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1 Multinational Financial Management: An Overview
1. The most commonly accepted goal of the MNC is: a. to maximize
revenues b. to maximize shareholder wealth c. to maximize
profitability of the firm d. both a and b
2. Agency costs are normally larger for MNCs than for purely
domestic firms. Which of the following is not a reason for this
larger agency cost? a. Monitoring managers of distant subsidiaries
in foreign countries is more difficult. b. Managers from different
cultures may not follow uniform goals. c. U.S. managers tend to
downplay the short-term effects of decisions. d. Sheer size of the
larger MNCs can create larger agency problems.
3. Several constraints confront the MNC in its attempt to
maximize shareholder wealth. Which of the following is probably not
a constraint? a. competitive b. ethical c. regulatory d.
environmental
4. Part of the growth of multinational business over time is due
to the realization that specialization by countries can increase
production efficiency, making trade essential when a country
focuses on the products it produces best. This is an example of
which theory of international business? a. product cycle theory b.
competitive advantage theory c. imperfect markets theory d.
comparative advantage theory
5. According to the ___________, firms become first established
in the home market as a result of some perceived advantage they
would have over existing competitors, such as a need by the market
for at least one more supplier of the product. Eventually, firms
will penetrate foreign markets to satisfy foreign demand. a.
product cycle theory b. imperfect markets theory c. comparative
advantage theory d. none of the above
6. Which method of international business obligates a firm to
provide a specialized sales or service strategy, support
assistance, and possibly an initial investment in the entity in
exchange for periodic fees? a. joint venture b. new foreign
subsidiary c. licensing d. franchising
7. Multinational firms face exposure to many different types of
international risk. Which of the following is not a type of
exposure mentioned in the text? a. diversifiable risk b. political
risk c. foreign economies d. exchange rate movements
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8. A firms expects to receive $20,000 from domestic operations
and 20,000 British pounds () from a business in England. If the
pound's value is $1.25, the expected total dollar cash flows are:
a. $40,000 b. $36,000 c. $45,000 d. $20,000
9. Which of the following statements is not true regarding the
euro? a. In 1987, several European countries conformed to the euro
as their currency for business transactions between these
countries. b. The euro was phased in as a currency for other
transactions during 2001. c. The euro completely replaced the
currencies of the participating countries by 2002. d. The creation
of the euro allowed firms (including European subsidiaries of
U.S.-based MNCs) to engage in international transactions with the
use of one currency and eliminated transactions costs resulting
from exchanging currencies.
10. A decentralized management style is more likely to result in
higher agency costs because the subsidiary managers may make
decisions that do not focus on maximizing the value of the entire
MNC. a. True b. False
11. Using international trade as a method of conducting
international business is a relatively bold approach that can be
used by firms to penetrate markets. a. True b. False
12. The Single European Act of 1987 removed several cross-border
barriers among European countries. It also exposed firms to
additional competition. a. True b. False
13. Under NAFTA, the low-cost labor in Mexico has led to a
decrease in market share for some U.S. firms. This is most
pronounced in technology-intensive industries. a. True b. False
14. Political risk represents political actions taken by the
host government or the public that affect an MNC's cash flows. a.
True b. False
15. The so-called Asian crisis lingered in 1998 and adversely
affected numerous U.S.-based MNCs that conducted business in these
countries. a. True b. False
16. Licensing is a venture that is jointly owned and operated by
two or more firms. a. True b. False
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2 International Flow of Funds
1. Factor income represents income received by investors on
foreign investments in financial assets (securities). Factor income
is part of which component of the balance of payments? a. capital
account b. current account c. balance of trade d. none of the
above
2. Which of the following are factors that affect international
trade flows? a. government restrictions b. exchange rates c.
inflation d. all of the above e. none of the above
3. Even if a country's home currency weakens, its balance of
trade will not necessarily improve immediately. This may occur
because: a. many international trade transactions are prearranged
and cannot be immediately adjusted b. the currencies of some other
countries may have strengthened c. prices on goods will remain the
same, making goods just as competitive d. all of the above e. none
of the above
4. Which of the following factors will lead to an inflow of
direct foreign investment (DFI) into a country? a. high tax rates
in the country where the investment flows b. privatization in the
country where the investment flows c. an expectation that the
currency in the country where the investment flows will depreciate
d. all of the above e. none of the above
5. Which of the following factors will lead to an inflow of
portfolio investment into a country, everything else held constant?
a. an expectation of a weaker currency in the country where the
investment flows b. higher tax rates in the country where the
investment flows c. higher interest rates in the country where the
investment flows d. none of the above e. both a and c
6. Among the major objectives of the ________ are to promote
cooperation among countries on international monetary issues and to
promote stability in exchange rates. a. International Monetary Fund
(IMF) b. World Bank c. World Trade Organization d. International
Financial Corporation e. none of the above
7. The World Bank does cofinancing of loans with which of the
following entities? a. official aid agencies b. export credit
agencies c. commercial banks
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d. both a and c e. all of the above
8. ______________ is a component of the capital account and
represents the investment in fixed assets in foreign countries that
can be used to conduct business operations. a. Portfolio investment
b. Direct foreign investment (DFI) c. Other capital investment d.
Transfer payments e. None of the above
9. The General Agreement on Tariffs and Trade (GATT): a. is an
accord reached between 100 countries in 1980 b. reduced some
tariffs by 80 percent on average c. removed some tariffs over a
five- to ten-year period d. made more progress on reducing tariffs
in service industries than in manufacturing industries e. none of
the above
10. The capital account is primarily composed of merchandise
exports and imports and service exports and imports. a. True b.
False
11. Tariffs are taxes imposed on imported goods. a. True b.
False
12. In the long run, a weak dollar is expected to cause a higher
balance of trade from the U.S. perspective. a. True b. False
13. The General Agreement on Tariffs and Trade (GATT) was
established in 1993 to settle trade disputes and provide a forum
for multilateral trade negotiations. It began operations in 1995
with a membership of 81 countries. a. True b. False
14. The International Development Association (IDA) was created
in 1960 with country development objectives similar to those of the
World Bank. Its loan policy is more appropriate for less prosperous
nations. a. True b. False
15. Dumping reflects the exporting of products by one country to
other countries at prices above cost. a. True b. False
16. A graphical illustration of the fact that the U.S. balance
of trade may actually deteriorate in the short run as a result of
dollar depreciation is called the J curve effect. a. True b.
False
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3 International Financial Markets
1. Which of the following is not a motive for investing in
foreign markets? a. expectations of a weaker foreign currency b.
international diversification c. economic conditions d. all of the
above are motives for investing in foreign markets
2. Which of the following are important attributes of banks that
provide foreign exchange? a. speed of execution b. advice about
current market conditions c. forecasting advice d. all of the above
e. both b and c
3. The bid rate for the British pound is $1.65 and the ask rate
is $1.68. What is the bid/ask spread? a. 1.82% b. -1.82% c. 1.79%
d. -1.79% e. none of the above
4. If the value of the Canadian dollar (C$) is $0.65 and the
euro () is worth $0.90, what is the value of the euro in Canadian
dollars? a. C$1.38 b. C$0.72 c. C$0.59 d. 0.72 e. none of the
above
5. The Eurodollar market grew substantially in the 1960s and
1970s for which of the following reasons? a. higher reserve
requirements for Eurobanks b. U.S. regulations in 1968 which
limited foreign lending by U.S. banks c. higher spreads that
Eurobanks could charge on loans and deposits d. all of the above e.
both a and c
6. Multinational corporations sometimes borrow in the Eurocredit
market. These loans are denominated in dollars and many other
currencies. The common maturity for Eurocredit loans is: a. one
year b. three years c. five years d. ten years e. thirty years
7. A long-term bond that is issued by a borrower foreign to the
country where the bond is placed is called a:
a. foreign bond b. Eurobond c. Eurocredit bond d. all of the
above
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8. A stock offering by foreign corporations in the U.S. is
called a (an): a. American depository receipt (ADR) b. Yankee stock
offering c. floating rate note (FRN) d. none of the above
9. The most common type of foreign exchange transaction is for
immediate exchange at the so-called forward rate. a. True b.
