FINANCE-A South Korean company imports from the U.S. and pays in U.S. dollars

QUESTION

1. A
South Korean company imports from the U.S. and pays in U.S. dollars. The spot
exchange rate is $/1054won and the forward rate is the same. The South Korean
company expects the U.S. dollar to appreciate against the won. The South Korean
company could protect its position by:

entering into a
hedge buying dollars forward

entering into a
hedge selling dollars forward

entering into
locational arbitrage

entering into
triangular arbitrage

none of the above

2. The inflation rate is
expected to rise substantially in Argentina while U.S. inflation remains
unchanged. With respect to the U.S. dollar, this would:

place either upward
or downward pressure on the Argentine real (depending on degree of increase
in Argentine inflation)

place upward
pressure on the Argentine peso

place downward
pressure on the Argentine peso

place downward
pressure on the U.S. dollar

none of the above

3. A U.S. company purchases
materials from a company in Brazil for 1 million reals. It receives revenues
from Brazil of 2 million reals. The U.S. company would:

be unaffected by a
stronger dollar

be unaffected by a
weaker dollar

benefit from a
stronger dollar

benefit from a
weaker dollar

none of the above

4 A
U.S. MNC expects net cash inflows of equal amounts in two foreign currencies.
The two currencies are positively correlated. The MNC’s transaction exposure
is:

relatively high

relatively low

neutral

need more
information to answer this question

none of the above

5 The
most important goal of a domestic firm is to maximize shareholder wealth. The
most important goal of a MNC is to:

maximize sales
volume

maximize earnings

maximize employee
well-being

maximize shareholder
wealth

none of the above

6 The
capital account includes:

Interest and
dividend payments received by investors on foreign securities

unilateral transfers

portfolio investment

all of the above

none of the above

7 A
U.S.-based MNC has 10 million yen receivables due in 60 days. It is
certain that the yen will appreciate substantially over time and the expected
appreciation is already priced into the forward market. If the firm is
correct, it should:

sell yen forward.

purchase yen
currency put options.

purchase yen
currency call options.

purchase yen
forward.

remain unhedged

8 The
U.S. tends to import more when:

economic growth in
foreign countries increases

the currencies of
foreign countries strengthen against the dollar

the currencies of
foreign countries weaken against the dollar.

U.S. inflation
rises.

none of the above

9 European
currency options:

have all of the same
characteristics as American-style options, but trade only in European markets

are similar to
American-style options, except they can only be exercised on the expiration
date

usually have the
same premium as American-style options

are not available
for speculating in the foreign exchange market

none of the above

10The
exchange rate of the British pound is $1.31. This is an example of:

a direct quotation
showing how many dollars a pound will buy

a direct quotation
showing how many pounds a dollar will buy

an indirect
quotation showing how many dollars a pound will buy

an indirect
quotation showing how many pounds a dollar will buy

none of the above

11Eurobonds:

are denominated only
in euros

are rarely issued in
bearer form

are denominated in a
number of currencies

do not have
secondary markets

none of the above

12When
goods are exported at prices below cost:

the local government
may be providing free loans

the local government
may be providing free land

it may be considered
dumping

all of the above

none of the above

13A
U.S. MNC should increase in value when its cash flows from subsidiaries in
China and Vietnam increase, and when the:

Chinese yuan and
Vietnamese dong appreciate

Chinese yuan and
Vietnamese dong depreciate

the yuan appreciates
and the dong depreciates

the dong appreciates
and the yuan depreciates

none of the above

14Economic
exposure:

represents only the
exchange rate risk when converting net foreign cash inflow to the local
currency

represents any
impact of exchange rate fluctuations on a firm’s future cash flows

represents
contractual transactions denominated in foreign currencies

is short-term in
nature

none of the above

15A
U.S. company focuses on local sales, but buys inventory, denominated in yen,
from Japanese companies. The company has almost no foreign competition. The
company will probably benefit most by:

depreciation of the
local currency

appreciation of the
local currency

appreciation of the
yen

a stable yen

none of the above

16The
market price of a currency call option will probably increase if:

the strike price is
increased

the length of time
to expiration is shorter

the underlying
currency fluctuates in value

the value of the
underlying currency depreciates

none of the above

17The
Fijian dollar cannot have which of the bid/ask quotations shown below?

$.57/$.56

$.57/$.59

$.53/$.54

$.58/$.60

All of the above are
possible bid/ask quotations.

18 If
Mexican demand for U.S. dollars increases, and other things remain constant,
which of the following should occur:

the value of the
dollar should decrease

the value of the
dollar should increase

the value of the
dollar should remain the same

the value of the
peso should increase

none of the above

19 From
the standpoint of the U.S., a Canadian purchase of U.S. securities represents
a:

capital outflow

unilateral transfer

capital inflow

trade inflow

none of the above

20 Portugal
currently has a balance of trade deficit with Country X. When a firm in Country
X manufactures a product that is almost identical to the original product
produced in Portugal and other countries, this:

increases Portugal’s
capital account deficit

decreases Portugal’s
capital account deficit

increases the
balance of trade deficit with Country X

decreases the
balance of trade deficit with Country X

none of the above

21 Last
week, the Brazilian real was worth $0.50, but appreciated 2% by the end of the
week. What is the value of the real today. Show how you derive the answer.

