International Financial Management 12th Edition

Chapter 2 International Flow of Funds Lecture Outline Balance of Payments Current Account Capital and Financial Accounts Growth in International Trade Events That Increased Trade Volume Impact of Outsourcing on Trade Trade Volume Among Countries Trend in U.S.Balance of Trade Factors Affecting International Trade Flows Impact of Inflation Impact of National Income Impact of Government Policies

Chapter 1 Multinational Financial Management: An Overview Lecture Outline Managing the MNC Agency Problems Management Structure of an MNC Why Firms Pursue International Business Theory of Comparative Advantage Imperfect Markets Theory Product Cycle Theory How Firms Engage in International Business International Trade Licensing Franchising Joint Ventures Acquisitions of Existing Operations Establishing New Foreign Subsidiaries Summary of Methods Valuation Model for an MNC Domestic Model Multinational Model Uncertainty Surrounding an MNCs

Answers to End of Chapter Questions 1. Agency Problems of MNCs. a. Explain the agency problem of MNCs. ANSWER: The agency problem reflects a conflict of interests between decision-making managers and the owners of the MNC. Agency costs occur in an effort to assure that managers act in the best interest

25. Impact of Exchange Rates on MNC Value. Olmsted Co. has small computer chips assembled in Poland and transports the final assembled products to the parent, where they are sold by the parent in the U.S. The assembled products are invoiced in dollars. It uses Polish currency (the zloty) to

Chapter 10 Measuring Exposure to Exchange Rate Fluctuations Lecture Outline Relevance of Exchange Rate Risk Transaction Exposure Estimating Net Cash Flows in Each Currency Exposure of an MNCs Portfolio Transaction Exposure Based on Value-at-Risk Economic Exposure Economic Exposure to Local Currency Appreciation Economic Exposure to Local Currency Depreciation Economic Exposure of Domestic Firms Measuring Economic Exposure Translation Exposure Determinants of Translation Exposure Exposure of

Answers to End of Chapter Questions 1. Transaction versus Economic Exposure. Compare and contrast transaction exposure and economic exposure. Why would an MNC consider examining only its net cash flows in each currency when assessing its transaction exposure? ANSWER: Transaction exposure is due only to international transactions by a firm. Economic exposure

32. Cash Flow Sensitivity to Exchange Rate Movements. The Central Bank of Poland is about to engage in indirect intervention later today, in which it will lower Polands interest rates substantially. This will have an impact on the value of the Polish currency (zloty) against most currencies because it will immediately

Chapter 11 Managing Transaction Exposure Lecture Outline Policies for Hedging Transaction Exposure Hedging Most of the Exposure Selective Hedging Hedging Payables Forward or Futures Hedge Money Market Hedge Call Option Hedge Comparison of Techniques Used to Hedge Payables Evaluating the Hedge Decision Hedging Receivables Forward or Futures Hedge Money Market Hedge Put Option Hedge Comparison of Techniques for Hedging Receivables Evaluating the Hedge Decision Summary of

Answers to End of Chapter Questions 1. Hedging in General. Explain the relationship between this chapter on hedging and the previous chapter on measuring exposure. ANSWER: The previous chapter explains how to measure exposure, which is necessary before an MNC decides whether to hedge its exposure. MNC decides whether to

33. Techniques for Hedging Receivables. SMU Corp. has future receivables of 4,000,000 New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following information to make the decision. Verify your answer by determining

50. PPP and Hedging with Call Options. Visor Inc. (a U.S. firm) has agreed to purchase supplies from Argentina and will need 1 million Argentine pesos in one year. Interest rate parity presently exists. The annual interest rate in Argentina is 19%. The annual interest rate in the U.S. is

