opportunities can exist in either the spot or the forward market. IV. is based solely on differences in exchange ratios between spot and futures markets.

answer

I, II, and III only

question

Spot trades must be settled:

answer

within two business days.

question

Assume the euro is selling in the spot market for $1.33. Simultaneously, in the 3-month forward market the euro is selling for $1.35. Which one of the following statements correctly describes this situation?

answer

The euro is selling at a premium relative to the dollar.

question

Which one of the following formulas expresses the absolute purchasing power parity relationship between the U.S. dollar and the British pound?

answer

PUK = S0 PUS

question

Which of the following conditions are required for absolute purchasing power parity to exist? I. goods must be identical II. goods must have equal economic value III. transaction costs must be zero IV. there can be no barriers to trade

answer

I, II, III, and IV

question

Absolute purchasing power parity is most apt to exist for which one of the following items?

answer

silver

question

Relative purchasing power parity:

answer

relates differences in inflation rates to differences in exchange rates.

question

Which one of the following formulas correctly describes the relative purchasing power parity relationship?

answer

E(St) = S0 [1 + (hFC - hUS)]t

question

Which one of the following statements is correct given the following exchange rates? Country/US$ per 1 foreign unit Fri/Thurs South Africa/0.1028/0.1023 Thailand/0.0284/0.0286

answer

The South African rand appreciated from Thursday to Friday against the U.S. dollar.

question

Which of the following variables used in the covered interest arbitrage formula are correctly defined? I. RFC: Foreign country nominal risk-free interest rate II. RUS: U.S. real risk-free interest rate III. F1: 360-day forward rate IV. S0: Current spot rate expressed in units of foreign currency per one U.S. dollar

answer

I, III, and IV only

question

Interest rate parity:

answer

eliminates covered interest arbitrage opportunities.

question

The interest rate parity approximation formula is:

answer

Ft = S0 [1 + (RFC - RUS)]t.

question

The unbiased forward rate is a:

answer

predictor of the future spot rate at the equivalent point in time.

question

The forward rate market is dependent upon:

answer

forward rates equaling the actual future spot rates on average over time.

question

Uncovered interest parity is defined as:

answer

E(St) = S0 [1 + (RFC - RUS)]t.

question

The international Fisher effect states that _____ rates are equal across countries.

answer

real

question

The home currency approach (p1):

answer

employs uncovered interest parity to project future exchange rates.

question

The home currency approach (p2):

answer

requires an applicable exchange rate for every time period for which there is a cash flow.

question

The foreign currency approach to capital budgeting analysis: I. is computationally easier to use than the home currency approach. II. produces the same results as the home currency approach. III. requires an exchange rate for each time period for which there is a cash flow. IV. computes the NPV of a project in both the foreign and the domestic currency.

answer

I, II, and IV only

question

Which one of the following is a suggested method of reducing a U.S. importer's short-run exposure to exchange rate risk?

answer

entering a forward exchange agreement timed to match the invoice date

question

Long-run exposure to exchange rate risk relates to:

answer

unexpected changes in relative economic conditions.

question

The type of exchange rate risk known as translation exposure is best described as:

answer

the problem encountered by an accountant of an international firm who is trying to record balance sheet account values.

question

Which of the following statements are correct? I. The usage of forward rates increases the short-run exposure to exchange rate risk. II. Accounting translation gains and losses are recorded in the equity section of the balance sheet. III. The long-run exchange rate risk faced by an international firm can be reduced if a firm borrows money in the foreign country where the firm has operations. IV. Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk.

answer

II and III only

question

Which one of the following types of operations would be subject to the most political risk if the operation were conducted outside of a firm's home country?

answer

military weapons manufacturing

question

How many Euros can you get for $2,100 if one euro is worth $1.2762?

answer

€1,645.51 $2,100 (€1/$1.2762) = €1,645.51

question

You are planning a trip to Australia. Your hotel will cost you A$145 per night for seven nights. You expect to spend another A$2,800 for meals, tours, souvenirs, and so forth. How much will this trip cost you in U.S. dollars given the following exchange rates? Country: Australia US $ Equivalent: 0.6707 Currency per US$: 1.4910

answer

$2,559 [(A$145 7) + A$2,800] ($1/A$1.4910) = $2,559

question

You want to import $147,000 worth of rugs from India. How many rupees will you need to pay for this purchase if one rupee is worth $0.0202?

answer

Rs 7,277,228 $147,000 (Rs 1/$0.0202) = Rs 7,277,228

question

Currently, $1 will buy C$1.2103 while $1.2762 will buy €1. What is the exchange rate between the Canadian dollar and the euro?

