Chapter 17: Homework1. In Japan, 90-day securities have a 4% annualized return and 180-day 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 Japanesesecurities are denominated in terms of the Japanese yen. Assuming that interest rate parity holdsin all markets, which of the following statements is most CORRECT?a. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-dayforward market.b. The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forwardmarket.c. The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchangerate in the 180-day forward market.d. The spot rate equals the 90-day forward rate.e. The spot rate equals the 180-day forward rate.Answer: A is correct2. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ___________ tothe spot rate.a. premium of 8%b. premium of 18%c. discount of 18%d. discount of 8%e. premium of 16%Answer: D is correct3. Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firmin 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 payablewith a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes aforward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually1.638 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging itsexchange rate exposure?
a. -$396 b. -$243 c. $0 d. $243 e. $638Answer: E is correct4. A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. Ifpurchasing power parity (PPP) holds, what is the price of the product in Switzerland?a. 123.75 Swiss francsb. 454.55 Swiss francsc. 750.00 Swiss francsd. 1,237.50 Swiss francse. 1,650.00 Swiss francsAnswer: D is correct5. Chen Transport, a U.S. based company, is considering expanding its operations into a foreigncountry. The required investment at Time = 0 is $10 million. The firm forecasts total cashinflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possibleterminal value of $8 million. In addition, due to political risk factors, Chen believes that there isa 50% chance that the gross terminal value will be only $2 million and a 50% chance that it willbe $8 million. However, the government of the host country will block 20% of all cash flows.Thus, cash flows that can be repatriated are 80% of those projected. Chens cost of capital is15%, but it adds one percentage point to all foreign projects to account for exchange rate risk.Under these conditions, what is the project’s NPV?a. $1.01 millionb. $2.77 millionc. $3.09 milliond. $5.96 millione. $7.39 millionAnswer: B is correct