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Exam 22: International Financial Management

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Question 31

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Suppose in the spot market 1 US dollar equals 1.0613 Canadian dollars. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%) . 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the US dollar-Canadian dollar exchange rate in the 180-day forward market?

A) 1 US dollar = 0.6235 Canadian dollars
B) 1 US dollar = 0.6265 Canadian dollars
C) 1 US dollar = 1.0587 Canadian dollars
D) 1 US dollar = 1.5961 Canadian dollars

E) A) and B)
F) A) and C)

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Question 32

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The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.

A) True
B) False

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Question 33

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

Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.

A product sells for $750 in Canada. The exchange rate is $1 to 9.55 pesos. If the law of one price holds, what is the price of the product in Mexico?

The cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.

Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% 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?

In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In Canada, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements best describes the exchange rate?

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.

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.