$0.510

$0.49

$0.52

$1.15

none of the above

22 The
Hong Kong dollar is:

allowed to fluctuate
freely

pegged to the
Chinese yuan

pegged to the U.S.
dollar

pegged to the euro

none of the above

23 Depreciation
of a firm’s local currency will benefit from which of the following operations:

borrowing in a
foreign currency

paying dividends to
foreign stockholders

purchasing supplies
overseas

exporting to foreign
countries

none of the above

24 A
British MNC believes that the U.S. dollar is going to depreciate significantly
in the near future. It has payables of $1 million due in 60 days. If the MNC is
correct that the dollar will depreciate, a good strategy is to:

sell dollars forward

purchase dollars
forward

purchase dollar
currency call options

remain unhedged

none of the above

25 A
Belgian company purchases materials from a company in the U.S. for 1.5 million
euros. It receives revenues from the U.S. of 2 million euros. The Belgian
company:

would be unaffected
by a stronger dollar

has high transaction
exposure

has high economic
exposure

has high translation
exposure

none of the above

26 A U.S.
company sells goods to a Canadian company for 8 million Canadian dollars,
purchases supplies from Canadian companies for 7 million Canadian dollars, and
incurs interest expense of 4 million Canadian dollars on Canadian loans. The
exchange rate is C$/US$1.014. (1) Calculate the US$ value of the company’s cash
flows; (2) Would the US$ value of the cash flows increase or decrease with an
exchange rate of C$/US$.98 and how much? Show how you derive your answers.
27
“A U.S. company expects to receive 1 million British pounds in 1 year. The
U.S. deposit rate for 1 year is 4% and the borrowing rate for 1 year is 9%. The
British deposit rate for 1 year is 3% and the borrowing rate for 1 year is 8%.
The British pound spot rate is $1.61 and the 1-year forward rate is $1.62.
Calculate the value of these exports in 1 year in U.S. dollars if the company
enters into a money market hedge. Show how you derive your answer. ”
28 MLC
Audio is a U.S.-based MNC that has subsidiaries in three European countries.
The subsidiaries frequently remit their earnings back to the parent company.
This year, the Portuguese subsidiary generated a net outflow of €2,000,000, the
Spanish subsidiary generated a net inflow of €2,500,000, and the Italian
subsidiary generated a net inflow of €500,000. Calculate the net inflow or
outflow as measured in U.S. dollars this year. The exchange rate for the euro
is $1.31. Show how you derive your answer.
29 In
Period 1, the predicted value of the Mexican peso was $0.13 and the realized
value was $0.14. In period 2 the predicted value was $0.14 and the realized
value was $0.12. In period 3, the predicted value was $0.13 and the realized
value was $0.15. Calculate the mean absolute forecast error as a percentage of
the realized value. Show how you derive your answer.
30 The
U.S. one-year interest rate is 5% and its expected annual inflation rate is 3%.
The 1-year Chinese interest rate is 10% and its expected annual inflation rate
is 8%. You plan to invest $100,000 in the Chinese market for one year and you
believe that PPP holds. The spot exchange rate of a Chinese RMB is $0.159.
Calculate the percentage yield on your investment? Show how you derive your
answer.
31 The
current spot rate of the Mexican peso is $0.13 and the 180-day forward rate is
$0.14. The180-day deposit rate is 1% in the U.S. and 4% in Mexico. An investor
plans to use covered interest arbitrage for a 180-day investment of $1 million.
(1) Calculate how many U.S. dollars you will have after 180 days; and (2) the
amount of the gain or loss. Show how you derive your answers.
32 The
bid rate of an Australian dollar is $1.055 and the ask rate is $1.065 at Bank
1. The bid rate of the Australian dollar is $1.04 and the ask rate is $1.05 at
Bank Y. Calculate your gain if you use $1,000,000 and execute locational
arbitrage. Show how you derive your answer.
33 The
spot rate of the British pound is $1.61. The premium on a British pound call
option is $.02 and the exercise price is $1.65. The option will be exercised on
the expiration date, if at all. The spot rate on the expiration date is $1.66.
(1) Calculate the profit as a percent of the premium paid. Show how you derive
your answer; and (2) Will the option be exercised?
34 One
ADR of a German company sells for $55.50 and the ADR is convertible into 2
shares of stock. The spot rate of the euro is $1.31. Calculate the share price
of the firm in euros. Show how you derive your answer.
35 At
the end of the year, a U.S. company has expected cash flows of ¥1,000,000 from
Japanese operations, CHF200,000 from Swiss operations, and €350,000 euros from
German operations. At the end of the year, the yen value is expected to be.
$.011; the Swiss franc value is expected to be $1.08, and the euro value is
expected to be $1.31. Calculate expected dollar cash flows for the company by
currency and total. Show how you derive your answer.

 

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