False
10. A purchaser of a currency put option buys the right to sell
a specific currency at a specific price within a specific period of
time. a. True b. False
11. In December 1987, 12 major industrialized countries met in
Buenos Aires and agreed on standardized guidelines for bank capital
classification. This agreement was called the "Brazil Accord." a.
True b. False
12. Loan rates float in accordance with the movement of some
market interest rate, such as the Lisbon Intrabank Offer Rate
(LIBOR). It is the rate commonly charged for loans between
Eurobanks. a. True b. False
13. The adoption of the euro discouraged MNCs based in Europe to
issue stock. a. True b. False
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4 Exchange Rate Determination
1. Assume the spot rate of the euro () is $0.90. The expected
spot rate one year from now is assumed to be $0.85. This percentage
change reflects a: a. 5.56% appreciation of the euro b. 5.56%
depreciation of the euro c. 5.88% appreciation of the euro d. 5.88%
depreciation of the euro
2. The current spot rate of the British pound () is $1.45. One
year from now, the spot rate of the British pound is $1.51. This
percentage change reflects a: a. 4.14% appreciation of the U.S.
dollar. b. 4.14% depreciation of the British pound. c. 4.14%
appreciation of the British pound. d. 3.97% appreciation of the
British pound
3. Suppose the inflation rate in Australia goes up relative to
the U.S. inflation rate. What effect will that have on the supply,
demand, and equilibrium exchange rate of the Australian dollar? a.
the supply of Australian dollars will go up, the demand for
Australian dollars will go down, and the Australian dollar will
depreciate b. the supply of Australian dollars will go up, the
demand for Australian dollars will go down, and the Australian
dollar will appreciate c. the supply of Australian dollars will go
down, the demand for Australian dollars will go up, and the
Australian dollar will depreciate d. the supply of Australian
dollars will go down, the demand for Australian dollars will go up,
and the Australian dollar will appreciate
4. Suppose interest rates in Europe increase relative to U.S.
interest rates. What effect will that have on the supply, demand,
and equilibrium exchange rate of the euro ()? a. the supply of
euros will go up, the demand for euros will go down, and the euro
will depreciate b. the supply of euros will go up, the demand for
euros will go down, and the euro will appreciate c. the supply of
euros will go down, the demand for euros will go up, and the euro
will depreciate d. the supply of euros will go down, the demand for
euros will go up, and the euro will appreciate
5. Suppose income levels in Australia go up relative to the U.S.
levels. What effect will that have on the supply, demand, and
equilibrium price of U.S. dollars? a. the supply of U.S. dollars
will go up, the demand for U.S. dollars will go down, and the U.S.
dollar will depreciate b. the supply of U.S. dollars will go up,
the demand for U.S. dollars will go down, and the U.S. dollar will
appreciate c. the supply of U.S. dollars will not change, the
demand for U.S. dollars will go up, and the U.S. dollar will
depreciate d. the supply of U.S. dollars will not change, the
demand for U.S. dollars will go up, and the U.S. dollar will
appreciate
6. If a bank thinks the British pound is overvalued, it should
do which of the following? a. buy more of the pound before it
depreciates b. buy more of the pound before it appreciates c. sell
the pound before it depreciates d. sell the pound before it
appreciates e. none of above
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7. Assume the U.S. and Argentina have high levels of trade flows
but low levels of capital flows. Which of the following statements
is true regarding exchange rate determination? a. inflation
differentials are very important b. interest rate differentials are
very important c. income differentials are very important d. both a
and c e. all of the above
8. Which of the following is not a factor that affects exchange
rates? a. relative inflation rates b. relative income levels c.
relative interest rates d. government controls e. all of the above
are factors that affect exchange rates
9. If the U.S. intervenes in the foreign exchange market by
buying U.S. dollars with Japanese yen, then the U.S. dollar should
appreciate against the Japanese yen. a. True b. False
10. If the U.S. government places a high tax on interest income
earned on foreign investments, it would most likely encourage the
exchange of U.S. dollars for other currencies. a. True b. False
11. Currency speculators can be especially influential on the
exchange rate movements of emerging markets because those markets
have a smaller amount of foreign exchange trading. a. True b.
False
12. A higher foreign interest rate tends to place downward
pressure on the foreign currency and therefore can have an
unfavorable affect on expected dollar cash flows. a. True b.
False
13. If two countries engage in a large volume of international
trade but very small international capital flows, relative
inflation rates would likely be more influential than relative
interest rates. a. True b. False
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5 Currency Derivatives
1. Which of the following are possible contract periods for
forward contracts? a. 30 days b. 65 days c. 97 days d. 1 year, 2
months e. all of the above
2. Assume that as of May 15, a futures contract on 125,000 euros
() with a June settlement date is priced at $1.00 per euro. The
______ of this currency futures contract will ________ for the
euros on the settlement date. a. seller; pay $125,000 b. buyer; pay
$125,000 c. seller; receive $125,000 d. buyer; receive $125,000 e.
answers b and c are correct
3. The Swiss franc spot rate is $.90 and the Swiss franc 90-day
forward rate is $.88. At what discount or premium is the Swiss
franc selling? a. 2.22%, premium b. -2.22%, discount c. -9.09%,
discount d. 8.89%, premium e. -8.89%, discount
4. What is the typical initial margin requirement for a currency
futures contract? a. $500 b. $1,000-$2,000 c. 5%-10% of the
contract d. none of the above
5. Which of the following is a similarity between the currency
futures market and the forward market? a. both are self-regulating
b. both use standardized contract sizes c. both use standardized
delivery dates d. all of the above are similarities e. none of the
above are similarities
6. Which of the following factors does not affect the premium of
a currency call option? a. level of existing spot price relative to
strike price b. length of time before the expiration date c. the
currency of the call option d. potential variability of currency e.
all of the above are factors
7. Suppose Darlene is a speculator who buys five British pound
call options with a strike price of $1.50 and a March expiration
date. The current spot price is $1.45. Darlene pays a premium of
$0.01 per unit for the call option. Just before expiration, the
spot price reaches $1.53, and Darlene exercises the option. Assume
one option contract specifies 31,250 units. What is the profit or
loss for Darlene? a. $625 b. $3,125
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c. $1,250 d. $6,250 e. none of the above
8. Suppose Darlene is a speculator who buys ten British pound
put options with a strike price of $1.50 and a March expiration
date. The current spot price is $1.55. Darlene pays a premium of
$0.02 per unit for the call option. Just before expiration, the
spot price reaches $1.48 and Darlene exercises the option. Assume
one option contract specifies 31,250 units. What is the profit or
loss for Darlene? a. $0 b. $6,250 c. $3,125 d. $625 e. none of the
above
9. Peter has purchased a call option on euros () with a strike
price of $1.06 and a premium of $0.01. The current spot price of
the euro is $1.04. Just before expiration, the euro's spot price is
$1.09.What is the per unit profit or loss to the writer of this
option? a. $.02 loss b. $.02 profit c. $.03 loss d. $.03 profit
10. The forward rate will usually contain a premium (or
discount) that reflects the difference between the home inflation
rate and the foreign inflation rate. a. True b. False
11. A non-deliverable forward contract (NDF) is like a regular
forward contract because it is for a specified amount and a
specified exchange rate. However, it differs from a regular forward
contract because it does not have a specified future settlement
date. a. True b. False
12. Forward contracts are used primarily by small firms and
individuals because they can be tailored to the needs of those
clients. a. True b. False
13. A company expects to receive a foreign currency from the
sale of merchandise. Because it is nervous about possible exchange
rate movements in this currency, it wants to hedge its position
with an option in the currency. The appropriate action for them to
hedge is to buy a call option. a. True b. False
14. A European-style currency option may only be exercised on
the expiration date. a. True b. False
15. If the spot rate of a currency increased substantially over
a period, the futures price would likely increase by about the same
amount. a. True b. False
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6 Government Influence on Exchange Rates
1. Some countries use a _________ exchange rate arrangement, in
which their home currency's value is pegged to a foreign currency
or to some unit of account. a. fixed b. freely floating c. managed
float d. pegged e. none of the above
2. Currently, the U.S. dollar is under which type of exchange
rate system? a. fixed b. freely floating c. managed float d. pegged
e. none of the above
3. The U.S. dollar was under which type of exchange rate system
from 1944 to 1971? a. fixed b. freely floating c. managed float d.
