21. The current spot rate is GBP 0.5024/USD. The three-month forward rate is GBP 0.5040/USD. The TE Company expects a payment of GBP 100 million in three months. If the firm hedges this transaction in the forward market, what is the USD amount it will receive in three months?
A. USD198.41 million
B. USD199.04 million
C. USD 50.40 million
D. USD 50.24 million
22. The current spot rate is $US0.8543/$A. The one-year forward rate is $US0.8475/$A. A U.S. exporter denominates its exports to Australia in $A and expects to receive $A600,000 in one year. What is the value of these exports in one year in $US given that the firm executes a forward hedge?
A. $US 508,500
B. $US 512,580
C. $US 707,965
D. $US 702,329
23. Suppose that the G Company knows that in one month it must pay£7 million for goods that its U.S. subsidiary will receive in Britain. The current exchange rate is $1.99£. The risk that the corporate treasurer faces is that
A. the $US/pound exchange rate falls in a month’s time (i.e., the pound weakens).
B. the $US/pound exchange rate rises in a month’s time (i.e., the pound strengthens).
C. the $US/pound exchange rate does not change from its current position.
D. the pound exchange rate falls in a month’s time (i.e., the pound strengthens).
24. Currency risk exposure can be categorized as
A. transaction exposure.
B. economic exposure.
C. None of these options are correct.
D. All of these options are correct.
25. An Australian firm is evaluating a proposal to build a new plant in the United States. The expected cash flows in $US (in millions) are as follows: Year 0, -100; Year 1, 40; Year 2, 50; Year 3, 65. The discount rate in $A is 10 percent, while the discount rate in $US is 12 percent and the spot rate is $US0.60/$A. Calculate the NPV of the project in $US.
A. +36.40
B. -21.84
C. +13.10
D. +21.84
26. An Australian firm is evaluating a proposal to build a new plant in the United States. The expected cash flows in $US (in millions) are as follows: Year 0, -100; Year 1, 40; Year 2, 50; Year 3, 65. The discount rate in $A is 10 percent, while the discount rate in $US is 12 percent and the spot rate is $US0.85/$A. Calculate the NPV in $A.
A. +25.69
B. -21.84
C. +13.10
D. +21.84
27. XJ Company from the United States is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, -50; Year 1, 25; Year 2, 35; Year 3, 40. The discount rate in BP is 14 percent and the discount rate in $US is 12 percent. The spot rate is $US1.99/BP. Calculate the NPV of the project in BP.
A. +28.69
B. +25.86
C. +42.67
D. +22.68
28. XJ Company from the United States is evaluating a proposal to build a new plant in the United Kingdom. The expected cash flows in pounds are as follows: Year 0, -50; Year 1, 25; Year 2, 35; Year 3, 40. The discount rate in BP is 14 percent and the discount rate in the $US is 12 percent. The spot rate is $US1.99/BP. Calculate the NPV in $US.
A. +25.86
B. +28.69
C. +51.46
D. +45.14
29. Political risk is can be thought of as
A. unanticipated changes in exchange rates.
B. unanticipated actions by the host government affecting the cash flows of a project.
C. unanticipated actions by the World Bank affecting the cash flows of a project.
D. All of these options are correct.
30. The risk associated with unanticipated actions by the host country government or its courts towards a multinational firm is called
A. economic risk.
B. transaction risk.
C. political risk.
D. translation risk.
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