MULTINATIONAL FINANCIAL CHAPTER 17 MANAGEMENT
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Please see the preface preface for information on the AACSB letter indicators (F, (F, M, etc.) on the subject lines. Multiple Choice: True/False (17-2) Multinational fin. mgmt. 1
.
F T
Answer: a
EA E ASY
Multi Multinat natio ional nal finan financia cial l manag manageme ement nt requi require res s that that finan financi cial al analy analyst sts s consider the effects of changing currency values. a. True b. False
(17-2) Multinational fin. mgmt. 2
.
F T
Answer: b
EA E ASY
Legal Legal and econo economic mic diffe differen rence ces s amo among ng count countrie ries, s, althou although gh impor importan tant, t, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations and subsidiaries. a. True b. False
(17-3) Currency appreciation 3
.
F T
Answer: a
EA EASY
When When the the value value of the the U.S. U.S. dolla dollar r app apprec recia iates tes again against st anoth another er countr country' y's s currency, we may purchase more of the foreign currency with a dollar. a. True b. False
(17-3) Floating exchange rates 4
.
F T
Answer: a
EA EASY
The Unite United d Sta States tes and and most most other other major major indu industr stria ializ lized ed natio nations ns curren currentl tly y operate under a system of floating exchange rates. a. True b. False
(17-4) Exchange rates 5
.
F T
Answer: b
EASY
Exch Exchan ange ge rate rate quot quotat atio ions ns cons consis ist t sol solel ely y of of dir direc ect t quo quota tati tion ons. s. a. True b. False
(17-4) Cross rates 6
.
F T
Answer: a
EASY
Calc Calcul ulat atin ing g a curr curren ency cy cro cross ss rat rate e invo involv lves es det deter ermi mini ning ng the the exc excha hang nge e rate for two currencies by using a third currency as a base.
Chapter 17: Multinational
True/False
Page 165
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a. True b. False (17-9) Eurodollars 7
.
F T
Answer: a
EASY
A Euro Eurodo doll llar ar is is a U.S U.S. . dol dolla lar r depo deposi site ted d in a bank bank out outsi side de the the Unit United ed States. a. True b. False
(17-9) LIBOR 8
.
F T
Answer: b
EASY
LIBO LIBOR R is is an an acr acron onym ym for for Lon Londo don n Int Inter erba bank nk Offe Offer r Rat Rate, e, whic which h is is an an average of interest rates offered by London banks to smaller U.S. corporations. a. True b. False
(17-10) Exchange rate risk 9
.
F T
Answer: a
E EA ASY
Exch Exchan ange ge rate rate risk risk is the the ris risk k tha that t the the cash cash flow flows s fro from m a for forei eign gn project, when converted to the parent company's currency, will be worth less than was originally projected because of exchange rate changes. a. True b. False
(17-11) Political risk 10
.
F T
Answer: b
EASY
Becau Because se polit politic ical al risk risk is seldo seldom m nego negotia tiabl ble, e, it cannot cannot be expl explici icitly tly addressed in multinational corporate financial analysis. a. True b. False
(17-5) Forward market hedging 11
.
F T
Answer: b
ME M EDIUM
Indiv Individu idual als s and and corp corpora oratio tions ns can buy or sell sell forwa forward rd curr currenc encie ies s to 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. a. True b. False
(17-5) Discount on forward rate 12
.
F T
Answer: a
MEDIUM
If an inves investor tor can obtai obtain n mor more e of of a forei foreign gn curr currenc ency y for for a dol dollar lar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate. a. True b l
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13
.
If a doll dollar ar will will buy buy few fewer er units units of a for forei eign gn curre currency ncy in the the for forwar ward d market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate. a. True b. False
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(17-8) Currency value and inflation 14
.
F T
Answer: a
MEDIUM
A fore foreign ign curre currency ncy will, will, on on aver averag age, e, depr deprec eciat iate e agai against nst the U.S. U.S. doll dollar ar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States. a. True b. False
(17-11) Relevant investment CFs 15
.
F T
Answer: b
MEDIUM
The cash cash flows flows relev relevant ant for a for foreig eign n inv inves estme tment nt shoul should, d, from from the 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. a. True b. False
(17-11) For. proj. cost of capital 16
.
F T
Answer: a
MEDIUM
The cost cost of capit capital al may be diffe differe rent nt for a for forei eign gn proje project ct than than for for an an equivalent domestic project because foreign projects may be more or less risky. a. True b. False
(17-11) Risk and int'l. investment 17
.