answer

C$1.5446 = €1 (C$1.2103/$1) ($1.2762/€1) = C$1.5446/€1

question

Assume that ¥98.48 equal $1. Also assume that SKr7.7274 equal $1. How many Japanese yen can you acquire in exchange for 3,000 Swedish krone?

answer

¥38,233 SKr3,000 ($1/SKr7.7274) (¥98.48/$1) = ¥38,233

question

You just returned from some extensive traveling throughout the Americas. You started your trip with $20,000 in your pocket. You spent 3.4 million pesos while in Chile and 16,500 bolivares in Venezuela. Then on the way home, you spent 47,500 pesos in Mexico. How many dollars did you have left by the time you returned to the U.S. given the following exchange rates? (Note: Multiple symbols are used to designate various currencies. For example, the U.S. dollar is notated as "$" or as "USD".) Country/US$ Equiv./Currency per US$ Chile/?/668.0001 Mexico/0.0777/? Venezuela/?/2.1473

answer

3,535 USD 20,000USD - [3.4mCLP (1USD/668.0001CLP)] - [16,500 VEF (1USD/2.1473VEF)] - [47,500MXN (0.0777USD/1MXN) = 3,535USD

question

You have 100 British pounds. A friend of yours is willing to exchange 180 Canadian dollars for your 100 British pounds. What will be your profit or loss if you accept your friend's offer, given the following exchange rates? Country/Equiv./Currency per US$ Canada/?/1.2103 UK/1.16100/?

answer

£7.63 loss [£100 (C$180/£100) ($1/C$1.2103) (£1/$1.6100)] - £100 = -£7.63 = £7.63 loss

question

Assume you can buy 52 British pounds with 100 Canadian dollars. How much profit can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars? Country/Equiv/Curr. per USD Canada/?/1,2103 UK/?/0.6211

answer

$1.33 [$100 (C$1.2103/$1) (£52/C$100) ($1/£0.6211)] - $100 = $1.33 profit

question

Today, you can exchange $1 for £0.6211. Last week, £1 was worth $1.6104. How much profit or loss would you now have if you had converted £100 into dollars last week?

answer

profit of ₤0.02 [£100 ($1.6104/£1) (£0.6211/$1)] - £100 = £0.02

question

Today, you can get either 121 Canadian dollars or 1,288 Mexican pesos for 100 U.S. dollars. Last year, 100 U.S. dollars was worth 115 Canadian dollars or 1,291 Mexican pesos. Which one of the following statements is correct given this information?

answer

$100 converted into Canadian dollars last year would now be worth $95.05. $100 (C$115/$100) ($100/C$121) = $95.05 $100 (Ps1,291/$100) ($100/Ps1,288) = $100.23

question

The camera you want to buy costs $289 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing power parity exists.

answer

$349.79 $289 (C$1/$0.8262) = C$349.79

question

A new coat costs 3,900 Russian rubles. How much will the identical coat cost in Euros if absolute purchasing power parity exists and the following exchange rates apply? Country/Equiv/C per USD Russia/?/27.0520 Euro/1.2762/?

answer

€112.97 Ru3,900 ($1/Ru27.0520) (€1/$1.2762) = €112.97

question

Assume that $1 can buy you either ¥98.48 or £0.6211. If a TV in London costs £990, what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

answer

¥156,972 £990 ($1/£0.6211) (¥98.48/$1) = ¥156,972

question

In the spot market, $1 is currently equal to A$1.4910. Assume the expected inflation rate in Australia is 3.5 percent and in the U.S. 4.0 percent. What is the expected exchange rate one year from now if relative purchasing power parity exists?

answer

A$1.4835 E(S1) = A$1.4910 [1 + (0.035 - 0.04)]1 = A$1.4835

question

In the spot market, $1 is currently equal to £0.6211. Assume the expected inflation rate in the U.K. is 4.2 percent while it is 3.4 percent in the U.S. What is the expected exchange rate one year from now if relative purchasing power parity exists?

answer

£0.6261 E(S1) = £0.6211 [1 + (0.042 - 0.034]1 = £0.6261

question

In the spot market, $1 is currently equal to £0.6211. Assume the expected inflation rate in the U.K. is 2.6 percent while it is 4.3 percent in the U.S. What is the expected exchange rate four years from now if relative purchasing power parity exists?

