Multinational Finance Quiz

1) If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ____ to the spot rate.

a. premium of 8%

b. premium of 18%

c. discount of 18%

d. discount of 8%

e. premium of 16%

2) A U.S.-based company, MooWaz, Ltd., arranged a 2-year, $1,000,000 loan to fund a project in Mexico. The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due. The loan was not hedged in the foreign exchange market. Thus, Stewart must convert U.S. funds to Mexican pesos to make its payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective interest rate will Stewart end up paying on the loan?

a. 10.36%

b. 11.50%

c. 17.44%

d. 20.00%

e. 21.79%

3) Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover its trade obligation. Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How much in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward market hedge?

a. $0

b. $1,834.86

c. $4,517.26

d. $5,712.31

e. $7,547.17

4) A U.S.-based importer, Cheddar “Cheese Cat”, Enterprises, makes a purchase of premium cat food from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs...