Test bank corporate finance 8e ros chap022

Chapter 022 International Corporate Finance Multiple Choice Questions 1. A security issued in the United States that represents shares of a foreign stock and allows that stock to be traded in the United States is called a(n): A. American Depository Receipt b. Yankee bond c. Yankee stock d. Eurostock e. foreign obligation trust certificate SECTION: 22.1 TOPIC: AMERICAN DEPOSITORY RECEIPT TYPE: DEFINITIONS 2. The implicit exchange rate between two currencies when both are quoted in some third currency is called a(n): a. open exchange rate B. crossrate c. backward rate d. forward rate e. interest rate SECTION: 22.1 TOPIC: CROSSRATE TYPE: DEFINITIONS 3. International bonds issued in multiple countries but denominated in a single currency are called: a. Treasury bonds b. Bulldog bonds C. Eurobonds d. Yankee bonds e. Samurai bonds SECTION: 22.1 TOPIC: EUROBONDS TYPE: DEFINITIONS 22-1 Chapter 022 International Corporate Finance 4. Money deposited in a financial center outside the country whose currency is involved is called: a. a foreign depository receipt b. an international exchange certificate c. Euroyen D. Eurocurrency e. Eurodollars SECTION: 22.1 TOPIC: EUROCURRENCY TYPE: DEFINITIONS 5. International bonds issued in a single country and denominated in that country's currency are called: a. Treasury bonds b. Eurobonds c. gilts d. Brady bonds E. foreign bonds SECTION: 22.1 TOPIC: FOREIGN BONDS TYPE: DEFINITIONS 6. Gilts are government securities issued by: A. Britain and Ireland b. Japan c. Germany d. Australia and New Zealand e. Italy SECTION: 22.1 TOPIC: GILTS TYPE: DEFINITIONS 22-2 Chapter 022 International Corporate Finance 7. The rate most international banks charge one another for overnight Eurodollar loans is called the: a. Eurodollar yield to maturity B. London Interbank Offer Rate c. Paris Opening Interest Rate d. United States Treasury bill rate e. international prime rate SECTION: 22.1 TOPIC: LONDON INTERBANK OFFER RATE TYPE: DEFINITIONS 8. Agreements to exchange two securities or currencies are called: a. gilts b. LIBORs c. Samurais d. Yankee agreements E. swaps SECTION: 22.1 TOPIC: SWAPS TYPE: DEFINITIONS 9. The foreign exchange market is where: a. one country's stocks are exchanged for another's b. one country's bonds are exchanged for another's C. one country's currency is traded for another's d. international banks make loans to one another e. international businesses finalize import/export relationships with one another SECTION: 22.2 TOPIC: FOREIGN EXCHANGE MARKET TYPE: DEFINITIONS 22-3 Chapter 022 International Corporate Finance 10. The price of one country's currency expressed in terms of another country's currency is called the: a. LIBOR rate b. cross inflation rate c. depository rate D. exchange rate e. foreign interest rate SECTION: 22.2 TOPIC: EXCHANGE RATE TYPE: DEFINITIONS 11. An agreement to trade currencies based on the exchange rate today for settlement within two business days is called a(n) _ trade. a. swap b. option c. futures d. forward E. spot SECTION: 22.2 TOPIC: SPOT TRADE TYPE: DEFINITIONS 12. The exchange rate on a spot trade is called the _ exchange rate. A. spot b. forward c. triangle d. cross e. open SECTION: 22.2 TOPIC: SPOT EXCHANGE RATE TYPE: DEFINITIONS 22-4 Chapter 022 International Corporate Finance 13. An agreement to exchange currencies at some point in the future using an agreedupon exchange rate is called a _ trade. a. spot B. forward c. swap d. floating e. triangle SECTION: 22.2 TOPIC: FORWARD TRADE TYPE: DEFINITIONS 14. The agreedupon exchange rate to be used at some point in the future to swap currencies is called the _ exchange rate. a. spot b. swap C. forward d. parity e. triangle SECTION: 22.2 TOPIC: FORWARD EXCHANGE RATE TYPE: DEFINITIONS 15. The idea that the exchange rate adjusts to keep buying power constant among currencies is called: a. the unbiased forward rates condition b. uncovered interest rate parity c. the international Fisher effect D. purchasing power parity e. interest rate parity SECTION: 22.3 TOPIC: PURCHASING POWER PARITY TYPE: DEFINITIONS 22-5 Chapter 022 International Corporate Finance 16. 