answer

£0.5799 E(S4) = £0.6211 [1 + (0.026 - 0.043)]4 = £0.5799

question

Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1952. The nominal risk-free rate in Canada is 3 percent while it is 4 percent in the U.S. Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

answer

$0.003 Arbitrage profit = [$1 (C$1.2103/$1) 1.03 ($1/C$1.1952)] - ($1 1.04) = $0.003

question

Assume the current spot rate is C$1.1875 and the one-year forward rate is C$1.1724. The nominal risk-free rate in Canada is 4 percent while it is 3 percent in the U.S. Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

answer

$0.023 Arbitrage profit = [$1 (C$1.1875/$1) 1.04 ($1/C$1.1724)] - ($1 1.03) = $0.023

question

Assume the spot rate for the Japanese yen currently is ¥98.48 per $1 and the one-year forward rate is ¥97.62 per $1. A risk-free asset in Japan is currently earning 2.5 percent. If interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S. security?

answer

3.37 percent (¥97.62 - ¥98.48)/¥98.48 = 0.025 - RUS; RUS = 3.37 percent

question

Assume the spot rate for the British pound currently is £0.6211 per $1. Also assume the one-year forward rate is £0.6347 per $1. A risk-free asset in the U.S. is currently earning 3.4 percent. If interest rate parity holds, what rate can you earn on a one-year risk-free British security?

answer

5.66 percent (£0.6347/£0.6211) = [(1 + RFC)/1.034]; RFC = 5.66 percent

question

A risk-free asset in the U.S. is currently yielding 3 percent while a Canadian risk-free asset is yielding 2 percent. Assume the current spot rate is C$1.2103. What is the approximate three-year forward rate if interest rate parity holds?

answer

C$1.1744 F3 = C$1.2103 [1 + (0.02 - 0.03)]3 = C$1.1744

question

Assume the spot rate on the Canadian dollar is C$1.1847. The risk-free nominal rate in the U.S. is 5 percent while it is only 4 percent in Canada. What one-year forward rate will create interest rate parity?

answer

C$1.1734 F1/C$1.1847 = 1.04/1.05; F1 = C$1.1734

question

Assume the spot rate on the Canadian dollar is C$0.9872. The risk-free nominal rate in the U.S. is 5.4 percent while it is only 3.8 percent in Canada. Which one of the following four-year forward rates best establishes the approximate interest rate parity condition?

answer

C$0.9255 F4 = C$0.9872 [1 + (0.038 - 0.054)]4 = C$0.9255

question

You are considering a project in Poland which has an initial cost of 275,000PLN. The project is expected to return a one-time payment of 390,000PLN four years from now. The risk-free rate of return is 4.5 percent in the U.S. and 3 percent in Poland. The inflation rate is 4 percent in the U.S. and 2 percent in Poland. Currently, you can buy 277PLN for 100USD. How much will the payment of 390,000PLN be worth in U.S. dollars four years from now?

answer

$149,568 E(S4) = (277PLN/100USD) [1 + (0.03 - 0.045)]4 = 2.607502245PLN Payment = 390,000PLN ($1/2.607502245PLN) = $149,568

question

You are expecting a payment of 480,000PLN three years from now. The risk-free rate of return is 3 percent in the U.S. and 4 percent in Poland. The inflation rate is 2.5percent in the U.S. and 3 percent in Poland. Currently, you can buy 277PLN for 100USD. How much will the payment three years from now be worth in U.S. dollars?

answer

$168,189 E(S3) = (277PLN/100USD) [1 + (0.04 - 0.03)]3 = 2.85393377PLN 480,000PLN ($1/2.85393377PLN) = $168,189

question

You are expecting a payment of C$100,000 four years from now. The risk-free rate of return is 3.8 percent in the U.S. and 4.1 percent in Canada. The inflation rate is 2 percent in the U.S. and 3 percent in Canada. Suppose the current exchange rate is C$1 = $0.8273. How much will the payment four years from now be worth in U.S. dollars?

answer

$81,745 E(S4) = (C$1/$0.8273) [1 + (0.041 - 0.038)]4 = C$1.223321779 C$100,000 ($1/C$1.223321779) = $81,745

question

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.6869. The expected inflation rate in Norway is 6 percent and in the U.S. it is 3.5 percent. A risk-free asset in the U.S. is yielding 4 percent. What risk-free rate of return should you expect on a Norwegian security?

answer

6.5 percent 0.04 - 0.035 = RFC - 0.06; RFC = 6.5 percent

question

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.7119. The expected inflation rate in Norway is 4 percent and in the U.S. 3 percent. A risk-free asset in the U.S. is yielding 4.5 percent. What approximate real rate of return should you expect on a risk-free Norwegian security?

