Question : 11.The expected rate of inflation for Japan 11%. The risk-free : 1325783

11.The expected rate of inflation for Japan is 11%. The risk-free rate in Japan is 5% and the risk-free rate in Italy is 2%. What must the inflation rate in Italy be in order for real interest rate parity to hold?

a.11.0%

b.7.83%

c.-3.51%

d.14.26%

12.Suppose that J.B. Campbell & Company operates in the United States and sells 10 coffee tables to a Japanese company. J.B. Campbell & Company delivers the tables now and will receive ¥187,500 in 6 months. If the current spot rate is ¥122/$ and if the exchange rate in 6 months is ¥127/$, how much will J.B. Campbell & Company have gained / lost from the movements in exchange rates if it does not hedge this transaction.

a.They will not gain or lose anything on this transaction.

b.They will gain ¥50

c.They will gain $60.50

d.They will lose $60.50

13.Gates Auto Inc. manufactures automobile engines in the United States. Gates Auto Inc. sells 200 of its 8 – cylinder Hoste model engines to a company in Canada. The total price for these engines is C$60,000. Gates Auto Inc. will deliver the engines today and receive payment in 3 months from the Canadian company. When payment is received Gates Auto will convert the C$60,000 into U.S. dollars. The spot rate is $0.7865/C$ and if the spot rate in 3 months is $0.7622/C$, how much will Gates Auto Inc. gain or lose due to exchange rate movements on this transaction if it does not perform any hedges.

a.They will lose $1,458.29

b.They will gain $1,458.29

c.They will not gain or lose anything on this transaction.

d.They will gain $31,530

14.Beech Industries is a U.S. company that sells shoes to Japanese retailers. Beech Industries just signed a contract to sell 1,000 pairs of shoes to Yakata Inc. The total price for these shoes is ¥200,000. The shoes will be delivered today but Beech Industries won’t receive payment for 6 months. The current spot rate is ¥127/$ and the 6-month forward rate is ¥128/$. Marcus Duncan, the treasurer at Beech Industries, expects that in 6 months the spot rate will ¥131/$. Based on the information given Beech Industries is most likely to

a.enter into a 6-month forward contract and lock in the rate ¥128/$

b.remain unhedged on this transaction

c.demand payment today instead of in 6 months

d.cancel the transaction with Yakata Inc. because they will lose too much of their profit due to exchange rate movements.

15.Which of the following is not a strategy that corporations can use to transfer exchange rate risk?

a.Forward Contracts

b.Option Contracts

c.Currency Swaps

d.operate and sell in only one country

16.The following are all examples of political risk that could affect a multinational corporation, except

a.increasing taxes on a firm’s activities

b.employing quotas on the goods or services that a firm sells

c.Implementing tax incentives to attract new corporations

d.Implementing barriers that prevent a firm from repatriating profits back to their home country

17.Which of the following is an example of macro political risk?

a.the current government is overthrown by a radical militia group

b.restricting the amount of assets that steel companies may control in their territories

c.raising the level of taxes for oil firms

d.removing tax subsidies received by paper manufacturer’s

18.Suppose that a United States firm is considering an investment that will yield cash flows in Canadian dollars. The projects cash flows will be the following: Initial cost = C$-1,000,000, Year 1 = C$550,000, Year 2 = C$340,000, Year 3 = C$125,000. The U.S. firm plans to evaluate the project by discounting the cash flows at the Canadian cost of capital of 7% and then converting the NPV back to U.S. dollars at the current spot rate which is $0.8213/C$. What is the NPV of the project in U.S. dollars?

a.$-71,433

b.$-86,975

c.C$-86,975

d.C$-71,433

19.Mark Duncan owns a furniture manufacturing firm in the United States. He is considering an investment in Japan which will have the following cash flows: Initial cost = ¥-300,000,000, Year 1 = ¥150,000,000, Year 2 = ¥200,000,000, Year 3 = ¥250,000,000 and Year 4 = ¥100,000,000. The appropriate discount rate that should be used to discount yen-denominated cash flows is 11%. Calculate the NPV of the project, if Duncan plans on converting the NPV from Yen into U.S. dollars at the current spot rate of ¥123/$.

a.¥246,130,565

b.$246,130,565

c.$2,001,062

d.¥2,001,062

20.Crum Industries is a paper manufacturing company based in the United States. The CEO of the company Hannah Monstzka is considering an investment in Canada to take advantage of Canadian government subsidies. The investment will have the following cash flows: Initial cost = C$-2,000,000, Year 1 = C$1,250,000, Year 2 = C$1,000,000, Year 3 = C$750,000. Monstzka plans on hedging the cash flows using forward contracts throughout the life of the project. The risk-free rate of interest in Canada is 5% and the risk-free rate of interest in the U.S. is 4%. Currently the spot rate is $0.7134/C$ and the project should be discounted at a U.S. adjusted rate of 9%. Assume Monstzka will be able to convert the Canadian dollar cash flows into U.S. dollars at the implied forward rates when they are received. What is the NPV of the project in U.S. dollars?

a.$374,071

b.$567,606

c.$404,930

d.$393,465