pegged e. none of the above
4. Which of the following countries suspended participation in
the exchange rate mechanism (ERM) of the European Economic
Community during the 1992 crisis? a. Britain b. France c. Italy d.
Switzerland e. both a and c
5. Which of the following strategies would result in successful
sterilized intervention by the Fed if it wanted to make the U.S.
dollar depreciate in value? a. sell dollars in the currency
markets, buy government treasury bonds b. sell dollars in the
currency markets, sell government treasury bonds c. buy dollars in
the currency markets, buy government treasury bonds d. buy dollars
in the currency markets, sell government treasury bonds e. none of
the above
6. Assume the Fed wants to boost exports for the United States.
Which of the following strategies would help boost exports? a.
raise interest rates b. increase the money supply by selling
government bonds c. lower interest rates d. decrease the money
supply by selling government bonds e. none of the above
7. Assume the Fed wants to decrease inflation in the United
States. Which of the following strategies would help reduce
inflation? a. raise interest rates b. increase the money supply by
buying government bonds
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c. lower interest rates d. decrease the money supply by buying
government bonds e. none of the above
8. Which of the following statements is not true with respect to
the euro since its introduction in 1999? a. its value declined
substantially against the British pound, the dollar, and many other
currencies from 1999 to 2000 b. there was more money flowing out of
Europe and into U.S. and other financial markets than money flowing
from these countries to Europe, causing a depreciation of the euro
after it was introduced c. investors preferred to hold assets
denominated in dollars, pounds, or yen rather than in euros,
contributing to the depreciation of the euro d. all of the above
are true with respect to the euro
9. In December 1971, the Bretton Woods Agreement called for a
devaluation of the U.S. dollar by about 8 percent against other
currencies. a. True b. False
10. A currency board is a system for maintaining the value of
the local currency with respect to some other specified currency.
To do this, the currency board must have credibility in its promise
to maintain the exchange rate. a. True b. False
11. Three members of the European Union initially decided not to
participate in the single European currency (euro). These countries
are the United Kingdom, Denmark, and Sweden. a. True b. False
12. The European Central Bank is based in Frankfurt and is
responsible for setting monetary policy for all participating
European countries. Its objective is to control inflation in the
participating countries and to stabilize the value of the euro with
respect to other major currencies. a. True b. False
13. One method of direct intervention by the U.S. Federal
Reserve System in currency markets is to sell dollars and buy
foreign currencies to make the U.S. dollar depreciate. a. True b.
False
14. Dollarization represents the replacement of a foreign
currency with U.S. dollars. This process is a little less drastic
than a currency board. a. True b. False
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7 International Arbitrage and Interest Rate Parity
1. Bank A quotes a bid price of $1.52 and an ask price of $1.54
for the British pound. Bank B quotes a bid price of $1.51 and an
ask price of $1.53 for the British pound. If a trader has $100,000
to invest, what should the trader do to take advantage of
locational arbitrage and how much profit would the trader make? a.
buy pounds at Bank A, sell pounds at Bank B, make $1,000 b. buy
pounds at Bank A, sell pounds at Bank B, make $657.89 c. buy pounds
at Bank B, sell pounds at Bank A, make $1,000 d. buy pounds at Bank
B, sell pounds at Bank A, make $657.89 e. none of the above,
locational arbitrage is not possible
2. National Bank quotes a bid price of $1.15 and an ask price of
$1.17 for the euro. City Bank quotes a bid price of $1.10 and an
ask price of $1.14 for the euro. If you have $1,000,000 to invest,
what would your profit be from conducting locational arbitrage? a.
locational arbitrage is not possible in this situation b. $30,000
c. $10,000 d. $50,000 e. none of the above
3. A bank quotes a bid price of $1.50 for the British pound (),
a rate of $0.75 for the Swiss franc (Sf), and a rate of Sf2.02 for
the British pound. If I have $100,000 to invest, what should I do
to take advantage of triangular arbitrage and how much profit would
I make (assume the bid and ask prices are the same)? a. buy pounds
with dollars, sell pounds for francs, buy dollars with francs, make
$101,000 profit. b. buy pounds with dollars, sell pounds for
francs, buy dollars with francs, make $1,000 profit. c. buy francs
with dollars, sell francs for pounds, buy dollars with pounds, make
$101,000 profit. d. buy francs with dollars, sell francs for
pounds, buy dollars with pounds, make $1,000 profit. e. none of the
above, triangular arbitrage is not possible.
4. The spot rate is $0.75 for the Swiss franc (Sf), the 180 day
forward rate for the Swiss franc is $0.80, the 180 day interest
rate in the U.S. is 4%, and the 180 day interest rate in
Switzerland is 3%. If I have $100,000 to invest, what would my
approximate annual yield be from covered interest arbitrage? a.
9.87% b. 10.93 c. 21.87 d. 19.73% e. none of the above, a covered
interest arbitrage profit cannot be made.
5. Assume the Swiss franc has a 90-day interest rate of 3% and
the U.S. dollar has a 4% 90-day interest rate. What is the
non-annualized discount or premium on the Swiss franc? a. 9.7%
premium b. 9.7% discount c. 0.97% premium d. 0.97% discount e. none
of the above
6. Assume interest rate parity does not hold, yet covered
interest arbitrage is still not possible. Which of the following is
not a reason for this anomaly? a. accounting differences b.
transaction costs
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c. currency restrictions d. differential tax laws e. all of the
above are reasons
7. Which of the following forms of arbitrage takes advantage of
differentials in cross exchange rates? a. locational arbitrage b.
covered interest arbitrage c. triangular arbitrage d. interest rate
arbitrage e. none of the above
8. The British pound () is worth $1.60, while the euro () is
worth $.95. What is the value of the British pound with respect to
the euro? a. 0.59 b. 1.68 c. 1.68 d. 0.59 e. none of the above
9. Arbitrage can be loosely defined as capitalizing on a
discrepancy in quoted prices. In many cases, there is no investment
of funds tied up for any length of time and no risk involved in the
strategy. a. True b. False
10. According to interest rate parity, if the interest rate in
the U.S. is greater than the interest rate in Canada, then the
Canadian dollar forward rate should be at a discount. a. True b.