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: a. the unbiased forward rates condition b. uncovered interest rate parity c. the international Fisher effect d. purchasing power parity E. interest rate parity SECTION: 22.4 TOPIC: INTEREST RATE PARITY TYPE: DEFINITIONS 17. The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate is called: A. the unbiased forward rates condition b. uncovered interest rate parity condition c. the international Fisher effect d. purchasing power parity e. interest rate parity SECTION: 22.4 TOPIC: UNBIASED FORWARD RATES TYPE: DEFINITIONS 18. The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates between the countries is called: a. the unbiased forward rates condition B. uncovered interest parity c. the international Fisher effect d. purchasing power parity e. interest rate parity SECTION: 22.4 TOPIC: UNCOVERED INTEREST PARITY TYPE: DEFINITIONS 22-6 Chapter 022 International Corporate Finance 19. The theory that real interest rates are equal across countries is called: a. the unbiased forward rates condition b. uncovered interest rate parity C. the international Fisher effect d. purchasing power parity e. interest rate parity SECTION: 22.4 TOPIC: INTERNATIONAL FISHER EFFECT TYPE: DEFINITIONS 20. The risk related to having international operations in a world where relative currency values vary is called _ risk. a. international b. diversifiable c. purchasing power D. exchange rate e. political SECTION: 22.6 TOPIC: EXCHANGE RATE RISK TYPE: DEFINITIONS 21. The risk related to changes in value that arise because of political actions is called _ risk. a. international b. diversifiable c. purchasing power d. exchange rate E. political SECTION: 22.7 TOPIC: POLITICAL RISK TYPE: DEFINITIONS 22-7 Chapter 022 International Corporate Finance 22. Eurobonds are primarily traded from which one of the following cities? a. Munich b. Frankfurt C. London d. New York e. Paris SECTION: 22.1 TOPIC: EUROBOND TYPE: CONCEPTS 23. Which one of the following names matches the country where the bond is issued? a. Empire: United Kingdom b. Western: United States c. Flotilla: Spain d. Bulldog: France E. Rembrandt: Netherlands SECTION: 22.1 TOPIC: FOREIGN BONDS TYPE: CONCEPTS 24. The LIBOR is primarily used as the basis for: a. shortterm debt in the Lisbon market b. mortgage loans based on the Lisbon market C. money market rates in the London market d. U.K. debt securities of all maturities e. U.K. debt sold outside of the country SECTION: 22.1 TOPIC: LONDON INTERBANK OFFER RATE TYPE: CONCEPTS 22-8 Chapter 022 International Corporate Finance 25. A basic interest rate swap generally involves trading a: a. shortterm rate for a longterm rate b. foreign rate for a domestic rate c. government rate for a corporate rate D. fixed rate for a variable rate e. taxable rate for a taxexempt rate SECTION: 22.1 TOPIC: INTEREST RATE SWAP TYPE: CONCEPTS 26. Which one of the following statements is correct concerning the foreign exchange market? a. The trading floor of the foreign exchange market is located in London, England b. The foreign exchange market is the world's second largest financial market c. The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the British pound, the French franc, and the euro D. Importers, exporters, and speculators are key players in the foreign exchange market e. The U.S. created a communications network called SWIFT to facilitate currency trading SECTION: 22.2 TOPIC: FOREIGN EXCHANGE MARKET TYPE: CONCEPTS 27. 