Chapter 12 Managing Economic Exposure and Translation Exposure Lecture Outline Managing Economic Exposure Assessing Economic Exposure Restructuring to Reduce Economic Exposure Issues Involved in the Restructuring Decision A Case on Hedging Economic Exposure Savor Co.s Dilemma Assessment of Economic Exposure Assessment of Each Units Exposure Identifying the Source of the Units Exposure Possible Strategies to Hedge Economic Exposure Savors Hedging Strategy Limitations of Savors

Answers to End of Chapter Questions 1. Reducing Economic Exposure. Baltimore, Inc., is a U.S.-based MNC that obtains 10 percent of its supplies from European manufacturers. Sixty percent of its revenues are due to exports to Europe, where its product is invoiced in euros. Explain how Baltimore can attempt to reduce

Chapter 13 Direct Foreign Investment Lecture Outline Motives for Direct Foreign Investment (DFI) Revenue-Related Motives Cost-Related Motives Comparing Benefits of DFI Among Countries Measuring an MNC's Benefits of DFI Benefits of International Diversification Diversification Analysis of International Projects Diversification Among Countries Host Government Views of DFI Incentives to Encourage DFI Barriers to DFI Government-Imposed Conditions to Engage in DFI Chapter Theme The main purpose of this

Answers to End of Chapter Questions 1. Motives for DFI. Describe some potential benefits to an MNC as a result of direct foreign investment (DFI). Elaborate on each type of benefit. Which motives for DFI do you think encouraged Nike to expand its footwear production in Latin America? ANSWER: See the text exhibit

Chapter 14 Multinational Capital Budgeting Lecture Outline Subsidiary versus Parent Perspective Tax Differentials Restrictions on Remitted Earnings Exchange Rate Movements Input for Multinational Capital Budgeting Multinational Capital Budgeting Example Background Analysis Other Factors to Consider Exchange Rate Fluctuations Inflation Financing Arrangement Blocked Funds Uncertain Salvage Value Impact of Project on Prevailing Cash Flows Host Government Incentives Real Options Adjusting Project Assessment for Risk Risk-Adjusted Discount Rate Sensitivity Analysis Simulation Multinational Capital Budgeting 2 Chapter

Answers to End of Chapter Questions 1. MNC Parents Perspective. Why should capital budgeting for subsidiary projects be assessed from the parents perspective? What additional factors that normally are not relevant for a purely domestic project deserve consideration in multinational capital budgeting? ANSWER: When a parent allocates funds for a project, it

27. Capital Budgeting Analysis. Wolverine Corp. currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess this project: The initial investment required is $50 million in New Zealand dollars (NZ$). Given the existing spot rate of $.50 per New Zealand

Solution to Continuing Case Problem: Blades, Inc. 1. Should the sales and the associated costs of 180,000 pairs of roller blades to be sold in Thailand under the existing agreement be included in the capital budgeting analysis to decide whether Blades should establish a subsidiary in Thailand? Should the sales resulting from a

International Corporate Governance and Control 1 Chapter 15 International Corporate Governance and Control Lecture Outline International Corporate Governance Governance by Board Members Governance by Institutional Investors Governance by Shareholder Activists International Corporate Control Motives for International Acquisitions Trends in International Acquisitions Barriers to International Corporate Control Model for Valuing a Foreign Target Factors Affecting a Target Valuation Target-Specific Factors Country-Specific Factors Example

International Corporate Governance and Control 1 Answers to End of Chapter Questions 1. Motives for Restructuring. Why do you think MNCs continuously assess possible forms of multinational restructuring, such as foreign acquisitions or downsizing of a foreign subsidiary? ANSWER: MNCs continuously assess possible forms of multinational restructuring so that they can capitalize on

22. Factors that Affect the NPV of a Divestiture. Clemson Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. One week ago, it received an offer from a company to purchase it, and it has not yet responded to this offer. a.