False
11. If the interest rate in the United Kingdom is 6% and the
interest rate in the U.S. is 4%, the approximate premium on the
British pound forward rate should be 2%. a. True b. False
12. If interest rate parity exists, then foreign investors will
earn the same return as U.S. investors. a. True b. False
13. In triangular arbitrage, currency transactions are conducted
in the spot market to capitalize on a discrepancy in the cross
exchange rate between two currencies. a. True b. False
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8 Relationships Among Inflation, Interest Rates, and Exchange
Rates
1. There are various forms of purchasing power parity (PPP)
theory. Which form of PPP is also known as the "law of one price"?
a. numerical form b. relative form c. accounting form d. absolute
form e. none of the above
2. Inflation in the U.S. is 3% and the inflation rate in Europe
is 5%. From the perspective of the U.S., what should the euro
adjustment be if purchasing power parity (PPP) applies? a. 1.94%
appreciation b. -1.9% depreciation c. -1.94% depreciation d. 1.9%
appreciation e. none of the above
3. Which of the following is not a reason for deviations in PPP?
a. relative income levels b. trade barriers c. interest rate
differentials d. several substitutes for traded goods e. all of the
above are reasons for deviations
4. Assume Switzerland has a one-year interest rate of 3% and the
U.S. has a 4%, one-year interest rate. If the International Fisher
effect (IFE) holds, what would your forecast for the Swiss franc
exchange rate with respect to the dollar be? a. 9.7% appreciation
b. 9.7% depreciation c. 0.97% appreciation d. 0.97% depreciation e.
none of the above
5. Assume the United Kingdom has a one-year interest rate of 6%
and the U.S. has a 4%, one-year interest rate. If the spot rate is
$1.50 per British pound and the international Fisher effect (IFE)
holds, what would you forecast for the future spot rate of the
pound in one year (using the simplified method)? a. $1.5288 b.
$1.5300 c. $1.4700 d. $1.4717 e. none of the above
6. Which of the following statements is false? a. the
international Fisher effect (IFE) uses interest rates to predict
forward rates. b. the international Fisher effect (IFE) uses
interest rates to predict future spot rates. c. interest rate
parity (IRP) uses interest rates to predict forward rates. d.
purchasing power parity (PPP) uses inflation rates to predict
future spot rates. e. all of the above are true statements.
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7. The absolute form of purchasing power parity (PPP) accounts
for the possibilities of market imperfections such as
transportation costs, tariffs, and quotas. a. True b. False
8. While the relationship between inflation differentials and
exchange rates is not perfect even in the long run, recent research
supports the use of inflation differentials to forecast long-run
movements in exchange rates. a. True b. False
9. The International Fisher effect (IFE) uses interest rates
rather than inflation rate differentials to explain exchange rate
changes over time. It is closely related to the PPP theory because
interest rates are often not correlated with inflation rates. a.
True b. False
10. It is possible for purchasing power parity (PPP) to hold but
for the international Fisher effect (IFE) to not hold over the same
time period. a. True b. False
11. Unlike purchasing power parity (PPP), the international
Fisher effect (IFE) consistently holds over the short run. a. True
b. False
12. The international Fisher effect (IFE) and interest rate
parity (IRP) use interest rate differentials to predict expected
future spot rates. a. True b. False
13. A somewhat simplified statistical test of purchasing power
parity (PPP) could be developed by applying regression analysis to
historical exchange rates and inflation differentials. a. True b.
False
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9 Forecasting Exchange Rates
1. Which of the following is not a corporate function that makes
exchange rate forecasting necessary? a. hedging decisions b.
capital budgeting decisions c. earnings assessments d. short-term
investment decisions e. all of the above are corporate functions
that make exchange rate forecasting necessary
2. Which of the following is not a method of forecasting
exchange rates? a. institutional b. fundamental c. technical d.
market-based e. all of the above are general groups for forecasting
exchange rates
3. Which of the following is a limitation in fundamental
forecasting? a. uncertain timing of impact b. the forecasts are
always inaccurate c. omission of other relevant factors from the
model d. both a and c e. all of the above
4. Market-based forecasting is based on what? a. spot rates b.
forward rates c. either a or b d. neither a nor b
5. ___________ forecasting involves use of historical exchange
rate data to predict future values. a. fundamental b. technical c.
market-based d. none of the above
6. Using the mixed forecasting method to predict the value of
the Japanese yen, which of the following factors should be
considered? a. recent movements in the yen b. Japanese inflation c.
the current spot rate of the yen d. all of the above e. none of the
above
7. If a forecaster predicts the British pound to be $1.70 in one
year, but the spot rate of the pound turns out to be $1.80 in one
year, what is the absolute forecast error as a percentage of
realized value? a. 5.56% b. -5.56% c. -5.88% d. 5.88% e. none of
the above
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8. MNC A uses a regression model to forecast the value of the
euro in the upcoming period. The following regression model was
developed: t = b0 + b1INFt-1 + b2INCt-1, where the two variables
are the percentage change in the inflation differential between the
U.S. and Europe and the quarterly percentage change in the income
growth differential between the U.S. and Europe, respectively. The
coefficients for the regression model are: b0 = 0.005, b1 = 0.9,
and b2 = 0.7. In the most recent quarterly, U.S. inflation
increased by 1%, while European inflation increased by 2%. Also in
the most recent quarter, U.S. income growth increased by 1.5%,
while European income growth increased by 2%. Based on this
information, what is the expected change in the euro? a. 0.75%
appreciation b. 0.75% depreciation c. 1.05% appreciation d. 0.05%
depreciation e. none of the above
9. From a corporate point of view, use of technical forecasting
may be limited in that it typically focuses on the near future. a.
True b. False
10. Regression analysis, sensitivity analysis, and purchasing
power parity (PPP) can be used for fundamental forecasting of
exchange rates. a. True b. False
11. The forward rate is considered biased in market-based
forecasting because of implications of interest rate parity. a.
True b. False
12. Some studies have shown forecast services to be not much
more accurate than freely available forecasts. a. True b. False
13. On a graph with X as the predicted value, Y as the realized
value, and a 45 degree line drawn from the apex, upward bias would
be shown if more points are below the line than above the line. a.
True b. False
14. If currency markets are weak-form efficient, then
fundamental forecasting cannot be used to improve forecasts. a.
True b. False
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10 Measuring Exposure to Exchange Rate Fluctuations
1. Some have argued the exchange rate risk is irrelevant. Which
of the following is not an argument for exchange rate risk
irrelevance? a. purchasing power parity argument b. investor hedge
argument c. interest rate parity argument d. currency
diversification argument e. all of the above are arguments for
irrelevance
2. One of the arguments for exchange rate risk irrelevance is
that if a U.S.-based MNC is well diversified across numerous
countries, its value will not be affected by exchange rate
movements because of offsetting affects. This identifies which
argument? a. purchasing power parity argument b. investor hedge
argument c. interest rate parity argument d. currency
diversification argument e. none of the above
3. The exposure of the MNC's consolidated financial statements
to exchange rate fluctuations is what type of exposure? a. economic
b. translation c. transaction d. none of the above
4. Over the next year, an MNC expects British pound () inflows
of 10,000, outflows of 15,000, and a British pound exchange rate of
$1.50. It expects Swiss franc (Sf) inflows of Sf30,000, outflows of
Sf20,000, and a Swiss franc exchange rate of $0.75. The company
expects Mexican peso (p) inflows of p1,000,000, outflows of
p1,500,000, and a Mexican peso exchange rate of $0.20. What is this
MNC's transaction exposure? a. -5,000, +Sf10,000, -p500,000 b.
+5,000, -Sf10,000, +p500,000 c. -$7,500 on pounds, +$7,500 on
francs, +$100,000 on pesos d. -$7,500 on pounds, +$7,500 on francs,
-$100,000 on pesos e. none of the above
5. Using the information in question 4, the MNC expects the
Swiss franc and the British pound to be perfectly negatively
correlated over this year and the peso to have 0 correlation to the
pound and the franc. What will be the MNC's transaction exposure?
a. The pound and franc exposures will offset, leaving just peso
exposure. b. The MNC will still have pound, franc, and peso
exposure. c. The MNC will have no exposure because it converts the
currencies to dollars. d. None of the above.