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. a. I and IV only b. II and III only C. I, II, and III only d. II, III, and IV only e. I, II, III, and IV SECTION: 22.2 TOPIC: TRIANGLE ARBITRAGE TYPE: CONCEPTS 22-9 Chapter 022 International Corporate Finance 28. Spot trades must be settled: a. on the day of the trade b. on the day following the day of the trade C. within two business days d. within three business days e. within one week of the trade date SECTION: 22.2 TOPIC: SPOT TRADES TYPE: CONCEPTS 29. Assume the euro is selling in the spot market for $1.33. Simultaneously, in the 3month forward market the euro is selling for $1.30. Which one of the following statements correctly describes this situation? a. The spot market is out of equilibrium b. The forward market is out of equilibrium C. The dollar is selling at a premium relative to the euro d. The euro is selling at a premium relative to the dollar e. The euro is expected to appreciate in value SECTION: 22.2 TOPIC: CURRENCY PREMIUM TYPE: CONCEPTS 30. Which one of the following formulas expresses the absolute purchasing power parity relationship between the U.S. dollar and the British pound? a. S0 = PUK PUS b. PUS = Ft PUK C. PUK = S0 PUS d. Ft = PUS PUK e. S0 Ft = PUK PUS SECTION: 22.3 TOPIC: ABSOLUTE PURCHASING POWER PARITY TYPE: CONCEPTS 22-10 Chapter 022 International Corporate Finance 61. The camera you want to buy costs $269 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8635? Assume absolute purchasing power parity exists. a. $232.28 b. $247.19 C. $311.52 d. $315.60 e. $318.67 $269 (C$1 / $0.8635) = C$311.52 AACSB TOPIC: ANALYTIC SECTION: 22.3 TOPIC: ABSOLUTE PURCHASING POWER PARITY TYPE: PROBLEMS 62. A new coat costs 1,670 Russian rubles. How much will the identical coat cost in euros if absolute purchasing power parity exists and the following exchange rates apply? a. €47.23 B. €48.15 c. €69.05 d. €83.27 e. €85.61 Ru1,670 ($1 / Ru26.0112) (€1 / $1.3334) = €48.15 AACSB TOPIC: ANALYTIC SECTION: 22.3 TOPIC: ABSOLUTE PURCHASING POWER PARITY TYPE: PROBLEMS 22-25 Chapter 022 International Corporate Finance 63. Assume that $1 can buy you either ¥118 or £.5087. If a TV in London costs £1,375, what will that identical TV cost in Tokyo if absolute purchasing power parity exists? a. ¥82,537 b. ¥94,508 c. ¥159,911 d. ¥298,607 E. ¥318,950 £1,375 ($1 / £.5087 (¥118 / $1) = ¥318,950 AACSB TOPIC: ANALYTIC SECTION: 22.3 TOPIC: ABSOLUTE PURCHASING POWER PARITY TYPE: PROBLEMS 64. In the spot market, $1 is currently equal to A$1.2389. The expected inflation rate in Australia is 5 percent and in the U.S. 3.5 percent. What is the expected exchange rate one year from now if relative purchasing power parity exists? a. A$1.2203 b. A$1.2246 c. A$1.2539 D. A$1.2575 e. A$1.2648 E(S1) = A$1.2389 [1 + (.05 .035)]1 = A$1.2575 AACSB TOPIC: ANALYTIC SECTION: 22.3 TOPIC: RELATIVE PURCHASING POWER PARITY TYPE: PROBLEMS 22-26 Chapter 022 International Corporate Finance 65. In the spot market, $1 is currently equal to £0.5086. The expected inflation rate in the U.K. is 5 percent and in the U.S. 4 percent. What is the expected exchange rate one year from now if relative purchasing power parity exists? a. £.5035 b. £.5077 c. £.5109 d. £.5121 