Chapter 16 Country Risk Analysis Lecture Outline Political Risk Characteristics Attitude of Consumers in the Host Country Actions of Host Government Blockage of Fund Transfers Currency Inconvertibility War Bureaucracy Corruption Financial Risk Characteristics Economic Growth Measuring Country Risk Techniques to Assess Country Risk Deriving a Country Risk Rating Comparing Country Risk Ratings Across Countries Incorporating Country Risk in Capital Budgeting Adjustment of the Discount Rate Adjustment

Answers to End of Chapter Questions 1. Forms of Country Risk. List some forms of political risk other than a takeover of a subsidiary by the host government, and briefly elaborate on how each factor can affect the risk to the MNC. Identify common financial factors for an MNC to consider

22. Integrating Country Risk and Capital Budgeting. Tovar Co. is a U.S. firm that has been asked to provide consulting services to help Grecia Company (in Greece) improve its performance. Tovar would need to spend $300,000 today on expenses related to this project. In one year, Tovar will receive payment

Chapter 17 Multinational Cost of Capital and Capital Structure Lecture Outline Components of Capital External Sources of Debt External Sources of Equity The MNC's Capital Structure Decision Influence of Corporate Characteristics Influence of Host Country Characteristics Response to Changing Country Characteristics Subsidiary Versus Parent Capital Structure Decisions Impact of Increased Subsidiary Debt Financing Impact of Reduced Subsidiary Debt

Answers to End of Chapter Questions 1. Capital Structure of MNCs. Present an argument in support of an MNCs favoring a debt-intensive capital structure. Present an argument in support of an MNCs favoring an equity-intensive capital structure. ANSWER: MNCs that are well-diversified across countries would have somewhat stable cash flows and may therefore

25. Sensitivity of Foreign Project Risk to Capital Structure. Texas Co. produces drugs and plans to acquire a subsidiary in Poland. This subsidiary is a lab that would perform biotech research. Texas Co. is attracted to the lab because of the cheap wages of scientists in Poland. The parent of Texas

Chapter 18 Long-Term Debt Financing Lecture Outline Financing to Match the Inflow Currency Using Currency Swaps to Execute the Matching Strategy Using Parallel Loans to Execute the Matching Strategy Debt Denomination Decision by Subsidiaries Debt Decision in Host Countries with High Interest Rates Debt Denomination to Finance a Foreign Project Debt Maturity Decision Assessment of Yield Curve Financing

Answers to End of Chapter Questions 1. Floating-Rate Bonds. a. What factors should be considered by a U.S. firm that plans to issue a floating rate bond denominated in a foreign currency? ANSWER: A U.S. firm should consider the interest rate for each possible currency as well as forecasts of the exchange

Solution to Continuing Case Problem: Blades, Inc. 1. Given that Blades expects to use the cash flows generated by the Thai subsidiary to pay the interest and principal of the notes, would the effective financing cost of the baht-denominated notes be affected by exchange rate movements? Would the effective financing cost

Chapter 19 Financing International Trade Lecture Outline Payment Methods for International Trade Prepayment Letters of Credit Drafts Consignment Open Account Trade Finance Methods Accounts Receivable Financing Factoring Letters of Credit Bankers Acceptances Working Capital Financing Medium-Term Capital Goods Financing (Forfaiting) Countertrade Agencies that Motivate International Trade Export-Import Bank of the U.S. Private Export Funding Corporation (PEFCO) Overseas Private Investment Corporation (OPIC) 2015 Cengage Learning. All Rights Reserved. May not be

Answers to End of Chapter Questions 1. Bankers Acceptances. a. Describe how foreign trade would be affected if banks did not provide trade-related services. b. How can a bankers acceptance be beneficial to an exporter, an importer, and a bank? ANSWER: Foreign trade would be reduced without the trade-related services by banks,

Answers to End of Chapter Questions 1. Balance of Payments. a. Of what is the current account generally composed? ANSWER: The current account balance is composed of (1) the balance of trade, (2) the net amount of payments of interest to foreign investors and from foreign investment, (3) payments from international