answer

1.5 percent Approximate real rateN = Approximate real rateU.S. = 0.045 - 0.03 = 1.5 percent

question

The expected inflation rate in Finland is 2.8 percent while it is 3.7 percent in the U.S. A risk-free asset in the U.S. is yielding 4.9 percent. What approximate real rate of return should you expect on a risk-free Finnish security?

answer

1.2 percent Approximate real rateF = Approximate real rateU.S = 0.049 - 0.037 = 1.2 percent

question

You want to invest in a project in Canada. The project has an initial cost of C$2.2 million and is expected to produce cash inflows of C$900,000 a year for 3 years. The project will be worthless after the first 3 years. The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S. The applicable interest rate for the project in Canada is 13 percent. The current spot rate is C$1 = $0.8158. What is the net present value of this project in Canadian dollars?

answer

-C$74,963 NPV= C$2.2m + C$900000 x (1-[(1/[1.13^3])/0.13]= C$74963

question

You want to invest in a riskless project in Sweden. The project has an initial cost of SKr4.1million and is expected to produce cash inflows of SKr1.75 million a year for three years. The project will be worthless after three years. The expected inflation rate in Sweden is 3.2 percent while it is 4.3 percent in the U.S. A risk-free security is paying 5.5 percent in the U.S. The current spot rate is $1 = SKr7.7274. What is the net present value of this project in Swedish kroner? Assume the international Fisher effect applies.

answer

SKr719,774 0.055 - 0.043 = RFC - 0.032; RFC = 0.044 Compute NPV

question

You are analyzing a project with an initial cost of £48,000. The project is expected to return £11,000 the first year, £36,000 the second year and £38,000 the third and final year. There is no salvage value. The current spot rate is £0.6211. The nominal return relevant to the project is 12 percent in the U.S. The nominal risk-free rate in the U.S. is 4 percent while it is 5 percent in the U.K. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

answer

$25,938 E(S1) = 0.6211 [1 + (0.05 - 0.04)]1 = 0.627311 E(S2) = 0.6211 [1 + (0.05 - 0.04)]2 = 0.63358411 E(S3) = 0.6211 [1 + (0.05 - 0.04)]3 = 0.639919951 CF0 = -£48,000 ($1/£0.6211) = -$77,282.24 CO1 = £11,000 ($1/£0.627311) = $17,535.16 CO2 = £36,000 ($1/£0.63358411) = $56,819.61 CO3 = £38,000 ($1/£0.639919951) = $59,382.43 NPV = -$77,282.24 + ($17,535.16/1.121) + ($56,819.61/1.122) + ($59,382.43/1.123) = -$77,282.24 + $15,656.39 + $45,296.25 + $42,267.24 = $25,938

question

You are analyzing a project with an initial cost of £130,000. The project is expected to return £20,000 the first year, £50,000 the second year and £100,000 the third and final year. There is no salvage value. The current spot rate is £0.6211. The nominal risk-free return is 5.5 percent in the U.K. and 6 percent in the U.S. The return relevant to the project is 14 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

answer

-$8,030 E(S1) = 0.6211 [1 + (0.055 - 0.06)]1 = 0.6179945 E(S2) = 0.6211 [1 + (0.055 - 0.06)]2 = 0.614904528 E(S3) = 0.6211 [1 + (0.055 - 0.06)]3 = 0.611830005 CF0 = -£130,000 ($1/£0.6211) = -$209,306.07 CO1 = £20,000 ($1/£0.6179945) = $32,362.75 CO2 = £50,000 ($1/£0.614904528) = $81,313.44 CO3 = £100,000 ($1/£0.611830005) = $163,444.09 NPV = -$209,306.07 + ($32,362.75/1.141) + ($81,313.44/1.142) + ($163,444.09/1.143) = -$209,306.07 + $28,388.38 + $62,568.05 + $110,320.11 = -$8,030

question

Based on the information below, what is the cross-rate for Australian dollars in terms of Swiss francs? Currency/USD Equiv Australia dollar/0.7002 Switzerland franc/0.8008

answer

0.8744 Cross-rate = 0.7002/0.8008 = 0.8744

question

Suppose the spot exchange rate for the Canadian dollar is C$1.28 and the six-month forward rate is C$1.33. The U.S. dollar is selling at a _____ relative to the Canadian dollar and the U.S. dollar is expected to _____ relative to the Canadian dollar.

