Quiz Ch 17 – Interest Rate Parity and Exchange Rates
Fundamentals of Financial Management, Concise
Brigham and Houston
09th Edition
Under the assumption of interest rate parity, which statement is MOST ACCURATE?
Under the assumption of interest rate parity, which statement is MOST ACCURATE?
True or false: The cost of capital for a foreign project can differ from that of an equivalent domestic project due to potential variations in the level of risk associated with foreign projects.
True or false: In assessing the risk of foreign investment, greater risk can stem from factors like exchange rate and political risk, while lower risk can be attributed to international diversification.
True or false: On average, a foreign currency is expected to depreciate against the U.S. dollar by a percentage rate roughly equivalent to the difference between its inflation rate and that of the United States.
True or false: When an investor can acquire more units of foreign currency per dollar in the forward market compared to the spot market, the forward currency is considered to be trading at a discount to the spot rate.
True or false: A forward currency is at a premium when a dollar buys less of it compared to the spot market.
True or false: Individuals and corporations can employ forward currency contracts as a hedging strategy for their exchange rate exposure. This essentially involves selling the currency expected to gain value while purchasing the currency expected to lose value.
True or false: In the context of foreign investment from the parent company’s viewpoint, the pertinent cash flows should encompass the financial flows that the subsidiary can repatriate to the parent company, along with the cash flows required to remain in the foreign country.