978-0134083285 Chapter 16 Part 1

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Foundations of Finance, 9e (Keown/Martin/Petty)

Chapter 16 International Business Finance

Learning Objective 16.1

1) Compared with other developed countries, the U.S. is particularly reliant on foreign trade for self–

subsistence.

Keywords: Foreign Trade, Self-subsistence

Learning Obj.: L.O. 16.1

AACSB: Reflective Thinking

2) Investments in capital markets in foreign countries are motivated by the desire to earn higher returns

and reduce risk through international diversification.

Keywords: Foreign Investment, International Diversification

Learning Obj.: L.O. 16.1

AACSB: Reflective Thinking

3) The Eurodollar market is larger than any financial market in the United States.

Keywords: Financial Markets, Eurodollar Market

Learning Obj.: L.O. 16.1

AACSB: Reflective Thinking

4) International expansion often occurs because it is generally easier for firms to expand the market for

their products rather than to develop new products.

Keywords: International Markets

Learning Obj.: L.O. 16.1

AACSB: Reflective Thinking

5) A U.S. corporation investing in a foreign corporation by purchasing stock on a foreign stock exchange

is an example of direct foreign investment.

Keywords: Direct Foreign Investment, Portfolio Investment

Learning Obj.: L.O. 16.1

AACSB: Reflective Thinking

6) The cost of debt used in the international investment decision is the lesser of the parent’s or the

subsidiary’s cost of debt.

Keywords: Cost of Debt

Learning Obj.: L.O. 16.1

AACSB: Reflective Thinking

7) A major source of long-term capital overseas is in the Eurocurrency market.

Keywords: Eurocurrency Market

Learning Obj.: L.O. 16.1

AACSB: Reflective Thinking

8) Problems of multinationals include

A) cash management and positioning of funds.

B) managing receivables.

C) global control.

D) all of the above.

Keywords: Multinationals

Learning Obj.: L.O. 16.1

AACSB: Reflective Thinking

9) Which of the following is a reason for international investment?

A) to reduce portfolio risk

B) to increase P/E ratio

C) to gain an advantage in a foreign country

D) to gain access to foreign currency

Keywords: International Investment, Portfolio Risk

Learning Obj.: L.O. 16.1

AACSB: Reflective Thinking

Learning Objective 16.2

1) Most major countries in the world have agreed on fixed exchange rates in order to facilitate

international trade.

Keywords: Fixed Exchange Rates

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

2) The bid-asked spread is much lower for currencies that are infrequently traded in order to compensate

banks for providing the service.

Keywords: Bid-Asked Spread

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

3) A cross rate is the computation of an exchange rate for a currency from the exchange rates of two other

currencies.

Keywords: Cross Rate

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

4) The forward exchange rate quoted today should be equal to the spot rate in the future.

Keywords: Forward Exchange Rate, Spot Rate

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

5) Short-term daily fluctuations in exchange rates are caused by supply and demand conditions in the

foreign exchange market.

Keywords: Exchange Rates

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

6) An indirect quote indicates the number of units of foreign currency that can be bought for one unit of

the home currency.

Keywords: Indirect Quote

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

7) Arbitrage is the process of buying in one market and selling in another market in order to make a

riskless profit.

Keywords: Arbitrage

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

8) Spot exchange markets provide the potential for arbitrage opportunities.

Keywords: Spot Exchange Market, Arbitrage

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

9) The difference between the asked price and the bid price is known as the spread.

Keywords: Bid-Asked Spread

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

10) A narrow spread indicates efficiency in the spot exchange market.

Keywords: Bid-Asked Spread

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

11) Forward contracts are usually quoted for periods greater than 1 year.

Keywords: Forward Contracts

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

12) Forward rates, like spot rates, are quoted in both direct and indirect form.

Keywords: Forward Rates, Spot Rates, Direct Quote, Indirect Quote

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

13) Forward contracts benefit only the customer due to a reduction in uncertainty.

Keywords: Forward Contracts

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

14) The efficiency of foreign currency markets is assured, in large measure, by the process of arbitrageurs.

Keywords: Arbitrage, Foreign Currency Markets

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

15) A quote of .7645 euros per dollar in New York is an example of a direct quote.

Keywords: Direct Quote, Indirect Quote

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

16) The bid rate is the rate at which the bank buys the foreign currency from the customer by paying in

home currency.

Keywords: Bid Rate

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

17) Foreign currency forward rates aid traders by reducing uncertainty regarding future market

fluctuations.

Keywords: Forward Rates

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

18) In order to profit from an expected near-term increase in the relative value of the British pound versus

the U.S. dollar, an investor would be wise to maintain a short position in pounds, then sell when the

pound rises in relative value.

Keywords: Relative Value, Foreign Exchange

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

19) Covered interest arbitrage can be taken advantage of when premiums in forward rates are not exactly

equal to the interest rate differential between two countries.

Keywords: Covered Interest Arbitrage

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

20) The value of the euro floats against other major international currencies, but has a fixed value when

compared to the currencies of the countries in the European Union, such as the French franc and the

German mark.

Keywords: Euro, Floating Exchange Rates

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

21) A direct quote of $1.9887 dollars to buy one U.K. pound corresponds to an indirect quote of .9887

pounds per one dollar.

Keywords: Direct Quote, Indirect Quote

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

22) Triangular arbitrage eliminates exchange rate differentials across three markets for three currencies.

Keywords: Triangular Arbitrage

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

23) The asked rate is also known as the selling rate or the offer rate.

Keywords: Asked Rate, Selling Rate, Offer Rate

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

24) The existence of a forward-spot differential creates an arbitrage opportunity that will eliminate the

differential almost immediately.