F T
Answer: a
MEDIUM
When When cons consid ideri ering ng the the ris risk k of a forei foreign gn inv invest estme ment, nt, a high higher er risk risk might might arise from exchange rate risk and political risk while lower risk might result from international diversification. a. True b. False
Multiple Choice: Conceptual (17-1) Motive for going global 18
.
C T
Answer: e
EA E ASY
Whic Which h of the the foll follow owin ing g are are rea reaso sons ns why why com compa pani nies es mov move e into into international operations? a. To take advantage advantage of of lower production production costs in regions regions where where labor costs are relatively low. b. To develop develop new new markets markets for for the firm's products. products. c. To better better serve their primary customers. customers. d. Because important important raw materials materials are located located abroad. abroad. e. All All of of the the above above. .
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(17-2) Multinational fin. mgmt. 19
.
C T
Answer: a
EA E ASY
Mult Multin inat atio iona nal l fin finan anci cial al mana manage geme ment nt requ requir ires es that that a. The effects effects of changing changing currency currency values values be included included in financial financial analyses. b. Legal and and economic economic differences differences need not not be considered considered in financial financial decisions because these differences are insignificant. c. Political Political risk should should be excluded excluded from from multinational multinational corporate corporate financial analyses. d. Traditional Traditional U.S. and European European financial financial models models incorporating incorporating the the existence of a competitive marketplace not be recast when analyzing projects in other parts of the world. e. Cultural Cultural differences differences need not be accounted accounted for for when considering considering firm goals and employee management.
(17-8) Currency depreciation 20
.
MEDIUM
Appreci Appreciate ate agains against t the U.S. U.S. dollar. dollar. Depreci Depreciate ate agains against t the U.S. U.S. dollar. dollar. Remain unchanged unchanged against against the U.S. U.S. dollar. dollar. Appreciate Appreciate against against other major currencies. currencies. Appreciate Appreciate against against the dollar dollar and other other major currenci currencies. es.
(17-6) Interest rate parity
.
Answer: a
If the the inf infla lati tion on rat rate e in the the Unit United ed Sta State tes s is grea greate ter r than than the the inflation rate in Britain, other things held constant, the British pound will a. b. c. d. e.
21
C T
C T
Answer: a
ME MEDIUM
In Japan Japan, , 90-d 90-day ay secur securit ities ies have have a 4% annua annualiz lized ed retur return n and and 180-d 180-day ay securities have a 5% annualized return. In the United States, 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 is most CORRECT? a. The yen-dollar yen-dollar spot spot exchange exchange rate equals equals the yen-dolla yen-dollar r exchange exchange rate in the 90-day forward market. b. The yen-dollar yen-dollar spot spot exchange exchange rate equals equals the yen-dolla yen-dollar r exchange exchange rate in the 180-day forward market. c. The yen-dollar yen-dollar exchange exchange rate rate in the 90-day 90-day forward forward market market equals the the yen-dollar exchange rate in the 180-day forward market. d. The yen-dollar yen-dollar exchange exchange rate rate in the 180-day 180-day forward forward market market equals the yen-dollar exchange rate in the 90-day spot market. e. The relationship relationship between spot spot and forward forward interest interest rates rates cannot be be inferred.
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(17-9) Int'l. bond markets 22
.
C T
Answer: d
ME MEDIUM
Whic Which h of the the fol follo lowi wing ng stat statem emen ents ts is NOT NOT CORR CORREC ECT? T? a. Any bond sold sold outside outside the country country of the the borrower borrower is called called an international bond. b. Foreign bonds bonds and Eurobonds Eurobonds are two important important types types of international international bonds. c. Foreign bonds are bonds bonds sold by a foreign foreign borrower borrower but denominated denominated in the currency of the country in which the issue is sold. d. The term Eurobond Eurobond applies applies only only to foreign foreign bonds denominated denominated in U.S. U.S. currency. e. A Eurodollar Eurodollar is a U.S. U.S. dollar deposited deposited in a bank outside outside the the U.S.
(17-6) Interest rate parity 23
.