6. Translation exposure is not dependent on which of the
following? a. accounting methods used b. locations of foreign
subsidiaries
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c. proportion of business conducted by foreign subsidiaries d.
translation exposure is dependent on all of the above e.
translation exposure is dependent on none of the above
7. The degree to which a firm's present value of future
long-term cash flows can be influenced by exchange rate
fluctuations is referred to as transaction exposure to exchange
rates. a. True b. False
8. If a local currency appreciates and the firm's exports are
denominated in the local currency, the firm should expect net cash
flows from transactions to decrease. a. True b. False
9. A firm without any foreign inflows or outflows (a purely
domestic company) is still vulnerable to economic exposure. a. True
b. False
10. One method of measuring an MNC's transaction exposure is to
classify the cash flows into different income statement items and
subjectively predict each income statement item based on a forecast
of exchange rates. a. True b. False
11. Under Financial Accounting Standards Board No. 52 (FASB-52),
revenues, expenses, and gains and losses of a foreign entity from
its functional into the reporting currency is done using the
weighted average exchange rate. a. True b. False
12. Most analysts agree that translation exposure is the most
relevant form of exposure. a. True b. False
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11 Managing Transaction Exposure
1. A U.S.-based MNC has sold C$5,000,000 of product to a
Canadian company and will receive payment in 90 days. Which of the
following would provide a complete hedge of transaction exposure
for the firm? a. buy futures contracts that expire in six months b.
buy put options that expire in 90 days c. buy a forward contract d.
buy raw materials worth C$3,000,000 in Canada e. none of the
above
2. A U.S.-based multinational wants to hedge a payable in Swiss
francs that is due in six months. Generally, what should the
company do if it wants to use a money market hedge? a. borrow
dollars, convert to francs, lend in francs for six months b. borrow
dollars, convert to francs, sell the francs forward six months c.
borrow francs, convert to dollars, lend the dollars d. borrow
francs, convert to dollars, sell the dollars forward six months e.
none of the above
3. A U.S.-based multinational expects to receive 200,000
Australian dollars (A$) in 90 days. It wants to hedge the position
with a money market hedge. Interest rates for 90 days are 3% in the
U.S. and 2% in Australia. How much should the MNC borrow
approximately? a. $194,175 b. A$200,000 c. A$194,175 d. A$196,078
e. none of the above
4. In 90 days, a company has a Swiss franc payable of
Sf1,000,000 due. A call option on francs that expires in 90 days
has an exercise price of $0.85 and a premium of $0.02. A put option
on francs that expires in 90 days has an exercise price of $0.90
and a premium of $0.03. What option should the company choose and
how much will it pay in dollars if it exercise the option,
including the premium? a. buy the call, pay $850,000 b. buy the
put, pay $850,000 c. buy the call, pay $830,000 d. buy the put, pay
$870,000 e. none of the above
5. In 180 days, a company expects a Mexican peso receivable of
p10,000,000. The forward rate on the peso is $0.15 and the expected
peso spot rate in 180 days is $0.16. If the company chooses to
hedge, what should it do and what is the expected real cost of the
hedge? a. buy the peso forward, real hedge cost is $100,000 b. buy
the peso forward, real hedge cost is $1,500,000 c. sell the peso
forward, real hedge cost is $100,000 d. sell the peso forward, real
hedge cost is $1,500,000 e. none of the above
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6. Which of the following is not a technique for hedging
long-term transaction exposure? a. leading and lagging b. long-term
forward contract c. currency swap d. parallel loan e. all of the
above are techniques
7. Bulldog Corporation has payables of 125,000, 90 days from
now. There is a call option available with an exercise price of
$1.05. Assume that the option premium is $0.03 per unit and that
Bulldog buys this option. Bulldog does not have to exercise its
call option if it can obtain pounds at a lower spot rate. Bulldog
expects the spot rate of the euro to be $1.03 when the payables are
due. What is the total amount Bulldog will pay for the 125,000,
including the option premium? a. $135,000 b. $132,500 c. $263,750
d. none of the above
8. A company should hedge every expected transaction. a. True b.
False
9. A company can hedge transaction exposure by buying call
options or selling put options. a. True b. False
10. To hedge receivables with a futures contract, the company
would need to sell currency futures representing the currency and
amount related to the receivable. a. True b. False
11. Overhedging is hedging a larger amount in a currency than
the actual transaction amount. A solution to avoid overhedging is
to hedge only the minimum known amount in the future transaction.
a. True b. False
12. A Japanese company that expects the yen to appreciate would
want to lead payables that are in U.S. dollars. a. True b.
False
13. An MNC reduces its transaction exposure to exchange rate
movements by diversifying its business among numerous countries
that do not have highly correlated currencies. This method of
reducing exposure is called cross-hedging. a. True b. False
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14. Selective hedging occurs when a company chooses to hedge
only in those situations in which it expect the currency to move in
a direction that will make hedging feasible. a. True b. False
15. A currency swap involves an exchange of currencies between
two parties with a promise to reexchange currencies at a specified
exchange rate and future date. a. True b. False
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12 Managing Economic Exposure and Translation Exposure
1. A U.S.-based MNC obtains 60% of its revenue in
euro-denominated sales. All of the MNC's expenses are in U.S.
dollars. How can this MNC reduce its economic exposure? a. build a
production facility in Germany b. borrow eurodollars in France c.
denominate its sales in dollars instead of euros d. a and c e. all
of the above
2. A U.S. importer obtains 60% of his imports from Japan. All of
the importer's sales are in U.S. dollars. How can this importer
reduce his economic exposure? a. sell more product in Europe b.
increase sales in the U.S. c. borrow Japanese yen to finance
operations d. both a and c e. none of the above
3. A U.S.-based MNC obtains 60% of its financing in euros. All
of the MNC's sales are in U.S. dollars. How will a depreciation of
the euro affect the MNC's dollar earnings? a. increase earnings b.
decrease earnings c. no effect d. cannot be determined
4. A U.S.-based MNC expects earnings of 200,000 this year at a
British subsidiary, which it plans to reinvest in the subsidiary.
If the firm is committed to hedging translation exposure, how
should it hedge its pound translation exposure if it expects a
depreciation of the pound through the year? a. buy pound futures
contracts b. buy a forward contract c. either a or b d. none of the
above
5. Which of the following are limitations in hedging translation
exposure? a. inaccurate earnings forecasts b. accounting
distortions c. increased transaction exposure d. both b and c e.
all of the above
6. When deciding how to restructure operations to reduce
economic exposure, which of the following questions should an MNC
not consider? a. Should the firm attempt to increase or reduce
sales in new or existing foreign markets? b. Should the firm
increase or reduce its dependency on foreign suppliers? c. Should
the firm establish or eliminate production facilities in foreign
markets? d. Should the firm increase or reduce its level of debt
denominated in foreign currencies? e. The MNC should consider all
of the above questions when deciding how to restructure.
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7. Some revenue or expenses may be more exchange rate sensitive
than others. a. True b. False
8. When a firm has exposure in a foreign currency that has a
greater impact on cash outflows than cash inflows, the firm should
increase foreign supply orders. a. True b. False
9. Since economic exposure is not considered "real" exposure,
there are good arguments against hedging this exposure. a. True b.