Keywords: Forward-Spot Differential, Arbitrage

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

25) A direct quote of $1.6255 dollars to buy one U.K. pound corresponds to an indirect quote of .6152

pounds per one dollar.

Keywords: Direct Quote, Indirect Quote

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

26) Commercial centers for foreign exchange exist only in New York and London in order to make it

possible for arbitrage to work.

Keywords: Foreign Exchange Market, Arbitrage

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

27) A direct quote is always denominated in U.S. dollars, since the dollar is the medium of exchange in

international business.

Keywords: Direct Quote

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

28) An exchange rate of $1.6 per British pound is an example of a direct quote in the United States.

Keywords: Direct Quote

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

29) A direct quote of $1.6 per British pound in the United States is equivalent to a direct quote of .625

British pounds per U.S. dollar in Great Britain.

Keywords: Direct Quote

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

30) Three types of arbitrage are simple arbitrage, rectangular arbitrage, and covered-expense arbitrage.

Keywords: Simple Arbitrage, Triangular Arbitrage, Covered-Interest Arbitrage

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

31) The forward-spot differential is the difference between the forward rate and the expected future spot

rate.

Keywords: Forward-Spot Differential

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

32) Due to the dominance of Chinese companies in international trade, the Chinese yuan is the most

frequently traded currency.

Keywords: Foreign Currency Markets

Learning Obj.: L.O. 16.2

AACSB: Diverse and multicultural work environments

33) The U.S. dollar is the most frequently traded currency in foreign currency markets, accounting for

over 40% of total trading.

Keywords: Foreign Currency Markets

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

34) Exchange rate risk exists in international trade contracts denominated in a foreign currency, but not in

foreign portfolio investments, because the returns on investment securities are adjusted automatically for

differences in exchange rates.

Keywords: Exchange Rate Risk, International Trade Contracts, Foreign Portfolio Investments

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

35) If a U.S. company enters into a purchase agreement with a European company and the contract is

denominated in euros, then direct exchange rate risk exists for both companies.

Keywords: Exchange Rate Risk

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

36) A wide bid/ask spread could indicate which of the following?

A) the presence of arbitrageurs

B) large volume transactions are taking place

C) frequent trading of a currency

D) an inefficient market

Keywords: Bid/Ask Spread, Efficient Markets

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking

37) The Euro increased dramatically in value against the U.S. dollar between 2000 and 2009. The result

has been that

A) U.S. exports are more competitive in Europe.

B) U.S. goods cost more in Europe.

C) U.S. travelers are finding it less expensive to travel in Europe.

D) European exports to the United States are more competitive.

Keywords: Euro, Exchange Rates

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

38) A British-made component costs 36 U.K. pounds. A company in the United States needs to buy these

components and the current indirect quote indicates that one dollar will buy .6250 pounds. Ignoring

transactions costs, how much will one component cost in U.S. dollars?

A) $22.50

B) $45.94

C) $57.60

D) $72.00

Keywords: Indirect Quote

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

39) The direct quote in New York is .015 dollar per Pakistani rupee. The direct quote in Pakistan is 60

rupees per dollar. This imbalance in rates can be corrected by arbitrage. A trader will ________ rupees in

New York and ________ rupees in Pakistan, causing the direct quote in New York to ________.

A) buy; sell; increase

B) buy; sell; decrease

C) sell; buy; decrease

D) sell; buy; increase

Keywords: Direct Quote, Indirect Quote, Arbitrage, Foreign Exchange

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

40) Suppose the current exchange rates are 1.3215 dollars per euro, and 84.19 yen per dollar. What is the

current exchange rate between yen and euros?

A) 86.356 yen per euro

B) 147.571 yen per euro

C) 151.696 yen per euro

D) 111.257 yen per euro

Keywords: Cross Rate

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

41) IMXP Corp. enters into a 30-day forward exchange contract to buy 113,540,000 yen for $100,000.

Which of the following statements is true concerning this transaction?

A) IMXP will pay $100,000 and receive 113,540,000 yen 30 days from now.

B) IMXP will pay $100,000 today and receive 113,540,000 yen 30 days from now.

C) The spot exchange rate in 30 days will be 113.54 yen per dollar.

D) IMXP will receive 113,540,000 yen today and pay $100,000 30 days from now.

Keywords: Forward Exchange Contract

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

42) The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate is .6211 pounds

per dollar. Therefore, pounds in the forward market are selling at a ________ to the current spot rate.

A) .958 discount

B) .958 premium

C) .04 discount

D) .04 premium

Keywords: Spot Rate, Forward Exchange Rate, Premium

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

43) The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate is .6211 pounds

per dollar. The percent-per-year discount on the 30-day pound is

A) 32.77%.

B) 30.57%.

C) 48.00%.

D) 45.93%.

Keywords: Percent-per-year Premium, Forward Exchange Rate

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

44) The 30-day forward exchange rate is .01073033 dollars per yen. If this forward rate represents a per

year discount of 2.5% from the current spot rate, what is the current spot exchange rate?

A) .01073033 dollars per yen

B) .01257754 dollars per yen

C) .01329684 dollars per yen

D) .01093833 dollars per yen

Keywords: Forward Exchange Rate, Spot Rate, Percent-per-year discount

Learning Obj.: L.O. 16.2

AACSB: Analytical Thinking

45) A Spot transaction occurs when

A) one currency is deposited in a foreign bank.

B) one currency is immediately exchanged for another currency.

C) one currency is exchanged for another currency at a specified price.

D) one currency is exchanged for another currency in 30, 60, or 90 days.

Keywords: Spot Transaction

Learning Obj.: L.O. 16.2

AACSB: Reflective Thinking