E. £.5137 E(S1) = £.5086 [1 + (.05 .04)]1 = £.5137 AACSB TOPIC: ANALYTIC SECTION: 22.3 TOPIC: RELATIVE PURCHASING POWER PARITY TYPE: PROBLEMS 66. In the spot market, $1 is currently equal to £.5086. The expected inflation rate in the U.K. is 3 percent and in the U.S. 4 percent. What is the expected exchange rate three years from now if relative purchasing power parity exists? a. £.4927 B. £.4935 c. £.5067 d. £.5188 e. £.5240 E(S3) = £.5086 [1 + (.03 .04)]3 = £.4935 AACSB TOPIC: ANALYTIC SECTION: 22.3 TOPIC: RELATIVE PURCHASING POWER PARITY TYPE: PROBLEMS 22-27 Chapter 022 International Corporate Finance 67. The current spot rate is C$1.1578 and the oneyear forward rate is C$1.1397. The nominal riskfree rate in Canada is 5 percent while it is 6 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. a. $.0033 B. $.0067 c. $.0084 d. $.0633 e. $.0667 Arbitrage profit = [$1 (C$1.1578 / $1) 1.05 ($1 / C$1.1397)] ($1 1.06) = $.0067 AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: COVERED INTEREST ARBITRAGE TYPE: PROBLEMS 68. The current spot rate is C$1.1578 and the oneyear forward rate is C$1.1397. The nominal riskfree rate in Canada is 7 percent while it is 6.5 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. a. $.0022 b. $.0025 C. $.0220 d. $.0239 e. $.0250 Arbitrage profit = [$1 (C$1.1578 / $1) 1.07 ($1 / C$1.1397)] ($1 1.065) = $.0220 AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: COVERED INTEREST ARBITRAGE TYPE: PROBLEMS 22-28 Chapter 022 International Corporate Finance 69. The spot rate for the Japanese yen currently is ¥117.4520 per $1. The oneyear forward rate is ¥116.8225 per $1. A riskfree asset in Japan is currently earning 4 percent. If interest rate parity holds, approximately what rate can you earn on a oneyear riskfree U.S. security? a. 3.46 percent b. 3.88 percent C. 4.54 percent d. 4.59 percent e. 4.64 percent (¥116.8225 ¥117.4520 / ¥117.4520) = .04 RUS; RUS = 4.54 percent AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: APPROXIMATE INTEREST RATE PARITY TYPE: PROBLEMS 70. The spot rate for the British pound currently is £.5086 per $1. The oneyear forward rate is £.4975 per $1. A riskfree asset in the U.S. is currently earning 4 percent. If interest rate parity holds, what rate can you earn on a oneyear riskfree British security? A. 1.73 percent b. 2.28 percent c. 4.27 percent d. 6.32 percent e. 6.49 percent (£.4975 / £.5086) = [(1 + RFC) / 1.04]; .5174 = .5086 + .5086RFC; RFC = 1.73 percent AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: INTEREST RATE PARITY TYPE: PROBLEMS 22-29 Chapter 022 International Corporate Finance 71. A riskfree asset in the U.S. is currently yielding 4 percent while a Canadian riskfree asset is yielding 5 percent. The current spot rate is C$0.8637. What is the approximate three year forward rate if interest rate parity holds? a. C$.8367 b. C$.8380 c. C$.8562 d. C$.8681 E. C$.8899 F3 = C$.8637 [1 + (.05 .04)]3 = C$.8899 AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: APPROXIMATE INTEREST RATE PARITY TYPE: PROBLEMS 72. The spot rate on the Canadian dollar is C$1.1578. The riskfree nominal rate in the U.S. is 7 percent while it is only 5 percent in Canada. What oneyear forward rate will create interest rate parity? A. C$1.1362 b. C$1.1429 c. C$1.1563 d. C$1.1799 e. C$1.1815 F1 / C$1.1578 = 1.05 / 1.07; F1 = 1.1362 AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: INTEREST RATE PARITY TYPE: PROBLEMS 22-30 Chapter 022 International Corporate Finance 73. The spot rate on the Canadian dollar is C$1.1578. The riskfree nominal rate in the U.S. is 4.6 percent while it is only 4.2 percent in Canada. Which