Financial Management: Core Concepts, 4e (Brooks)
Chapter 18 International Financial Management
1) Businesses that operate in more than one country are commonly referred to as ________.
A) multiamerican firms
B) multinational firms
C) ultranational firms
D) worldwide firms
2) The difficulties of managing international business operations stem from three special issues.
Which of the choices below is NOT one of these?
A) Political risk
B) Differences in business practices
C) Social fads
D) Cultural differences
3) ________ arise(s) from differences in customs, social norms, attitudes, assumptions, and
expectations of the local society in a host country.
A) Cultural risk
B) Political risk
C) Social fads
D) Similarities in business beliefs
4) Specific issues related to cultural differences can arise in the management of a multinational
enterprise. All of the following are related to cultural differences EXCEPT ________.
A) a requirement to have local management
B) issues with promotion of women into management positions
C) issues with observation of religious holidays
D) nationalization of the assets of a company by the foreign government
5) In regard to the cultural risks related to ownership structure, which of the statements below is
FALSE?
A) Cultural norms work their way into laws and regulations so that the interests of the host
country will take precedence over the interest of the foreign country, the original home of the
business.
B) In order to start a business operation in a foreign country, it may be necessary to utilize a joint
venture business form.
C) Today, there are practically no industries protected against foreign ownership in host
countries.
D) The ownership structure of a business can be restricted once the business ventures overseas
and faces the additional constraint of meeting ownership requirements of more than one
government.
6) In regard to the cultural risks related to human resources management, which of the statements
below is TRUE?
A) In some countries, women are restricted from management positions.
B) The hiring of local citizens instead of bringing in foreign expatriates is often a necessary part
of doing business abroad.
C) Foreign expatriates would find it difficult living and working in a community where they are
seen as taking away wages and livelihood from local citizens.
D) All of these statements are true.
7) In regard to the cultural risks related to nepotism and corrupt practices, which of the
statements below is TRUE?
A) The Foreign Corrupt Practices Act, passed during the administration of President Carter,
makes it illegal for U. S. citizens to pay bribes to foreign officials or leaders in order to facilitate
business operations.
B) If a firm does not have a competitive advantage so that it can overcome the bribery situation
and still make a profit, it may be best to look somewhere else to extend business operations.
C) Companies can be forced by a local government official to hire specific individuals and place
them in positions of control.
D) All of these statements are true.
8) In regard to the cultural risks related to intellectual property rights, which of the statements
9) A major aspect of operating a business in a host country is the business risk that must be
assumed. Which of the following is NOT a business risk?
A) A severe drought
B) The risk of the firm being nationalized by the host country.
C) A rise in interest rates
D) A shift in exchange rates
10) As we go from home operations to international operations, we can potentially receive a
________, but we can also see our ________ increase.
A) diversification benefit; systematic risk
B) diversification disadvantage; total risk
C) diversification disadvantage; systematic risk
D) diversification benefit; total risk
11) ________ involves the changes in a foreign government that can have far-reaching effects on
a multinational company.
A) Social risk
B) Political risk
C) Business risk
D) Government risk
12) Which of the statements below is FALSE?
A) Political risk involves changes in a foreign government. At one extreme is the case in which a
local government “takes over” the assets of the company and nationalizes it.
B) Political risk involves changes in a foreign government. An extreme example is the case in
which a government encourages foreign investment and gives breaks to companies willing to
move operations locally.
C) There are three basic defensive mechanisms that can guard against the extreme case of
nationalized assets. These include keeping critical operations private, financing operations and
assets with local money, and receiving primary inputs outside the local economy.
D) One way that a multinational firm can minimize the potential of nationalization of assets by a
foreign government is to share key elements of operations with the government.
13) There are three basic defensive mechanisms that can guard against the extreme case of
nationalized assets. Which of the mechanisms below is NOT one of these?
A) Keeping critical operations private
B) Making critical operations public
C) Financing operations with local money
D) Financing assets with local money
14) Nepotism can be a problem for an American company in a foreign host country, but
fortunately, it is not a problem in the United States.
15) Although domestic firms face political risk, we tend to think the stakes are much higher with
foreign operations.
16) One way to minimize the threat of nationalization in a host country is to maintain key
elements of operations safely within the firm.
17) A defense against nationalization is to have the assets financed by the overseas company.
18) Cultural risk arises from differences in customs, social norms, attitudes, assumptions, and
expectations of the local society in a host country. Name and describe two of the five specific
issues as identified in the textbook relating to cultural differences.
19) Describe business risk and political risk.
1) The ________ refers to the price of one country’s currency in units of another country’s
currency.
A) exchange price
B) forward rate
C) exchange rate
D) currency rate
2) ________ means that the price of similar goods is the same, regardless of which currency one
uses to buy the goods.
