30 31 FOR THE FOLLOWING, EITHER MAKE BOLD, RED OR HIGHLIGHT, JUST MAKE YOUR ANSW

Question

30 31 FOR THE FOLLOWING, EITHER MAKE BOLD, RED OR HIGHLIGHT, JUST MAKE YOUR ANSWER CLEAN 32 3) If interest rate parity holds, and given that interest rates in the US are 6% while interest rates in Germany are 3%, it would always be a good financial plan for a US firm to take out long term bond financing in Germany 34 35 36 371 38 39 TRUE b) 4) For an importer, prepayment represents a lower risk than alternatives such as sight or time drafts. b) There are two key types of letters of credit, either revocable or irrevocable b) TRUE FALSE 41 TRUE FALSE 5) Kaola Co. pays for many imports denominated in Australian dollars. It is a major exporter to France and invoices the exports in euros. It also has much business in U.S. dollars. It has no other international business and does not hedge its transactions. it is about to obtain a small loan. It could reduce its exchange rate risk if its loan is denominated in: 45 US dollars 47 48 49 b) Australian dollars none of the above d)

Explanation / Answer

3) FALSE (Since interest rate parity holds, the gain obtained through difference in interest rates would be nullified by the spot and future exchange rates)

4) FALSE (In case of both sight or time draft, payment by importer happens later than that of prepayment, lowering the risk for the importer. Time draft allows the importer to delay the payment shortly to ensure satisfaction of the product by the importer. For Sight draft, payment happens immediately after handing over of product. If importing country disallows import, then cost of shipment is borne by the exporter and importer does not pay anything, thus lowering risk for importer.)

FALSE (Apart from Revocable, Irrevocable, other key types of LC are Transferable, Untransferable, Confirmed, Standby etc)

5) Euros

6) FALSE (if bond issued in foreign currency and that currency depreciates against home currency, funds needed to make coupon payments should decrease)

7) A Letter of Credit (go through individual definitions)

8) Prepayment (Exporter gets prepaid and this ensures minimum risk for the exporter)

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