Multiple Choice: Exchange Rates Select the correct answer for each of the following:

The Albert Company makes a $1,000,000 loan to its Swiss subsidiary when the spot rate is 1.50 Swiss francs for $1 and the 90-day forward rate is 1.45 francs for $1.

At the time of the loan, the Swiss subsidiary will record in francs a liability of:

a. 666,667 francs.

b. 145,000 francs.

c. 1,500,000 francs.

d. 689,655 francs.

Beata Clothing Company buys on credit a shipment of winter coats from Poland at a cost of 410,000 zlotys. The spot rate is 4.10 zlotys to $1 at the time of the sale. If the rate is 4.00 zlotys to $1 when payment is made, Beata will have experienced an exchange:

a. Gain of $2,500.

b. Loss of $2,500.

c. Gain of $4,100.

d. Loss of $4,100 You have been sent by your company to buy $10,000 of leather goods in Mexico for a special promotion. You know that you will have to make the purchases in Mexican pesos, so you look up the exchange rates. You find that the spot rate is 9.50 pesos to $1 and the 30-day forward rate is 9.80 pesos to $1. When you exchange your dollars for pesos today, you can expect to receive:

a. 98,000 pesos.

b. 1,053 pesos.

c. 1,020 pesos.

d. 95,000 pesos.

When currency exchange rates are allowed to move freely:

a. Rates will usually remain the same over a long period of time.

b. There is a risk of an exchange gain or loss on outstanding receivables denominated in a foreign currency.

c. The forward rate will be the same as the spot exchange rate.

d. All of the above.