one of the following twoyear forward rates best establishes the approximate interest rate parity condition? a. C$1.1387 b. C$1.1472 C. C$1.1486 d. C$1.1598 e. C$1.1671 F2 = C$1.1578 [1 + (.042 .046)]2 = C$1.1486 AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: APPROXIMATE INTEREST RATE PARITY TYPE: PROBLEMS 74. You are considering a project in Poland which has an initial cost of 325,000PLN. The project is expected to return a onetime payment of 515,000PLN four years from now. The riskfree rate of return is 4 percent in the U.S. and 3.5 percent in Poland. The inflation rate is 3 percent in the U.S. and 2 percent in Poland. Currently, you can buy 291PLN for 100USD. How much will the payment four years from now be worth in U.S. dollars? a. $159,217 B. $180,560 c. $1,460,350 d. $1,468,901 e. $1,528,828 E(S4) = (291PLN / 100USD) [1 + (.035 .04)]4 = 2.852235047PLN; 515,000PLN ($1 / 2.852235047PLN) = $180,560 AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: UNCOVERED INTEREST PARITY TYPE: PROBLEMS 22-31 Chapter 022 International Corporate Finance 75. You are expecting a payment of 350,000PLN six years from now. The riskfree rate of return is four percent in the U.S. and three percent in Poland. The inflation rate is three percent in the U.S. and two percent in Poland. Currently, you can buy 291PLN for 100USD. How much will the payment six years from now be worth in U.S. dollars? A. $127,751 b. $138,525 c. $749,511 d. $1,057,269 e. $1,081,158 E(S6) = (291PLN / 100USD) [1 + (.03 .04)]6 = 2.739707235PLN; 350,000PLN ($1 / 2.739707235PLN) = $127,751 AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: UNCOVERED INTEREST PARITY TYPE: PROBLEMS 76. You are expecting a payment of C$60,000 three years from now. The riskfree rate of return is 4.3 percent in the U.S. and 4.8 percent in Canada. The inflation rate is 3.7 percent in the U.S. and 4.1 percent in Canada. Suppose the current exchange rate is C$1 = $.9489. How much will the payment three years from now be worth in U.S. dollars? a. $28,887 b. $30,132 c. $52,603 D. $56,088 e. $70,516 E(S3) = (C$1 / $.9489) [1 + (.048 .043)]3 = C$1.069738776; C$60,000 ($1 / C$1.069738776) = $56,088 AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: UNCOVERED INTEREST PARITY TYPE: PROBLEMS 22-32 Chapter 022 International Corporate Finance 77. The current spot rate for the Norwegian krone is $1 = NKr6.0888. The expected inflation rate in Norway is three percent and in the U.S. four percent. A riskfree asset in the U.S. is yielding six percent. What riskfree rate of return should you expect on a Norwegian security? a. 2 percent b. 3 percent c. 4 percent D. 5 percent e. 6 percent 06 .04 = RFC .03; RFC = .05 = 5 percent AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: INTERNATIONAL FISHER EFFECT TYPE: PROBLEMS 78. The current spot rate for the Norwegian krone is $1 = NKr6.0888. The expected inflation rate in Norway is six percent and in the U.S. five percent. A riskfree asset in the U.S. is yielding 7.5 percent. What approximate real rate of return should you expect on a riskfree Norwegian security? A. 2.5 percent b. 3.0 percent c. 6.5 percent d. 7.5 percent e. 8.5 percent Real rateN = Real rateU.S. = .075 .05 = .025 = 2.5 percent AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: INTERNATIONAL FISHER EFFECT TYPE: PROBLEMS 22-33 Chapter 022 International Corporate Finance 79. The expected inflation rate in Finland is one percent while it is three percent in the U.S. A riskfree asset in the U.S. is yielding 6.25 percent. What approximate real rate of return should you expect on a riskfree Norwegian security? a. 2.00 percent