Chapter 20 Short-Term Financing Lecture Outline Sources of Foreign Financing Internal Short-term Financing External Short-term Financing Access to Funding During the Credit Crisis Financing with a Foreign Currency Comparison of Interest Rates Among Currencies Determining the Effective Financing Rate Criteria Considered in the Financing Decision Interest Rate Parity The Forward Rate as a Forecast Exchange Rate Forecasts Actual Results from Foreign Financing Financing

Answers to End of Chapter Questions 1. Financing From Subsidiaries. Explain why an MNC parent would consider financing from its subsidiaries. ANSWER: A parent may obtain funds at a lower cost from its subsidiaries than from a bank, since a bank will maintain a spread between what it offers depositors and charges

Chapter 21 International Cash Management Lecture Outline Multinational Working Capital Management Subsidiary Expenses Subsidiary Revenue Subsidiary Dividend Payments Subsidiary Liquidity Management Centralized Cash Management Accommodating Cash Shortages Techniques to Optimize Cash Flows Accelerating Cash Inflows Minimizing Currency Conversion Costs Managing Blocked Funds Managing Intersubsidiary Cash Transfers Complications in Optimizing Cash Flow Company-Related Characteristics Government Restrictions Characteristics of Banking Systems Investing Excess Cash Determining the Effective Yield Implications of Interest Rate

Answers to End of Chapter Questions 1. International Cash Management. Discuss the general functions involved in international cash management. Explain how the MNCs optimization of cash flow can distort the profits of each subsidiary. ANSWER: The general functions of international cash management are optimizing cash flows and investing excess cash. These functions

Discussion in the Board Room This exercise is intended to apply many of the key concepts to broad issues that are discussed by managers who make financial decisions. It does not replace the more detailed questions and problems at the end of the chapter. Instead, it focuses on broad financial issues

Chapter 13 Assume that you wanted to expand your Learning English business to other non-U.S. countries where some individuals may want to speak English. a. Explain why you might be able to stabilize the profits of your total business in this manner. Review the motives for direct foreign investment that are

Chapter 3 International Financial Markets Lecture Outline Foreign Exchange Market History of Foreign Exchange Foreign Exchange Transactions Foreign Exchange Quotations Interpreting Foreign Exchange Quotations Currency Derivatives International Money Market Origins and Development Money Market Interest Rates Among Countries International Credit Market Regulations in the Credit Market Syndicated Loans in the Credit Market Impact of the Credit Crisis on the Credit Market International Bond

Answers to End of Chapter Questions 1. Motives for Investing in Foreign Money Markets. Explain why an MNC may invest funds in a financial market outside its own country. ANSWER: The MNC may be able to earn a higher interest rate on funds invested in a financial market outside of its own

Chapter 4 Exchange Rate Determination Lecture Outline Measuring Exchange Rate Movements Exchange Rate Equilibrium Demand for a Currency Supply of a Currency for Sale Equilibrium Factors that Influence Exchange Rates Relative Inflation Rates Relative Interest Rates Relative Income Levels Government Controls Expectations Interaction of Factors Influence of Factors Across Multiple Currency Markets Movements in Cross Exchange Rates Explaining Movements in Cross Exchange Rates Anticipation of Exchange

Answers to End of Chapter Questions 1. Percentage Depreciation. Assume the spot rate of the British pound is $1.73. The expected spot rate one year from now is assumed to be $1.66. What percentage depreciation does this reflect? ANSWER: ($1.66 $1.73)/$1.73 = 4.05% Expected depreciation of 4.05% percent Expected depreciation of 4.05% percent Expected depreciation

22. Relative Importance of Factors Affecting Exchange Rate Risk. Assume that the level of capital flows between the U.S. and the country of Krendo is negligible (close to zero) and will continue to be negligible. There is a substantial amount of trade between the U.S. and the country of Krendo