C T
Answer: c
MEDIUM/HARD
Curre Currentl ntly, y, a U.S. U.S. trad trader er not notes es tha that t in the the 6-mo 6-month nth forwa forward rd mar market ket, , the the Japanese yen is selling at a premium (that is, you receive more dollars per yen in the forward market than you do in the spot market), while the British pound is selling at a discount. Which of the following statements is CORRECT? a. If interest interest rate parity parity holds, holds, 6-month 6-month interest interest rates should should be the the same in the U.S., Britain, and Japan. b. If interest interest rate parity parity holds holds among the the three countries, countries, the United United States should have the highest 6-month interest rates and Japan should have the lowest rates. c. If interest interest rate parity parity holds holds among the the three countries, countries, Britain should have the highest 6-month interest rates and Japan should have the lowest rates. d. If interest interest rate parity parity holds holds among the the three countries, countries, Japan should have the highest 6-month interest rates and Britain should have the lowest rates. e. If interest interest rate parity parity holds holds among the the three countries, countries, the United United States should have the highest 6-month interest rates and Britain should have the lowest rates.
(17-6) Interest rate parity 24
.
C T
Answer: b
HA HARD
Today Today in the the spot spot marke market t $1 $1 = 1.82 1.82 Swiss Swiss franc francs s and and $1 = 130 130 Japan Japanese ese yen. In the 90-day forward market, $1 = 1.84 Swiss francs and $1 = 127 Japanese yen. Assume that interest rate parity holds worldwide. Which of the following statements is most CORRECT? a. Interest Interest rates on 90-day 90-day risk-free risk-free U.S. U.S. securities securities are higher higher than than the interest rates on 90-day risk-free Swiss securities. b. Interest Interest rates on 90-day 90-day risk-free risk-free U.S. U.S. securities securities are higher higher than than the interest rates on 90-day risk-free Japanese securities. c. Interest Interest rates on 90-day 90-day risk-free risk-free U.S. U.S. securities securities equal equal the interest rates on 90-day risk-free Japanese securities. d. Since interest interest rate rate parity holds holds interest interest rates rates should be be the same in all three countries.
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Problems
Problems with with * in the topic line are nonalgorithmic. (17-4) Exchange rates 25
.
C T
Answer: a
EASY
0.5051 0.5556 0.6111 0.6722 0.7394
(17-4) Exchange rates
.
EASY
If one one Bri Britis tish h poun pound d can can purc purchas hase e $1.9 $1.98 8 U.S. U.S. dol dollar lars, s, how how man many y Briti British sh pounds can one U.S. dollar buy? a. b. c. d. e.
28
Answer: b
0.5488 0.6098 0.6707 0.7378 0.8116
(17-4) Exchange rates
.
C T
If one one U.S U.S. . dol dollar lar buys buys 1.6 1.64 4 Can Canad adian ian dolla dollars, rs, how many many U.S. U.S. dolla dollars rs can you purchase for one Canadian dollar? a. b. c. d. e.
27
EASY
0.9592 1.0658 1.1842 1.3158 1.4474
(17-4) Exchange rates
.
Answer: d
If one one Swi Swiss ss franc franc can purch purchase ase $0.76 $0.76 U.S. U.S. dol dolla lars, rs, how many many Swis Swiss s francs can one U.S. dollar buy? a. b. c. d. e.
26
C T
C T
Answer: e
EASY
If one one U.S U.S. . dol dollar lar buys buys 0.6 0.63 3 eur euro, o, how how man many y dol dollar lars s can can you purch purchase ase for one euro?
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d. 1.5000 e. 1.6667
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(17-4) Currency appreciation 30
.
Answer: d
EASY
9.11% 10.13% 11.25% 12.50% 13.75%
(17-10) Exchange rate risk
.
C T
Suppo Suppose se a forei foreign gn inve invest stor or who who hol holds ds taxtax-ex exemp empt t Euro Eurobon bonds ds pay paying ing 9% is 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? a. b. c. d. e.
32
EA EASY
155. 155.52 5200 00 163. 163.29 2960 60 171. 171.46 4608 08 180. 180.03 0338 38 189. 189.03 0355 55
(17-9) Eurobonds vs. domestic bonds
.
Answer: a
Suppo Suppose se 144 144 yen yen coul could d be be pur purcha chase sed d in in the the forei foreign gn excha exchang nge e mar market ket for one U.S. dollar today. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow? a. b. c. d. e.
31
C T
C T
Answer: e
E EA ASY
Suppo Suppose se DeGra DeGraw w Cor Corpo porat ration ion, , a U.S. U.S. expor exporte ter, r, sold sold a sol solar ar heat heating ing station to a Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, DeGraw agreed to make the bill payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would DeGraw actually receive after it exchanged yen for U.S. dollars? a. b. c. d.