False
10. A U.S. MNC expects earnings of 200,000 at a British
subsidiary, which it expects to reinvest in the subsidiary. A good
translation exposure strategy if the MNC fears an appreciation of
the pound through the year is to sell the pounds forward. a. True
b. False
11. Some MNCs do not consider hedging translation exposure
because they do not perceive this exposure to be relevant. a. True
b. False
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13 Direct Foreign Investment
1. Establishing subsidiaries in markets whose business cycles
differ from those where existing subsidiaries are based identifies
which cost-related motive of direct foreign investment (DFI)? a.
the use of foreign technology b. the exploitation of monopolistic
advantages c. international diversification d. entering profitable
markets e. none of the above
2. Establishing a subsidiary in a new market that results in
increased production and possibly greater production efficiency
identifies which benefit of direct foreign investment (DFI)? a. the
entrance into markets in which superior profits are possible b.
international diversification c. the exploitation of monopolistic
advantages d. full benefits from economies of scale e. none of the
above
3. Establishing a subsidiary in a market to sell a product in
which competitors are unable to produce the identical product
identifies which benefit of direct foreign investment? a. the
entrance into profitable markets b. international diversification
c. the exploitation of monopolistic advantages d. full benefits
from economies of scale e. none of the above
4. If the U.S. places restrictions on the import of automobiles,
what would likely happen to direct foreign investment (DFI) by
foreign automobile producers in the U.S.? a. it would increase b.
it would decrease c. it would remain unchanged d. any of the above
might happen
5. A U.S.-based MNC invests 60% of its funds in U.S. projects
with an expected annual return of 20% and a standard deviation of
10%. This MNC invests 40% of its funds in European projects with an
expected annual return of 30% and a standard deviation of 15%. If
the correlation coefficient is 0.5, what is the portfolio variance?
a. 10.39% b. 1.08% c. 1.88% d. 13.69% e. none of the above
6. A U.S.-based MNC invests 60% of its funds in U.S. projects
with an expected annual return of 20% and a standard deviation of
10%. This MNC invests 40% of its funds in foreign projects with an
expected annual return of 30% and a standard deviation of 15%. If
the correlation coefficient is 0.5, what is the portfolio
return?
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a. 25% b. 26% c. 22% d. 24% e. none of the above
7. Some governments allow international acquisitions, but impose
special requirements on MNCs. Which of the following are examples
of these requirements? a. install pollution control equipment b.
require MNCs to export the products they produce c. retain all
employees of the target firm d. both b and c e. all of the
above
8. Corporations are increasingly establishing or acquiring
overseas plants to learn about the technology of foreign countries.
a. True b. False
9. The conversion of European currencies to the euro in 1999 for
business transactions and in 2002 for all transactions reduced the
influence of exchange rates on the selection of a European country
for direct foreign investment. a. True b. False
10. The Asian crisis in 1997 created potentially profitable
opportunities for direct foreign investment in many of the affected
countries by U.S. and European MNCs. a. True b. False
11. When examining the frontier of efficient project portfolios,
the term "efficient" refers to a maximum return for a given
expected risk. a. True b. False
12. MNCs can probably achieve the most desirable risk-return
characteristics from the project portfolios if they sufficiently
diversify among products but not among geographic markets. a. True
b. False
13. Reacting to trade restrictions is a cost-related motive for
direct foreign investment (DFI). a. True b. False
14. An implicit barrier to DFI in some countries is the "red
tape" involved, such as procedure and documentation requirements.
a. True b. False
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14 Multinational Capital Budgeting
1. Suppose the home tax rate is high for the parent company and
the host country taxes imposed on the subsidiary are low. Which of
the following statements is true? a. Capital budgeting projects
would look better from the parent's point of view than the
subsidiary's point of view. b. Capital budgeting projects would
look worse from the parent's point of view than the subsidiary's
point of view. c. Capital budgeting projects would look worse from
the subsidiary's point of view than the parent's point of view. d.
both a and c e. none of the above
2. Suppose the parent company obtains excessive remittances on
the subsidiary by charging it high administrative fees. Which of
the following statements is probably true? a. Capital budgeting
projects would look better from the parent's point of view than the
subsidiary's point of view. b. Capital budgeting projects would
look worse from the parent's point of view than the subsidiary's
point of view. c. Capital budgeting projects would look worse from
the subsidiary's point of view than the parent's point of view. d.
Both a and c. e. None of the above.
3. Suppose a parent company projects the euro to appreciate over
the life of a capital budgeting project for its European
subsidiary. Which of the following statements is probably true? a.
Capital budgeting projects would look better from the parent's
point of view than the subsidiary's point of view. b. Capital
budgeting projects would look worse from the parent's point of view
than the subsidiary's point of view. c. Capital budgeting projects
would look worse from the subsidiary's point of view than the
parent's point of view. d. Both a and c. e. None of the above.
4. Which of the following would have a positive affect on the
cash flows received by a parent company from a foreign subsidiary?
a. blocked funds b. an increase in the relative inflation rate of
the host country c. host government incentives d. both b and c e.
all of the above
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5. Which of the following would have a negative affect on the
cash flows of a foreign subsidiary? a. blocked funds b. a currency
depreciation of the host currency c. host government incentives d.
all of the above e. none of the above
6. When adjusting project assessment for risk, which of the
following is used to generate a probability distribution of net
present value (NPV) based on a range of possible values for one or
more input variables? a. risk-adjusted discount rate b. sensitivity
analysis c. simulation d. both b and c e. none of the above
7. A parent company wishes to compute the net present value
(NPV) of a capital budgeting project for its German subsidiary. The
initial investment by the parent is $5,000,000. The project will
last three years. Estimated remittances to the parent by the German
subsidiary are expected to be 2,000,000, 3,000,000, and 2,000,000,
in years 1, 2, and 3, respectively. The current spot rate of the
euro is $1.03. Exchange rates for the euro are expected to be
$1.05, $1.07, and $1.01 in years 1, 2, and 3, respectively. An
appropriate discount rate for this project is 12%. What is the NPV
of this project? Should the project be undertaken? a. NPV =
$2,000,000; undertake project b. NPV = $871,788; undertake project
c. NPV = $721,788; undertake project d. NPV = $871,788; do not
undertake project e. NPV = $721,788; do not undertake project
8. A withholding tax affects the cash flows of the parent and
the subsidiary. a. True b. False
9. The parent's perspective should always be used to decide
whether a capital budgeting project should be undertaken. a. True
b. False
10. Once the relevant cash flows for a project have been
estimated, they should be discounted at the MNC's cost of capital.
a. True b. False
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11. The net present value (NPV) from the parent's perspective is
based on a comparison of the present value of the cash flows
received by the parent to the initial outlay by the parent. a. True
b. False
12. From the viewpoint of the parent, the joint impact of
inflation and exchange rate fluctuations on a subsidiary's net cash
flows may produce a partially offsetting effect. a. True b.
False
13. Multinational capital budgeting problems should not include
debt payments in the measurement of cash flows, because all
financing costs are captured by the discount rate. a. True b.
False
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15 Multinational Restructuring
1. Which of the following is a viable choice for handling the
managerial talent of a target following an acquisition? a. allow
the target to be managed as it was before b. downsize the target
firm c. maintain the existing employees but restructure the
operations d. b and c only e. all of the above
2. Which of the following is not a country-specific factor when
estimating the cash flows that will be provided by the foreign
target to the parent following an acquisition? a. target's previous
cash flows b. target's local economic conditions c. target's
currency conditions d. target's industry's conditions e. all of the
above are country-specific factors
3. Target A is receptive to an acquisition, has favorable local
economic and industry conditions, acceptable political and currency
conditions, high prevailing stock prices, and reasonable tax laws.
Target B is not receptive to an acquisition, has favorable local
economic and industry conditions, acceptable political and currency
conditions, low prevailing stock prices, and reasonable tax laws.
Target C is receptive to an acquisition, has unfavorable local
economic and industry conditions, acceptable political and currency
conditions, low prevailing stock prices, and reasonable tax laws.