Chapter 5 Currency Derivatives Lecture Outline Forward Market How MNCs Use Forward Contracts Non-Deliverable Forward Contracts Currency Futures Market Contract Specifications Trading Currency Futures Trading Platforms for Currency Futures Comparison to Forward Contracts Pricing Currency Futures Credit Risk of Currency Futures Contracts How Firms Use Currency Futures Closing Out a Futures Position Speculation with Currency Futures Currency Options Market Options Exchanges Over-the-Counter Market Currency Call Options Factors Affecting Call Option

Answers to End of Chapter Questions 1. Forward versus Futures Contracts. Compare and contrast forward and futures contracts. ANSWER: Because currency futures contracts are standardized into small amounts, they can be valuable for the speculator or small firm (a commercial banks forward contracts are more common for larger amounts). However, the

31. Currency Strangles. (See Appendix B in this chapter.) Assume the following options are currently available for British pounds (): Call option premium on British pounds = $.04 per unit Put option premium on British pounds = $.03 per unit Call option strike price = $1.56 Put option strike price =

Chapter 6 Government Influence on Exchange Rates Lecture Outline Exchange Rate Systems Fixed Exchange Rate System Freely Floating Exchange Rate System Managed Float Exchange Rate System Pegged Exchange Rate System Dollarization Classification of Exchange Rate Arrangements A Single European Currency Impact on Eurozone Monetary Policy Impact on Firms in the Eurozone Impact on Financial Flows in the Eurozone Exposure of Countries Within the Eurozone Government

Answers to End of Chapter Questions 1. Exchange Rate Systems. Compare and contrast the fixed, freely floating, and managed float exchange rate systems. What are some advantages and disadvantages of a freely floating exchange rate system versus a fixed exchange rate system? ANSWER: Under a fixed exchange rate system, the governments attempted

28. Pegged Exchange Rates. The U.S., Argentina, and Canada commonly engage in international trade with each other. All the products traded can easily be produced in all three countries. The traded products are always invoiced in the exporting countrys currency. Assume that Argentina decides to peg its currency (called the

Chapter 7 International Arbitrage and Interest Rate Parity Lecture Outline International Arbitrage Locational Arbitrage Triangular Arbitrage Covered Interest Arbitrage Comparison of Arbitrage Effects Interest Rate Parity Derivation of Interest Rate Parity Determining the Forward Premium Graphic Analysis of Interest Rate Parity How to Test Whether Interest Rate Parity Exists Interpretation of Interest Rate Parity Does Interest Rate Parity Hold? Considerations When Assessing Interest Rate Parity Variation

Answers to End of Chapter Questions 1. Locational Arbitrage. Explain the concept of locational arbitrage and the scenario necessary for it to be plausible. ANSWER: Locational arbitrage can occur when the spot rate of a given currency varies among locations. Specifically, the ask rate at one location must be lower than the

36. IRP and Changes in the Forward Rate. Assume that interest rate parity exists. As of this morning, the 1-month interest rate in Canada was lower than the 1-month interest rate in the U.S.. Assume that as a result of the Feds monetary policy this afternoon, the one-month interest rate

Chapter 8 Relationships Among Inflation, Interest Rates, and Exchange Rates Lecture Outline Purchasing Power Parity (PPP) Interpretations of PPP Rationale Behind PPP Theory Derivation of PPP Using PPP to Estimate Exchange Rate Effects Graphic Analysis of PPP Testing the PPP Theory Why PPP Does Not Occur International Fisher Effect (IFE) Implications of the IFE for Foreign Investors Derivation of the IFE Graphic Analysis of

Answers to End of Chapter Questions 1. PPP. Explain the theory of purchasing power parity (PPP). Based on this theory, what is a general forecast of the values of currencies in countries with high inflation? ANSWER: PPP suggests that the purchasing power of a consumer will be similar when purchasing goods in

30. Interactive Effects of PPP. Assume that the inflation rates of the countries that use the euro are very low, while other European countries that have their own currencies experience high inflation. Explain how and why the euros value could be expected to change against these currencies according to the

