FIN 4213 INTERNATIONAL (EXAM 3) QUESTIONS AND
ANSWERS WITH COMPLETE SOLUTION
Which of the following forecasting techniques would best represent the use of
today's forward exchange rate to forecast the future exchange rate? Answer -
Market -based forecasting
Which of the following forecasting techniques would best represent the sole
use of the pattern of historical currency values of the euro to predict the euro's
future currency value? Answer - Technical Forecasting
Silicon Co. has forecasted the Canadian dollar for the most recent period to be
$0.75. The realized value of the Canadian dollar in the most recent period was
$0.80. Thus, what is the absolute forecast error as a percentage of the realized
value Answer - (0.75-0.80)/0.80= 6.25%
A portfolio of currency cash inflows is more volatile if the correlations between
currencies are __ Answer - HIgh
Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows
of Swiss francs. These two currencies are highly correlated in their movements
against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net
cash flows in these currencies as Diz Co. except that its euros represent net
cash outflows. Which firm has a higher exposure to exchange rate risk? Answer
- Diz Co.
Economic exposure can affect: Answer - Both MNCs and purely domestic firms
,Generally, MNCs with less foreign costs than foreign revenues will be ( )
affected by a weaker foreign currency. Answer - adversely
Transaction exposure reflects Answer - the exposure of a firm's financial
statements to exchange rate fluctuations
If a firm does not have foreign subsidiaries, it is not subject to ( ). Answer -
translation exposure
A US firm will need one million euros to pay its supplier in 6 months and
decides to hedge the euro payables. Which of the following is the right hedge?
Answer - buying euro call options
Which of the following is a hedge of net payables in euros by a US firm?
Answer - borrow U.S. dollars, convert them to euros, and invest them in a euro
deposit
A US firm is expecting to receive one million euros from its exports and wants
to hedge the euro receivables. Which of the following is a right hedge? Answer
- buying euro put options
Which of the following is a hedge of Canadian dollar receivables by a US firm?
Answer - B.buying Canadian dollar
put options
C.borrow Canadian
dollars, convert them
to US dollars, and
, invest them in a US
dollar deposit
***both B and C
Relations between economic factors (such as economic growth, inflation, and
interest rates) and exchange rate are used in ____ forecasting Answer -
Fundamental
Corporations tend to make only limited use of technical forecasting because it
typically focuses on the near future, which is not very helpful for developing
corporate policies Answer - True
If a US based MNC has a subsidiary in UK and British pound is expected to
weaken substantially against US dollar, the MNC's parent firm may prefer to
____ the remittance of its subsidiary earnings that are denominated in pounds
(assuming the same interest rate in US and UK). Answer - expedite
Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value
of the Thai baht (THB), which has a current exchange rate of $0.028. Inflation in
the U.S. is expected to be 3% during the next year, while inflation in Thailand is
expected to be 10%. Under this scenario, Pro Corp would forecast the value of
the baht at the end of the year to be: Answer - ef=(1+Ih)/(1+If)-1=
(1+0.03)/(1+0.10)-1=-0.0636
forecast:
St=So(1+ef)
=$0.028(1+-0.0636)
=$0.026
ANSWERS WITH COMPLETE SOLUTION
Which of the following forecasting techniques would best represent the use of
today's forward exchange rate to forecast the future exchange rate? Answer -
Market -based forecasting
Which of the following forecasting techniques would best represent the sole
use of the pattern of historical currency values of the euro to predict the euro's
future currency value? Answer - Technical Forecasting
Silicon Co. has forecasted the Canadian dollar for the most recent period to be
$0.75. The realized value of the Canadian dollar in the most recent period was
$0.80. Thus, what is the absolute forecast error as a percentage of the realized
value Answer - (0.75-0.80)/0.80= 6.25%
A portfolio of currency cash inflows is more volatile if the correlations between
currencies are __ Answer - HIgh
Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows
of Swiss francs. These two currencies are highly correlated in their movements
against the dollar. Yanta Co. is a U.S.-based MNC that has the same level of net
cash flows in these currencies as Diz Co. except that its euros represent net
cash outflows. Which firm has a higher exposure to exchange rate risk? Answer
- Diz Co.
Economic exposure can affect: Answer - Both MNCs and purely domestic firms
,Generally, MNCs with less foreign costs than foreign revenues will be ( )
affected by a weaker foreign currency. Answer - adversely
Transaction exposure reflects Answer - the exposure of a firm's financial
statements to exchange rate fluctuations
If a firm does not have foreign subsidiaries, it is not subject to ( ). Answer -
translation exposure
A US firm will need one million euros to pay its supplier in 6 months and
decides to hedge the euro payables. Which of the following is the right hedge?
Answer - buying euro call options
Which of the following is a hedge of net payables in euros by a US firm?
Answer - borrow U.S. dollars, convert them to euros, and invest them in a euro
deposit
A US firm is expecting to receive one million euros from its exports and wants
to hedge the euro receivables. Which of the following is a right hedge? Answer
- buying euro put options
Which of the following is a hedge of Canadian dollar receivables by a US firm?
Answer - B.buying Canadian dollar
put options
C.borrow Canadian
dollars, convert them
to US dollars, and
, invest them in a US
dollar deposit
***both B and C
Relations between economic factors (such as economic growth, inflation, and
interest rates) and exchange rate are used in ____ forecasting Answer -
Fundamental
Corporations tend to make only limited use of technical forecasting because it
typically focuses on the near future, which is not very helpful for developing
corporate policies Answer - True
If a US based MNC has a subsidiary in UK and British pound is expected to
weaken substantially against US dollar, the MNC's parent firm may prefer to
____ the remittance of its subsidiary earnings that are denominated in pounds
(assuming the same interest rate in US and UK). Answer - expedite
Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value
of the Thai baht (THB), which has a current exchange rate of $0.028. Inflation in
the U.S. is expected to be 3% during the next year, while inflation in Thailand is
expected to be 10%. Under this scenario, Pro Corp would forecast the value of
the baht at the end of the year to be: Answer - ef=(1+Ih)/(1+If)-1=
(1+0.03)/(1+0.10)-1=-0.0636
forecast:
St=So(1+ef)
=$0.028(1+-0.0636)
=$0.026
