FIN 535 Week 11 Final Exam: International Finance and Risk Management

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FIN 535 Week 11 Final Exam: International Finance and Risk ManagementFIN 535 Week 11 Final Exam Part 1Question 1The international Fisher effect (IFE) suggests that:Answera home currency will depreciate if the current home interest rateexceeds the current foreigninterest rate.a home currency will appreciate if the current home interest rate exceeds the current foreigninterest rate.a home currency will appreciate if the current home inflation rate exceeds the current foreigninflation rate.a home currency will depreciate if the current home inflation rate exceeds the current foreigninflation rate.Question 2Which of the following theories suggests the percentage change in spot exchange rate of acurrency should be equal to the interest rate differential between two countries?Answerabsolute form of PPP.relative form of PPP.international Fisher effect (IFE).interest rate parity (IRP)Question 3Assume a two-country world: Country A and Country B. Which of the following is correct aboutpurchasing power parity (PPP) as related to these two countries?AnswerIf Country A's inflation rate exceeds Country B's inflation rate, Country A's currency willweaken.If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken.If Country A's interest rate exceeds Country B's inflation rate, Country A's currency willstrengthen.If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency willweaken.Question 4If interest rates on the euro are consistently below U.S. interest rates, then for the internationalFisher effect (IFE) to hold:Answer

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the value of the euro would often appreciate against the dollar.the value of the euro would often depreciate against the dollar.the value of the euro would remain constant most of the time.the value of the euro would appreciate in some periods and depreciate in other periods, but onaverage have a zero rate of appreciation.Question 5If today's exchange rate reflects any historical trends in Canadian dollar exchange ratemovements, but not all relevant public information, then the Canadian dollar marketis:Answerweak-form efficient.semistrong-form efficient.strong-form efficient.semiweak-form efficient.Question 6Sensitivity analysis allows for all of the following except:Answeraccountability for uncertainty.focus on a single point estimate of future exchange rates.development of a range of possible future values.consideration of alternative scenarios.Question 7If aforeign currency is expected to ____ substantially against the parent's currency, the parentmay prefer to ____ the remittance of subsidiary earnings.Answerweaken; delayweaken; expediteappreciate; expediteappreciate; delayQuestion 8Which of the following is not one of the major reasons for MNCs to forecast exchange rates?Answerto decide in which foreign market to invest the excess cash.to decide where to borrow at the lowest cost.to determine whether to require the subsidiary to remit the funds or invest them locally.to speculate on the exchange rate movements.Question 9Which of the following is not a method of forecasting exchange rate volatility?AnswerUsing the absolute forecast error as a percentage of the realized value to improve your forecast.Using the volatility of historical exchange rate movements as a forecast for the future.

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Using a time series of volatility patterns in previous periods.Deriving the exchange rate's implied standard deviation from the currency option pricing model.Question 10The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:Answerthe expected percentage change in the currency for the next day.the standard deviation of the daily percentage changes in the currency over a previous period.the current level of interest rates.the confidence level used.Question 11Which ofthe following is not a form of exposure to exchange rate fluctuations?Answertransaction exposure.credit exposure.economic exposure.translation exposure.Question 12If a U.S. firm's cost of goods sold exposure is much greater than its sales exposure inSwitzerland, there is a ____ overall impact of the Swiss franc's depreciation against the dollar on____.Answerpositive; interest expensespositive; gross profitnegative; gross profitnegative; interest expensesQuestion 13U.S. based Majestic Co. sells products to U.S. consumers and purchases all of materials fromU.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:Answereconomic exposure.translation exposure.transaction exposure.no exposure to exchange rate fluctuations.Question 14In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the realcost of hedging payables will be:Answerhighly positive.highly negative.zero.

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netrual.Question 15The ____ does not represent an obligation.Answerlong-term forward contractcurrency swapparallel loancurrency optionQuestion 16A ____ involves an exchange of currencies between two parties, with a promise to re-exchangecurrencies at a specified exchange rate and future date.Answerlong-term forward contractcurrency option contractparallel loanmoney market hedgeQuestion 17A money market hedge on payables would involve, among others, borrowing ____ and investingin the ____.Answerthe foreign currency; U.S.the foreign currency; foreign countrydollars; foreign countrydollars; U.S.Question 18If a firm does not have foreign subsidiaries, it is not subject to ____.Answertransaction exposureeconomic exposuretransformation exposure.translation exposureQuestion 19If a U.S. firm has much more revenue than expenses denominated in euros, the firm will likely____ if the euro ____.Answerbenefit; weakensbe unaffected; weakensbe unaffected; strengthensbenefit; strengthensQuestion 20

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