$757 $757,0 ,005 05.4 .48 8 $796 $796,8 ,847 47.8 .88 8 $838 $838,7 ,787 87.2 .24 4 $882 $882,9 ,933 33.9 .94 4
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(17-4) Cross rates 34
.
MEDIUM
1.9691 2.0196 2.0701 2.1218 2.1749
(17-4) Cross rates
.
Answer: b
Suppo Suppose se tha that t curre current ntly, ly, 1 Briti British sh pound pound equ equals als 1.98 1.98 U.S. U.S. dolla dollars rs and and 1 U.S. dollar equals 1.02 Swiss francs. How many Swiss francs are needed to purchase 1 pound? a. b. c. d. e.
35
C T
C T
Answer: c
MEDIUM
A cur curren rency cy trader trader obser observes ves the the fol follow lowing ing quote quotes s in in the the spot spot marke market: t: 1 U.S. dollar = 122 Japanese yen 1 British pound = 2.25 Swiss francs 1 British pound = 1.65 U.S. dollars Given this information, how many yen can be purchased for 1 Swiss franc? a. b. c. d. e.
0.8505 0.8723 0.8947 0.9170 0.9400
(17-4) Cross rates 36
.
C T
Answer: c
MEDIUM
A cur curren rency cy trader trader obser observes ves the the fol follow lowing ing quote quotes s in in the the spot spot marke market: t: 1 U.S. dollar = 10.875 Mexican pesos 1 British pound = 6.205 Danish krone 1 British pound = 1.98 U.S. dollars Given this information, how many Mexican pesos can be purchased for 1 Danish krone? a. 2.7490 b 2 8195
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e. 9.18% 9.18% disco discount unt
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(17-5) Currency depreciation 38
.
MEDIUM
$1.486 4860 $1.651 6511 $1.834 8346 $2.038 0384 $2.242 2422
(17-5) Forward market hedge
.
Answer: d
Suppo Suppose se one one Bri Britis tish h pou pound nd can can pur purcha chase se 1.82 1.82 U.S. U.S. dolla dollars rs today today in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days? a. b. c. d. e.
39
C T
C T
Answer: e
ME MEDIUM
Stove Stover r Corp Corpora oratio tion, n, a U.S. U.S. base based d impo importe rter, r, makes makes a purch purchase ase of cry crysta stal l glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.64 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure? a. b. c. d.
$399 $444 $493 $548
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(17-6) Interest rate parity 41
.
Answer: c
MEDIUM
$60.39 $67.10 $74.55 $82.01 $90.21
(17-9) Exchange fluctuations
.
C T
Suppo Suppose se hocke hockey y ska skate tes s sell sell in Cana Canada da for 105 105 Can Canadi adian an dolla dollars rs, , and and 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States? a. b. c. d. e.
43
ME MEDIUM
$1.492 4924 $1.658 6582 $1.824 8240 $2.006 0064 $2.207 2070
(17-7) Purchasing power parity
.
Answer: b
Suppo Suppose se 9090-day day inves investme tments nts in Bri Britai tain n have have a 6% annual annualiz ized ed ret return urn and a 1.5% quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate ($/£)? a. b. c. d. e.
42
C T
C T
Answer: a
MEDIUM
Suppo Suppose se 6 mont months hs ago ago a Swiss Swiss inves investor tor bough bought t a 6-mon 6-month th U.S. U.S. Treas Treasury ury of $9,708.74, with $10,000.
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(17-10) Inventory and exchg. rates 45
.
MEDIUM
-$38 -$38,8 ,880 80.0 .00 0 -$43 -$43,2 ,200 00.0 .00 0 -$47 -$47,5 ,520 20.0 .00 0 -$52 -$52,2 ,272 72.0 .00 0 -$57 -$57,4 ,499 99.2 .20 0
(17-5) Exchg. rates & req. return
.
Answer: b
Suppo Suppose se one one yea year r ago ago, , Hein Hein Compa Company ny had had inv invent entor ory y in in Bri Brita tain in value valued d at at 240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates? a. b. c. d. e.