Chapter 9 Forecasting Exchange Rates Lecture Outline Why Firms Forecast Exchange Rates Forecasting Techniques Technical Forecasting Fundamental Forecasting Market-Based Forecasting Mixed Forecasting Guidelines for Implementing a Forecast Forecast Error Measurement of Forecast Error Forecast Accuracy Among Currencies Forecast Error over Time Periods Forecast Bias Graphic Evaluation of Forecast Performance Comparison of Forecasting Methods Forecasting Under Market Efficiency Using Interval Forecasts Methods of Forecasting Exchange Rate VolatilityChapter Theme This

Answers to End of Chapter Questions 1. Motives for Forecasting. Explain corporate motives for forecasting exchange rates. ANSWER: Several decisions of MNCs require an assessment of the future. Future exchange rates will affect all critical characteristics of the firm such as costs and revenues. To be more specific, various operations of

24. Selecting between Forecast Methods. Bolivia currently has a nominal one-year risk-free interest rate of 40 percent, which is primarily due to the high level of expected inflation. The U.S. nominal one-year risk-free interest rate is 8 percent. The spot rate of Bolivias currency (called the boliviano) is $.14. The

1) Intracompany trade makes up approximately ____ percent of all international trade. a. 50 b. 70 c. 25 d. 13 e. 5 Answer: A Answer: A Answer: A 2) At present, U.S. firms acquire more targets in the former Soviet Union than in any other country. a. True b. False Answer: B Answer: B Answer: B 3) An American tourist visiting Germany and spending money

1) If today's exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is: a. weak-form efficient b. semistrong-form efficient c. strong-form efficient d. all of the above Answer: A Answer: A Answer: A 2) If a currency's spot rate market is ____, its exchange

1) A subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are international rather than domestic. a. True b. False Answer: A Answer: A Answer: A 2) To force the value of the British pound to depreciate against the dollar, the Federal Reserve should: a. sell dollars for pounds in the

1) Which of the following would probably not cause the stock price of a foreign target to decrease? a. Its expected cash flows decline b. General stock market conditions in the foreign country are deteriorating c. Investors anticipate that the target will be acquired d. All of the above will cause the target's stock

1) Which of the following is not a way in which country risk analysis can be used? a. to monitor countries where an MNC is currently doing business b. as a screening device to avoid conducting business in countries with excessive risk c. to revise an MNC's financing decisions d. to determine the degree

1) In general, the ____ rate payer in a plain vanilla swap believes interest rates are going to ____. a. fixed; decline b. floating; decline c. floating; increase d. none of the above Answer: B Answer: B Answer: B 2) The VAR method presumes that the distribution of exchange rate movements is normal. a. True b. False Answer: A Answer: A Answer: A 3)

1) The parent of MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC. a. True b. False Answer: a Answer: a Answer: a 2) The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro. a. True b. False Answer: B Answer: B Answer:

1) There are no transactions costs associated with trading futures or options. a. True b. False Answer: B Answer: B Answer: B 2) According to the international Fisher effect, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____. a. lower;

1) An MNC must assess country risk not only in countries where it currently does business but also in those where it expects to export or establish subsidiaries. a. True b. False Answer: A Answer: A Answer: A 2) According to your text, U.S. firms pursue more international acquisitions in ____ than in other countries. a. the

1) The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used. a. True b. False Answer: B Answer: B Answer: B 2) The capital asset pricing model (CAPM) suggests that the required return on a firm's stock is a positive function of the risk-free rate of interest and the

1) Which of the following is not true regarding letters of credit? a. They are issued by banks on behalf of the importer promising to pay the exporter b. A revocable letter of credit can be cancelled or revoked at any time without prior notification to the beneficiary c. They guarantee that the

1) Which of the following is not a form of financial risk? a. Exchange rate movements b. Inflation rates c. Blockage of fund transfers d. All of the above are forms of financial risk. Answer: C Answer: C Answer: C 2) Transaction exposure results when an MNC translates each subsidiary's financial data to its home currency for consolidated financial

1) Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil. a. True b. False Answer: B Answer: B Answer: B 2) In general, a firm that concentrates on local sales, has very little foreign competition, and obtains foreign supplies (denominated in foreign currencies) will likely ____ a(n) ____ local currency. a. be hurt by;

1) Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar. a. benefit from; be unaffected by b. benefit

1) MNCs can use ____ to reduce exchange rate risk. This occurs when two parties provide simultaneous loans with an agreement to repay at a specified point in the future. a. forward contracts b. currency swaps c. parallel loans d. none of the above Answer: C Answer: C Answer: C 2) If the international Fisher effect (IFE) exists,

1) Assume the annual British interest rate is above the annual U.S. interest rate. Also assume the pound's forward rate of $1.75 equals the pound's spot rate. Given this information, interest rate parity ____ exist, and the U.S. firm ____ lock in a lower financing cost by borrowing pounds for

1) Transaction exposure reflects: a. the exposure of a firm's international contractual transactions to exchange rate fluctuations b. the exposure of a firm's local currency value to transactions between foreign exchange traders c. the exposure of a firm's financial statements to exchange rate fluctuations d. the exposure of a firm's cash flows to exchange

1) Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of: a. interest rate parity b. locational arbitrage c. purchasing power parity d. the exchange rate mechanism Answer: C Answer: C Answer: C 2) The translation gain (or loss) is simply a paper gain (or

1) The currency futures markets are regulated by the International Monetary Fund. a. True b. False Answer: B Answer: B Answer: B 2) An MNC may be more exposed to agency problems if most of its shares are held by: a. a few mutual funds b. a widely dispersed set of individual investors c. a few pension funds d. all

1) Procedural and documentation requirements imposed by the foreign government are referred to as: a. regulatory barriers b. industry barriers c. protective barriers d. "Red Tape" barriers Answer: D Answer: D Answer: D 2) If you have a position where you might be obligated to buy Euros, you are: a. a call writer b. a put writer c. a put buyer d.

1) Which of the following does not represent the risk from using forward contracts? a. if a forward contract is used to hedge receivables, and the spot exchange rate at the expiration of contract exceeds the contract price b. if a forward contract is used to hedge receivables, and the spot exchange

1) An MNC has determined that the degree of appreciation for the Singapore dollar that equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore will be more attractive. a. True b. False Answer: B Answer: B Answer: B 2) In general, stock markets allow for

1) Which of the following is not true regarding options? a. Options are traded on exchanges, never over-the-counter b. Similar to futures contracts, margin requirements are normally imposed on option traders c. Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per

1) Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____. a. low; small b. high; small c. low; large d. high; large Answer: C Answer: C Answer: C 2) Institutional investors such as mutual funds or pension funds which

1) Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes. a. True b. False Answer: B Answer: B Answer: B 2) Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries? a. If Country

1) Which of the following factors is not expected to generally have a favorable impact on the firm's cost of capital according to the text? a. easy access to international capital markets b. high degree of international diversification c. high exposure to exchange rate fluctuations d. all of the above Answer: C Answer: C Answer: C 2) When

1) If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation. a. True b. False Answer: B Answer: B Answer: B 2) Which of the following is not mentioned in the text as an additional risk resulting from international business? a. exchange rate

1) If the one-year forward rate for the euro is $1.07, while the current spot rate is $1.05, the expected percentage change in the euro is ____%. a. 1.90 b. 2.00 c. -1.87 d. none of the above Answer: A Answer: A Answer: A 2) In a countertrade transaction, banks on both ends act as intermediaries in the processing

1) A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency. a. True b. False Answer: A Answer: A Answer: A 2) If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge. a. put option b. forward c.

1) Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run. a. True b. False Answer: A Answer: A Answer: A 2) To reduce the exposure to a host government takeover, an MNC may attempt to recover cash flows from the foreign project more quickly or hire local labor. a. True b. False Answer:

1) The highest amount a buyer of a call or a put option can lose is the exercise price. a. True b. False Answer: B Answer: B Answer: B 2) Even if the interest rate associated with a foreign country is higher than the domestic interest rate, the financing costs of a foreign bond will always

1) A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future. a. True b. False Answer: A Answer: A Answer: A 2) If interest rate parity does not hold, and the forward ____ is greater than the interest rate differential, then covered interest arbitrage

1) If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could: a. obtain a 90-day forward purchase contract on Canadian dollars b. obtain a 90-day forward sale contract on Canadian dollars c. purchase

1) Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's "earnings before

1) Currency options are only traded on exchanges. That is, there is no over-the-counter market for options. a. True b. False Answer: B Answer: B Answer: B 2) Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, then the real cost of hedging payables will

1) The Asian crisis is generally believed to have started in Japan. a. True b. False Answer: B Answer: B Answer: B 2) Assume that the bank's bid quote of Mexican peso is $.126 and ask price is $.129. If you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000? a.

1) Although netting typically increases the need for foreign exchange conversion, it generally reduces the number of cross border transactions between subsidiaries. a. True b. False Answer: B Answer: B Answer: B 2) The valuation of MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the

1) Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.00 You expect the spot rate in 60 days to be $.0090.

1) Exhibit 14-1 Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps' cost of capital is 13%, and the project is of the

1) If the U.S. dollar appreciates, a. an MNC's U.S. sales will probably decrease b. an MNC's exports denominated in U.S. dollars will probably increase c. an MNC's interest owed on foreign funds borrowed will probably increase d. an MNC's exports denominated in foreign currencies will probably increase e. all of the above Answer: A Answer: A Answer:

1) If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders). a. True b. False Answer: b Answer: b Answer: b 2) If the functional currencies for reporting purposes are highly correlated, translation exposure is magnified. a. True b. False Answer: A Answer: A Answer: A 3) If you have bought a right

1) A set of currency cash inflows is more volatile if the correlations are low. a. True b. False Answer: B Answer: B Answer: B 2) ____ purchases more U.S. exports than the other countries listed here. a. Italy b. Spain c. Mexico d. Canada Answer: D Answer: D Answer: D 3) The required rate of return of a project is ____ the MNC's

1) The ____ an MNC, the ____ its cost of capital is likely to be. a. larger; higher b. larger; lower c. smaller; lower d. A and C Answer: B Answer: B Answer: B 2) Eurobonds: a. are usually issued in bearer form b. typically carry several protective covenants c. cannot contain call provisions d. A and B Answer: A Answer: A Answer: A 3) A

1) ____ can cause the parent's after-tax cash flows to differ from the subsidiary's after-tax cash flows. a. The number of units sold by the subsidiary b. The subsidiary's earnings before income and taxes (EBIT) c. The tax rate the subsidiary is subject to in the host country d. Withholding taxes imposed by the

1) The ____ is the difference between exports and imports. a. balance of trade b. balance on goods and services c. balance of payments d. current account e. capital account Answer: A Answer: A Answer: A 2) The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to

1) The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate. a. True b. False Answer: A Answer: A Answer: A 2) Good Company prefers variable to fixed rate debt.

1) A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is 9%. It uses today's spot rate as a forecast for the franc's spot rate in one year. The U.S. one-year interest rate is 10%. The expected effective financing rate on Swiss

1) Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest rate of 6%. At the time the loan is extended, the spot rate of the yen is $.005. If the spot rate of the yen at maturity of the loan is $.0035, what is the effective

1) A letter of credit does not guarantee that the goods purchased will be those invoiced and shipped. a. True b. False Answer: A Answer: A Answer: A 2) Assume the U.S. one-year interest rate is 11% and the French one-year interest rate is 18%. The break-even level of depreciation in the euro at which the U.S.