answer

premium; appreciate The U.S. dollar is selling at a premium because it is more expensive in the forward market than in the spot market. The U.S. dollar is expected to appreciate in value relative to the Canadian dollar because the U.S. dollar is worth more Canadian dollars in the future than it is today.

question

Based on the following information, the value of the U.S. dollar will _____ with respect to the yen and will _____ with respect to the Canadian dollar. Cur./Cur. per USD Japan yen/115.77 6-months forward/112.80 Canada dollar/1.1379 3-months forward/1.1339

answer

depreciate; depreciate The U.S. dollar will depreciate against both the yen and the Canadian dollar because it will take less of either currency to buy one U.S. dollar in the future as compared to today.

question

Suppose the Japanese yen exchange rate is ¥114 = $1, and the United Kingdom pound exchange rate is £1 = $1.83. Also suppose the cross-rate is ¥191 = £1. What is the arbitrage profit per one U.S. dollar?

answer

$0.0923 $1 = ¥114 ¥114 (£1/¥191) = £0.596859 £0.596859 ($1.83/£1) = $1.0923 Profit = $1.0923 - $1 = $0.0923

question

Suppose the exchange rates are as follows: Cur./Cur. per USD UK pound/0.5383 6-months forward/0.5363 Assume interest rate parity holds and the current six-month risk-free rate in the United States is 3.1 percent. What must the six-month risk-free rate be in Great Britain?

answer

2.73 percent RFC = (£0.5363 - £0.5383)/£0.5383 + 0.31 = 2.73 percent

question

Suppose your company imports computer motherboards from Singapore. The exchange rate is currently 1.5803S$/US$. You have just placed an order for 30,000 motherboards at a cost to you of 170.90 Singapore dollars each. You will pay for the shipment when it arrives in 120 days. You can sell the motherboards for $148 each. What will your profit be if the exchange rate goes up by 8 percent over the next 120 days?

answer

$1,435,999 Profit = 30,000 {$148 - [(S$170.90) ($1/(S$1.5803 1.08))]} = $1,435,999

question

Suppose the spot and six-month forward rates on the Norwegian krone are Kr6.36 and Kr6.56, respectively. The annual risk-free rate in the United States is 5 percent, and the annual risk-free rate in Norway is 7 percent. What would the six-month forward rate have to be on the Norwegian krone to prevent arbitrage?

answer

Kr6.4233 F180 = (Kr6.36)[1 + (0.07 - 0.05)]1/2 = Kr6.4233

question

You observe that the inflation rate in the United States is 3.5 percent per year and that T-bills currently yield 3.8 percent annually. What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 4.5 percent per year?

answer

4.20 percent RUS - hUs = RFC - hFC 0.038 - 0.035 = 0.045 - hFC; hFC = 4.20 percent

question

Suppose the spot and three-month forward rates for the yen are ¥128.79 and ¥133.85, respectively. What is the approximate annual percent difference between the inflation rate in the U.S. and in Japan?

answer

16.67 percent hUS - hJAP (¥133.85 - ¥128.79)/¥128.79 = 0.39289 Approximate inflation difference = (1 + 0.039289)4 - 1 = 16.67 percent

question

Assume the spot exchange rate for the Hungarian forint is HUF 215. Also assume the inflation rate in the United States is 4 percent per year while it is 9.5 percent in Hungary. What is the expected exchange rate 5 years from now?

answer

281 F5 = 215[1 + (0.095 - 0.04)]5 = 281

question

Lakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2.7 million in year 1, €3 million in year 2, and €2.8 million in year 3. The current spot exchange rate is $1.3/€. The current risk-free rate in the United States is 5 percent, compared to that in Europe of 3.5 percent. The appropriate discount rate for the project is estimated to be 18 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €6.5 million. What is the NPV of the project?

answer

-$2,016,686 E(S1) = (1.05/1.035)1 ($1.3/€) = $1.31884058/€ E(S2) = (1.05/1.035)2 ($1.3/€) = $1.337954211/€ E(S1) = (1.05/1.035)3 ($1.3/€) = $1.357344852/€ Year 0 cash flow = €-12,000,000 ($1.3/€) = -$15,600,000 Year 1 cash flow = €2,700,000 ($1.31884058/€) = $3,560,869.57 Year 2 cash flow = €3,000,000 ($1.337954211/€) = $4,013,862.63 Year 3 cash flow = €2,800,000 + €6,500,000) ($1.357344852/€) = $12,623,307.12 NPV = -$15,600,000 + ($3,560,869.57/1.18) + ($4,013,862.63/1.182) + ($12,623,307.12/1.183) = -$2,016,686

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