Which target(s) should the firm pursue for acquisition? a. target A
only b. target B only c. target C only d. both a and c e. none of
the above
4. Which of the following is not a reason for different
valuations of a specific target among MNCs? a. estimated cash flows
of the target b. exchange rate effects on remitted funds c. the
required rate of return d. all of the above are reasons for
different valuations
5. A joint venture or licensing agreement represents which type
of multinational restructuring? a. international acquisitions of
privatized businesses b. international partial acquisition c.
international alliance d. international divestiture e. none of the
above
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6. A call option on real assets represents: a. a proposed
project that contains an option of divesting part or all of the
project b. a proposed project that contains an option of pursuing
an additional venture c. a foreign government guarantee that a
target can be acquired d. none of the above
7. European firms in particular have been attractive targets for
U.S. firms attempting to establish a presence in Europe. This is
because of to the more uniform regulations across European
countries and the euro, among other factors. a. True b. False
8. In general, the Asian crisis has lowered the initial outlay
for acquiring Asian firms. However, the lower economic growth and
weak currencies in the region may not justify the lower initial
outlay. a. True b. False
9. Adoption of the euro simplifies the analysis for an MNC that
is comparing possible target firms in those participating
countries. a. True b. False
10. An MNC that plans to acquire a target would prefer to time
its bid for the target when the local stock market prices are
generally low. a. True b. False
11. When an MNC considers a partial acquisition of a firm, its
valuation of that firm can be conducted in a similar manner as when
it purchases the entire firm, especially when it plans to purchase
a substantial amount of shares so that it could control the firm.
a. True b. False
12. A put option on real assets represents a proposed project
that contains an option of divesting part or all of the project. a.
True b. False
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16 Country Risk Analysis
1. Which of the following is not a form of political risk? a.
attitude of consumers in the host country b. attitude of host
government c. blockage of fund transfers d. bureaucracy e. all of
the above are forms of political risk
2. What type of country risk assessment includes the historical
stability of the host government? a. macropolitical risk b.
macrofinancial risk c. micropolitical risk d. microfinancial risk
e. none of the above
3. What type of country risk assessment is represented by the
sensitivity of the firm's business to inflation trends? a.
macropolitical risk b. macrofinancial risk c. micropolitical risk
d. microfinancial risk e. none of the above
4. The technique to assess country risk that involves the
collection of independent opinions on country risk, without group
discussion by the assessors who provide these opinions, is called:
a. inspection visits b. discriminant analysis c. regression
analysis d. delphi e. none of the above
5. A firm is attempting to quantify country risk. It gives 40%
weight to financial factors and 60% to political factors. Political
factor A has a 40% weight and a rating of 3; political factor B has
a 40% weight and a rating of 4; and political factor C has a 20%
weight and a rating of 2. Financial factor A has a 30% weight and a
rating of 5, and financial factor B has a 70% weight and a rating
of 1. What is the overall country risk rating? a. 2.80 b. 2.70 c.
2.60 d. 3.00 e. none of the above
6. Which of the following is not a method of reducing exposure
to host government takeovers? a. hire local labor b. borrow local
funds c. use a long-term horizon
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d. purchase insurance e. all of the above will reduce
exposure
7. Currency incompatibility occurs when governments do not allow
the home currency to be exchanged into other currencies. a. True b.
False
8. Exchange rates, foreign interest rates, and foreign inflation
rates are financial risk factors that should be considered when
assessing country risk. a. True b. False
9. Regression analysis may be used to assess country risk, since
it can measure the sensitivity of one variable to other variables.
a. True b. False
10. The foreign investment risk matrix (FIRM) quantifies an
overall country risk rating for individual countries. a. True b.
False
11. Industrialized countries such as Germany and Japan are
assigned a higher political risk rating than economic risk rating.
a. True b. False
12. Many home countries of MNCs have investment guarantee
programs that insure to some extent the risks of expropriation,
wars, or currency blockage. a. True b. False
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17 Multinational Cost of Capital and Capital Structure
1. The cost of capital is typically different for MNCs than for
domestic firms. According to the author, which of the following
does not result in a higher cost of capital for MNCs? a.
international diversification b. exposure to exchange rate risk c.
exposure to country risk d. all of the above significantly affect
the probability of bankruptcy
2. The cost of debt varies across countries for several reasons.
Which of the following can cause a difference in the debt risk
premiums across countries? a. demographics b. monetary policies c.
tax laws d. government willingness to rescue failing firms e. none
of the above affect the risk premium
3. Which of the following can affect the cost of equity? a.
price/earnings multiple b. opportunity cost c. investment
opportunities d. all of the above e. none of the above
4. Which of the following corporate characteristics will lead to
more equity financing over debt financing in the capital structure
of an MNC? a. stable cash flows b. parent guarantees on subsidiary
debt c. lower credit risk d. agency problems e. none of the
above
5. If markets are segmented and the cost of funds in the
subsidiary's country is excessive, which of the following country
characteristics will lead to more equity financing over debt
financing in the capital structure of the MNC? a. high local
interest rates b. a depreciating local currency c. a threat by the
host country to block funds d. all of the above e. none of the
above
6. Which of the following equations is a valid representation of
the CAPM? a. Kd = Rf + B(Rm - Rf) b. Ke = (Rf + B)(Rm - Rf) c. ke =
Rf + B(Rm - Rf) d. ke = Rf + BRm - Rf e. none of the above
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7. Under the capital asset pricing model (CAPM), we can say with
certainty that an MNC will have a lower cost of capital than a
purely domestic firm in the same industry. a. True b. False
8. German and Japanese firms can have a higher degree of
financial leverage than U.S. firms. However, the Japanese and
German firms do not necessarily have a higher associated risk
premium associated with their cost of debt. a. True b. False
9. One method of accounting for a foreign project's risk is to
adjust the firm's weighted average cost of capital. If the project
has a risk higher than the firm's risk, then the weighted average
cost of capital should be reduced. a. True b. False
10. Investors in some countries are restricted by their
governments to invest in local markets only. Even when investors
are allowed to invest in other countries, they may not have
complete information about stocks of companies outside their home
countries. This represents an implicit barrier to cross-border
investing. a. True b. False
11. Increased debt financing by the subsidiary will always be
offset by reduced debt financing by the parent to keep the "global"
target capital structure. a. True b. False
12. One appropriate way for a parent to offset one subsidiary's
low degree of financial leverage is for the parent to have another
subsidiary issue more debt in some other host country. a. True b.
False
13. It can be argued that the adoption of the euro increased the
cost of equity capital in Europe by reducing market imperfections.
a. True b. False
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18 Long-Term Financing
1. When making long-term financing decisions, an MNC would
prefer to borrow in a country with a currency that is expected to:
a. remain stable b. appreciate currency c. depreciate currency d.
none of the above
2. Suppose a U.S.-based MNC borrowed 10,000 at 10% for three
years. The current spot rate is $1.50. The MNC expects the pound's
spot rate to be $1.55 at the end of year one, $1.60 at the end of
year 2, and $1.55 at the end of year 3. What is the MNC's annual
cost of financing if it has no existing business in the United
Kingdom and has to convert dollars to meet the pound obligation? a.
