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Exam 21: Options and Corporate Finance

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Question 31

Multiple Choice

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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?

A) 4.17 percent
B) 4.20 percent
C) 4.24 percent
D) 4.27 percent
E) 4.30 percent

F) C) and D)
G) A) and B)

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Question 32

Multiple Choice

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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?

A) $0.0743
B) $0.0846
C) $0.0857
D) $0.0923
E) $0.0948

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

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Question 33

Multiple Choice

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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?

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?

Suppose the exchange rates are as follows: 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?

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

How well do you think relative purchasing power parity (PPP) and uncovered interest parity (UIP) behave? That is, do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?

You want to invest in a riskless project in Sweden.The project has an initial cost of SKr3.8million 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.

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:

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

Spot trades must be settled:

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?

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 4.2 percent in Canada.Which one of the following four-year forward rates best establishes the approximate interest rate parity condition?

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

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

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?

Interest rate parity:

Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1925.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.

The unbiased forward rate is a:

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?