Quick Quiz 2

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1		The rate most international banks charge one another for loans of Eurodollars overnight in the London market is called:
			A)	EDC
			B)	Eurobond
			C)	Eurodollar
			D)	interest rate swap
			E)	LIBOR
2		___________________ holds because of the possibility covered interest arbitrage.
			A)	Uncovered interest parity
			B)	Interest rate parity
			C)	Unbiased forward rates
			D)	The International Fisher Effect
			E)	Purchasing power parity
3		Bank A quotes you that $1.00 will buy 2 Deutsche marks or 5 French francs. At the same time, bank B provides you a quote of 3 Deutsche marks to buy 5 French francs. Thus, there exists a potential for immediate profit via:
			A)	triangle arbitrage
			B)	futures arbitrage
			C)	an interest rate swap
			D)	rectangular arbitrage
			E)	a currency hedge
4		The 60-day forward rate for Japanese Yen is ¥108.02 per $1.00. The spot rate is ¥103.09 per $1.00. In 60 days you expect to receive ¥1,500,000. If you agree to a forward contract, how many dollars will you receive in 60 days?
			A)	$5 million
			B)	$15,463
			C)	$15,312
			D)	$14,550
			E)	$13,886
5		The current spot rate between Germany and Canada is DM1.27 per $1.00. Expected inflation in Germany is 9% per year and expected inflation in Canada is 4% per year. If relative purchasing power parity holds, what is the expected exchange rate 3 years from now?
			A)	DM 1.285 DM per $1.00
			B)	DM 1.388 DM per $1.00
			C)	DM 1.470 DM per $1.00
			D)	DM 1.572 DM per $1.00
			E)	DM 2.179 DM per $1.00
6		The Canadian risk-free rate is 5%. The British risk-free rate is 9%. Expected inflation in Canada is 3%. What is the expected inflation rate in Britain?
			A)	7%
			B)	4%
			C)	3%
			D)	10%
			E)	11%

Use the following information to answer the next four questions:
A Canadian firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost £16 million and will generate cash inflows of £7.6 million per year at the end of each of the next three years. After that, the company will be worthless. The current exchange rate is £0.43 British pounds per $1.00. The Canadian inflation rate is expected to be 4% over this period. The current risk-free rate of interest in Canada is 5% and the risk-free rate in Great Britain is 8%.

7		What is the approximate rate of inflation in Great Britain?
			A)	7%
			B)	5%
			C)	2%
			D)	8%
			E)	10%
8		What is the cost of the project in Canadian dollars?
			A)	$6.88 million
			B)	$41.63 million
			C)	$37.21 million
			D)	$21.53 million
			E)	$17.67 million
9		If uncovered interest parity holds, what is the expected spot rate 2 years from now?
			A)	0.430
			B)	0.456
			C)	0.439
			D)	0.461
			E)	0.470
10		What is the cash inflow for year 3 in terms of Canadian dollars?
			A)	$15.76 million
			B)	$16.70 million
			C)	$16.24 million
			D)	$18.32 million
			E)	$18.84 million