11.44% b. 10% c. 8.59% d. 13.56% e. none of the above
3. A U.S.-based MNC borrowed 15,000 at 8% for three years. The
current spot rate is $1.10. The MNC expects the euro's spot rate to
be $1.09 at the end of year one, $1.08 at the end of year 2, and
$1.05 at the end of year 3. What is the MNC's annual cost of
financing? a. 4.77% b. 10.11% c. 6.39% d. 2.36% e. none of the
above
4. Which of the following could be used to hedge a five-year
loan denominated in euros? a. futures contracts b. forward
contracts c. call option contracts d. all of the above e. none of
the above
5. A bond that is issued in several currencies is a: a. Special
Drawing Right (SDR) b. currency cocktail bond c. shogun bond d.
both a and b e. all of the above
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6. MNC A can borrow fixed rate at 8% or variable rate at LIBOR
+1%. MNC B can borrow fixed rate at 9.5% fixed or variable rate at
LIBOR +1.5%. What type of swap should these companies use given
this information? a. interest rate swap b. parallel loan c.
currency swap d. all of the above e. none of the above
7. Eurobonds are often issued with a floating coupon rate tied
to LIBOR. a. True b. False
8. Issuing bonds in a foreign currency in the same volume as the
company's revenues in that foreign currency will completely
eliminate the exchange rate risk of the bonds. a. True b. False
9. The creation of the euro has limited the use of currency
cocktail bonds in Europe. a. True b. False
10. A "back-to-back" loan represents simultaneous loans provided
by two parties with an agreement to repay at a specified point in
the future. a. True b. False
11. The yield curve of a country is a good tool to determine at
which maturity an MNC operating in that country should borrow. a.
True b. False
12. Simulation can be used to incorporate possible outcomes for
the exchange rate, but not for the coupon rate over the life of the
loan. a. True b. False
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19 Financing International Trade
1. Which of the following is not a payment method for
international trade? a. prepayment b. a bill of exchange c.
consignment d. factoring e. open account
2. Assume that goods are available to an importer before
payment, that payment is made by the importer after the buyer sells
the goods, and that the risk to the importer is negligible. Which
type of payment method for international trade is likely being used
in this example? a. sight draft b. time draft c. consignment d.
letter of credit e. none of the above
3. A type of financing where the exporter sells the accounts
receivable without recourse is called: a. forfaiting. b. factoring.
c. banker's acceptances. d. accounts receivables financing. e. none
of the above.
4. A type of financing where a bill of exchange, or time draft,
is created is called: a. forfaiting. b. factoring. c. a banker's
acceptance. d. a and c. e. all of the above.
5. Which of the following is not offered by the Export-Import
Bank of the U.S. (Ex-Imbank)? a. Working Capital Guarantee Program
b. Financial Institution Buyer Credit Policy c. Bank Bill of Lading
Policy d. a and c e. none of the above are offered by the
Ex-Imbank
6. An Ex-Imbank insurance policy for multiple exporters that is
issued to an administrator is called a(n): a. umbrella policy. b.
multi-buyer policy. c. single-buyer policy. d. small business
policy. e. none of the above.
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7. A bill of lading serves as a receipt for shipment and a
summary of freight charges; most importantly, it conveys title to
the merchandise. a. True b. False
8. Forfaiting refers to the purchase of financial obligations,
such as bills of exchange or promissory notes, with recourse to the
original holder. a. True b. False
9. A clearing account arrangement denotes the exchange of goods
between two parties under two distinct contracts expressed in
monetary terms. a. True b. False
10. Ex-Imbank's lending rates are generally slightly above
market rates because they are insured. a. True b. False
11. The Domestic International Sales Corporation (DISC) is the
primary tax vehicle to promote U.S. exports. a. True b. False
12. Private Export Funding Corporation (PEFCO) loans are
typically used to finance large projects and have very long terms
(5 to 25 years). a. True b. False
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20 Short-Term Financing
1. Assume an MNC borrows 1,000,000 Swiss francs for one year at
9%. The spot rate for the Swiss franc was $0.80 when it took out
the loan and $0.75 when it was paid off after the year. What was
the MNC's approximate effective financing rate? a. 9% b. 15.81% c.
2.19% d. 1.73% e. none of the above
2. Which of the following is not used directly by MNCs as a
criterion for deciding whether to borrow in a foreign currency? a.
interest rate parity b. the forward rate as a forecast c.
purchasing power parity d. exchange rate forecasts e. all of the
above are used directly as criteria
3. Assume the forward rate is used to forecast the future spot
rate of the euro. Further assume that an MNC is financing with
euros and does not cover the position. Interest rate parity holds.
The effective financing rate will be _______ than the domestic rate
if the future spot rate of the euro is ________ than the forward
rate. a. greater; less b. less; greater c. less; less d. a and b
are correct e. none of the above
4. An MNC can borrow in the U.S. at 10%. Furthermore, the MNC
can borrow funds in Germany at 8%. What is the expected exchange
rate change of the euro at which this MNC would be indifferent
between borrowing in U.S. dollars or in euros? a. 1.82%
depreciation b. 1.82% appreciation c. 1.85% depreciation d. 1.85%
appreciation e. none of the above
5. Assume the interest rate on British pound loans is 7% and our
company expects the pound to depreciate by 3% over the next year.
What would be the expected effective financing rate? a. 10.21% b.
7.00% c. 10.00% d. 3.79% e. none of the above
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6. Euronotes are unsecured debt securities based on LIBOR with
typical maturities of one, three, or six months. a. True b.
False
7. A negative effective financing rate implies the U.S. firm
actually paid fewer dollars in total loan payments than the number
of dollars borrowed. a. True b. False
8. If an MNC has an expected effective financing rate of 10%
from borrowing in yen, and an interest rate of 8% on a Japanese
loan, a company would expect the Japanese yen to depreciate. a.
True b. False
9. Short-term financing decisions affect the value of the MNC by
influencing the required rate of return (k). a. True b. False
10. Financing with a portfolio of currencies would not be much
more effective than financing with a single currency if the
currencies in the portfolio are highly correlated. a. True b.
False
11. An MNC may consider financing in a foreign currency to
offset a net payables position in that foreign currency. a. True b.
False
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21 International Cash Management
1. Which of the following is not a technique to optimize cash
flows? a. accelerating cash inflows b. maximizing currency
conversion costs c. managing blocked funds d. managing
intersubsidiary cash transfers e. all of the above are techniques
to optimize cash flows
2. Which of the following is not a complication an MNC may
encounter in optimizing cash flows? a. company-related
characteristics b. managing intersubsidiary cash transfers c.
government restrictions d. characteristics of banking systems e.
all of the above are techniques to optimize cash flows
3. Assume a company invested $100,000 in Canada for one year at
10%. The spot rate of the Canadian dollar was $0.65 when the
investment was made and $0.70 when the investment matured. What was
the approximate effective yield on this investment? a. 10.00% b.
2.14% c. 20.00% d. 18.46% e. none of the above
4. If covered interest arbitrage is feasible for investors
residing in the home country, then which of the following is true?
a. Interest rate parity exists. b. Interest rate parity exists and
the forward rate is an accurate forecast of the future spot rate.
c. Interest rate parity exists and the forward rate is expected to
overestimate the future spot rate. d. Interest rate parity does not
exist and the forward premium (discount) exceeds (is less than) the
interest rate differential. e. Interest rate parity does not exist
and the forward premium (discount) is less than (exceeds) the
interest rate differential.
5. An MNC has an investment in Greece at an interest rate of 8%.
The interest rate in the U.S. is 6%. What expected change in the
euro over the investment period would make the MNC indifferent
between investing in Greece and investing in the U.S.? a. 1.89%
appreciation b. 1.89% depreciation c. 1.85% appreciation d. 1.85%
depreciation e. none of the above
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6. A lockbox system is used to help reduce mail float. a. True
b. False
7. A multilateral netting system reduces administrative and
currency conversion costs. a. True b. False
8. The international Fisher effect suggests that firms can
consistently earn short-term yields on foreign securities that are
higher than those on domestic securities. a. True b. False
9. If the U.S. interest rate is 10% and the Canadian interest
rate is 12%, a firm would expect the Canadian dollar to depreciate
over time. a. True b. False
10. Some commercial banks have begun to offer dynamic hedging.
Unlike other hedging techniques, dynamic hedging does not guarantee
home currency cash flows to be received at a future point in time.
a. True b. False