46
C T
C T
Answer: e
MEDIUM/HARD
One year year ago, ago, a U.S U.S. . inv invest estor or conv convert erted ed dolla dollars rs to yen and and pur purcha chased sed 100 shares of stock in a Japanese company at a price of 3,150 yen per share. The stock's total purchase cost was 315,000 yen. At the time of purchase, in the currency market 1 yen equaled $0.00952. Today, the stock is selling at a price of 3,465 yen per share, and in the currency market $1 equals 130 yen. The stock does not pay a dividend. If the investor were to sell the stock today and convert the proceeds back to dollars, what would be his realized return on his initial dollar investment from holding the stock? a. -13.51 .51% b. -12.87 .87%
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(17-6) Interest rate parity 49
.
C T
Answer: d
HA HARD
Suppo Suppose se in in the the spot spot market market 1 U.S. U.S. dollar dollar equal equals s 1.60 1.60 Can Canadi adian an dollar dollars. s. 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 U.S. dollar-Canadian dollar exchange rate in the 180-day forward market? In other words, how many Canadian dollars are required to purchase one U.S. dollar in the 180-day forward market? a. b. c. d. e.
1.2727 1.4141 1.5712 1.7458 1.9203
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ANSWERS AND SOLUTIONS CHAPTER 17
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1.
(17-2) Multinational fin. mgmt.
F T
Answer: a
EASY
2.
(17-2) Multinational fin. mgmt.
F T
Answer: b
EASY
3.
(17-3) Currency appreciation
F T
Answer: a
EA EASY
4.
(17-3) Floating exchange rates
F T
Answer: a
EA E ASY
5.
(17-4) Exchange rates
F T
Answer: b
EASY
6.
(17-4) Cross rates
F T
Answer: a
EASY
7.
(17-9) Eurodollars
F T
Answer: a
EASY
8.
(17-9) LIBOR
F T
Answer: b
EASY
9.
(17-10) Exchange rate risk
F T
Answer: a
EA EASY
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25.
(17-4) Exchange rates
C T
Answer: d
EASY
C T
Answer: b
EASY
C T
Answer: a
EASY
1 Swiss franc = 0.76 U.S. dollar U.S. dollar = 1/0.76 Swiss francs Swiss francs 1 U.S. $ can purchase = 1.3158
26.
(17-4) Exchange rates
1 U.S. dollar = 1.64 Canadian dollars Canadian dollar = 1/1.64 U.S. dollars U.S. dollars 1 C$ can purchase = 0.6098
27.
(17-4) Exchange rates
1 British pound = 1.98 U.S. dollar U.S. dollar = 1/1.98 British pounds British pounds 1 U.S. $ can purchase = 0.5051
28
(17 4)
h
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Dollar value of payable = Payable in Yen/Yen exchange rate at t = 0.5 $ Value at t = 0.5 $929,404.15
33.
(17-4) Cross rates
C T
Answer: b
MEDIUM
C T
Answer: b
MEDIUM
One U.S. dollar = 1.41 SF One U.S. dollar = 0.64 € SF/€ = SF/$ × $/€ SF/€ = 1.4100 × 1.5625 SF/€ = 2.2031
34.
(17-4) Cross rates
£ = $1.98 $ = 1.02 SF SF/£ = SF/$ × $/£ SF/£ = 1.0200 × 1.9800
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39.
(17-5) Forward market hedge
Price of glassware in SF Dollar price of glassware Spot rate, SF/$ 90-day forward rate, SF/$ Spot rate in 90 days, SF/$
39,960 SF $24,000 1.6650 SF 1.6820 SF 1.6400 SF
C T
Answer: e
MEDIUM
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Ph = $74.55
43.
(17-9) Exchange fluctuations
6-mos. Treasury bill, VB Maturity value Spot rate, SF/$
$9,708.74 $10,000.00 1.420 SF
C T
Answer: a
MEDIUM
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$ investment in stock = $2,998.80 $ proceeds of of sale = (No. of of shares × Current yen stock price)/(Yen/$ spot rate) $ proceeds of sale = 100 × 3,465/130 $ proceeds of sale = $2,665.38 Return = ($ proceeds – $ investment)/$ investment
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Note that the forward exchange excha nge rate rat e gives g ives the numb number er of U.S dollars doll ars for 1 Canad C anad ian dollar, doll ar, but the problem probl em asks for the number of Canadian dollars per U.S. dollar. So, we need the inverse of the number above. Forward exchange rate C$/$ = 1/Forward exchange rate, $/C$ Forward exchange rate C$/$ = 1.7458