B. 3.25 percent c. 3.50 percent d. 4.25 percent e. 4.50 percent Real rateF = Real rateU.S = .0625 .03 = .0325 = 3.25 percent AACSB TOPIC: ANALYTIC SECTION: 22.4 TOPIC: INTERNATIONAL FISHER EFFECT TYPE: PROBLEMS 80. You want to invest in a project in Canada. The project has an initial cost of C$1.6 million and is expected to produce cash inflows of C$750,000 a year for 3 years. The project will be worthless after the first 3 years. The expected inflation rate in Canada is 5 percent while it is only 3.5 percent in the U.S. The applicable interest rate for the project in Canada is 12 percent. The current spot rate is C$1 = $0.8637. What is the net present value of this project in Canadian dollars using the foreign currency approach? a. C$187,924 B. C$201,373 c. C$246,460 d. C$265,139 e. C$267,528 AACSB TOPIC: ANALYTIC SECTION: 22.5 TOPIC: FOREIGN CURRENCY APPROACH TYPE: PROBLEMS 22-34 Chapter 022 International Corporate Finance 81. You want to invest in a riskless project in Sweden. The project has an initial cost of SKr3.7 million and is expected to produce cash inflows of SKr1.6 million a year for three years. The project will be worthless after three years. The expected inflation rate in Sweden is 3.6 percent while it is 4.8 percent in the U.S. A riskfree security is paying 6.5 percent in the U.S. The current spot rate is $1 = SKr6.9864. What is the net present value of this project in Swedish krona using the foreign currency approach? Assume the international Fisher effect applies. a. SKr537,561 b. SKr572,458 c. SKr588,287 d. SKr613,029 E. SKr632,819 AACSB TOPIC: ANALYTIC SECTION: 22.5 TOPIC: FOREIGN CURRENCY APPROACH TYPE: PROBLEMS 22-35 Chapter 022 International Corporate Finance 82. You are analyzing a project with an initial cost of £50,000. The project is expected to return £10,000 the first year, £35,000 the second year and £40,000 the third and final year. The current spot rate is £0.5086. The nominal return relevant to the project is 11 percent in the U.S. The nominal riskfree rate in the U.S. is three percent while it is five 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? a. $23,611 b. $25,408 C. $26,930 d. $29,639 e. $30,796 E(S1) = .5086 [1 + (.05 .03)]1 = .518772 E(S2) = .5086 [1 + (.05 .03)]2 = .52914744 E(S3) = .5086 [1 + (.05 .03)]3 = .539730389 CF0 = £50,000 ($1 £.5086) = $98,309.08 CO1 = £10,000 ($1 £.518772) = $19,276.29 CO2 = £35,000 ($1 £.52914744) = $66,144.14 CO3 = £40,000 ($1 £.539730389) = $74,111.08 NPV = $98,309.08 + ($19,276.29 / 1.111) + ($66,144.14 / 1.112) + ($74,111.08 / 1.113) = $98,309.08 + $17,366.03 + $53,684.07 + $54,189.38 = $26,930 AACSB TOPIC: ANALYTIC SECTION: 22.5 TOPIC: HOME CURRENCY APPROACH TYPE: PROBLEMS 22-36 Chapter 022 International Corporate Finance 83. You are analyzing a project with an initial cost of £150,000. The project is expected to return £25,000 the first year, £55,000 the second year and £110,000 the third and final year. The current spot rate is £0.5086. The nominal riskfree return is six percent in the U.K. and 6.5 percent in the U.S. The return relevant to the project is 12 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? a. $8,211 B. $7,465 c. $8,505 d. $8,730 e. $8,947 E(S1) = .5086 [1 + (.06 .065)]1 = .506057 E(S2) = .5086 [1 + (.06 .065)]2 = .503526715 E(S3) = .5086 [1 + (.06 .065)]3 = .501009081 CF0 = £150,000 ($1 £.5086) = $294,927.25 CO1 = £25,000 ($1 £.506057) = $49,401.55 CO2 = £55,000 ($1 £.503526715) = $109,229.56 CO3 = £110,000 ($1 £.501009081) = $219,556.90 NPV = $294,927.25 + ($49,401.55 / 1.121) + ($109,229.56 / 1.122) + ($219,556.90 / 1.123) = $294,927.25 + $44,108.53 + $87,077.13 + $156,276.26 = $7,465 AACSB TOPIC: ANALYTIC SECTION: 22.5 TOPIC: HOME CURRENCY APPROACH TYPE: PROBLEMS Essay Questions 84. Using currencies A, B, and C construct an example in which triangle arbitrage exists and then show how to exploit it. Students should construct an example similar to Example 22.2 in the text AACSB TOPIC: REFLECTIVE THINKING SECTION: 22.2 TOPIC: TRIANGLE ARBITRAGE 22-37 Chapter 022 International Corporate Finance 85. What is the relationship between the value of the dollar and the value of the euro in relation to the rate of inflation in the United States? The question asks the student to define and discuss the absolute and relative purchasing power parity (PPP) theories as well as some of the market frictions that keep PPP relationships from holding precisely AACSB TOPIC: REFLECTIVE THINKING SECTION: 22.3 TOPIC: INFLATION AND EXCHANGE RATES 86. 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? Each of the variables in these equations must be estimated so it is unlikely, even unrealistic, to expect them to hold with any high degree of accuracy especially over long periods of time. In addition, most countries manage the value of their currencies to some extent which adds a significant amount of noise to the exchange rate process AACSB TOPIC: REFLECTIVE THINKING SECTION: 22.3 TOPIC: RELATIVE PPP AND UIP 87. What conditions are necessary for absolute purchasing power parity (PPP) to exist? Is it realistic to believe PPP can exist within a country let alone across national borders? The requirements for absolute PPP to hold are zero trading costs, lack of trade barriers, and identical goods. Students should discuss the forces that either create or prevent these requirements both within a country and across national borders AACSB TOPIC: REFLECTIVE THINKING SECTION: 22.3 TOPIC: ABSOLUTE PURCHASING POWER PARITY 22-38 Chapter 022 International Corporate Finance 88. Describe the foreign currency and home currency approaches to capital budgeting for a foreign project. Which is better? Which approach would you recommend a U.S. firm use? Justify your answer. In the home currency approach, you must forecast both the foreign cash flows and the future expected exchange rates, convert the foreign currency cash flows into dollars, and discount those dollar cash flows at the cost of capital for dollardenominated investments. In the foreign currency approach, you forecast the foreign cash flows, determine the discount rate appropriate for cash flows denominated in the foreign currency and discount those cash flows to the present. You then convert the foreign currency NPV to dollars using the current exchange rate. If done properly, both approaches give identical results. However, the foreign currency approach is computationally somewhat more straightforward AACSB TOPIC: REFLECTIVE THINKING SECTION: 22.5 TOPIC: INTERNATIONAL CAPITAL BUDGETING 22-39 ... Chapter 022 International Corporate Finance 7. The rate most international banks charge one another for overnight Eurodollar loans is called the: a. Eurodollar yield to maturity B. London Interbank Offer Rate... Chapter 022 International Corporate Finance 10. The price of one country's currency expressed in terms of another country's currency is called the: a. LIBOR rate b. cross inflation rate c. depository rate... _ exchange rate. A. spot b. forward c. triangle d. cross e. open SECTION: 22.2 TOPIC: SPOT EXCHANGE RATE TYPE: DEFINITIONS 22-4 Chapter 022 International Corporate Finance 13. An agreement to exchange currencies at some point in the future using an agreedupon

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