A) Interest rate parity
B) Purchasing power parity
C) Currency parity
D) Expectation parity
3) In the United States, we can buy a pair of shoes for $78. These shoes are identical in every
way, shape, and form to a pair of shoes from Japan that be purchased for ¥9,200 including
shipping costs. From whom should we order the shoes if we can exchange $1 for ¥110?
A) Buy from the United States, as we save $5.64.
B) Buy from Japan, as we save $5.64.
C) Buy from the United States, as we save $2.00.
D) Buy from Japan, as we save $2.00.
4) In the United States, we can buy a pair of shoes for $105. These shoes are identical in all
aspects to a pair of shoes from Japan that be purchased for ¥11,000 including shipping costs.
What percentage (relative to $105 U.S. cost) can we save by buying the shoes in Japan if the
exchange rate is $1 for ¥112?
A) 7.33%
B) 7.11%
C) 6.46%
D) 5.17%
5) In the United States, we can buy a pair of shoes for $126. These shoes are identical in all
aspects to a pair of shoes from Japan that be purchased for ¥15,000 including shipping costs.
What dollar amount can we save by buying the shoes in the United States if the exchange rate is
$1 for ¥108?
A) $15.33
B) $12.89
C) $5.21
D) $0.00
6) Rather than a single good for the exchange rate, economists use the concept of ________ as
the price base for the exchange rate.
A) a pair of shoes
B) the price of a barrel of oil
C) a basket of goods
D) the S&P 500 Index
7) ________ is a financial term for “free money,” that is, the opportunity to make a profit
without risk.
A) Free rider
B) Arbitrage
C) Trading in perfect markets
D) Trading in imperfect markets
8) Assume that you are the manager of a U.S. company and you face an exchange rate of ¥110
per $1. Whenever you receive an order, rather than ship from your production facilities, you call
in the order to a Japanese company and have the bill shipped to you directly. If the bill shipped to
you is ¥9,500 and you can collect $85 per item sold to your customer, what would be your loss
per item if you pay the Japanese company ¥9,500?
A) -$1.36 per item
B) -$1.00 per item
C) -$0.64 per item
D) -$0.48 per item
9) Assume that you are the manager of a U.S. company and you face an exchange rate of ¥112
per $1. Whenever you receive an order, rather than ship from your production facilities, you call
in the order to a Japanese company and have the bill shipped to you directly. If the bill shipped to
you is ¥10,500 and you can collect $95 per item sold to your customer, what would be your
profit per item be if you pay the Japanese company ¥10,500?
A) $2.50 per item
B) $2.00 per item
C) $1.25 per item
D) $1.00 per item
10) Assume that you are the manager of a U.S. company and you face an exchange rate of ¥108
per $1. Whenever you receive an order, rather than ship from your production facilities, you call
in the order to a Japanese company and have the bill shipped to you directly. If the bill shipped to
you is ¥14,500 and you can collect $150 per item sold to your customer, what would be your
profit if you pay the Japanese company ¥7,500?
A) $15.74 per item
B) $16.33 per item
C) $18.21 per item
D) $23.68 per item
11) The ________ is the amount of foreign currency you need to buy one U.S. dollar.
A) American rate
B) non-European rate
C) direct rate
D) indirect rate
12) The ________ reflects the rate or amount of U.S. dollars required to purchase one unit of a
foreign currency.
A) direct rate
B) European rate
C) indirect rate
D) equivalent rate
13) In terms of exchange rates, you can think of the denominator as what you want to buy and
the numerator as ________.
A) the price in the foreign currency
B) the price in your currency
C) what you want to receive
D) none of these
14) The relationship between the American or direct rate and the European or indirect rate is
simply ________.
A) a reversal
B) an inversal
C) a reciprocal
D) all of these
15) Which of the statements below is FALSE?
A) The opportunity to make a profit without risk by exchanging three currencies is known as
triple arbitrage.
B) When cross rates are out of line, there can be an arbitrage opportunity.
C) Exchange rates vary from one day to the next.
D) Even if you could not do a direct exchange between pounds and yen, you could convert
pounds to dollars and then dollars to yen and ultimately end up changing pounds into yen.
16) Which of the statements below is TRUE?
A) The foreign rate is derived by pricing two currencies against a third.
B) All domestic rates can be computed using a setup with American rates and European rates
with the U.S. dollar as the home currency.
C) The opportunity to make a profit without risk by exchanging three currencies is known as
triple arbitrage.
D) When cross rates are out of line, there can be an arbitrage opportunity.
17) If €1 buys £1.21, then the reciprocal states that £1 buys what?
A) €0.888
B) €0.841
C) €0.826
D) €0.790
18) If £1 buys $1.35, then the reciprocal states that $1 buys what?
A) £0.7407
B) £0.8833
C) £0.9234
D) £0.9888
19) The beginning-of-the-year prices for a pair of boots are $75 in the United States and ¥11,000
in Japan. We know that prices in the United States and Japan will change over the coming year
due to inflation. If we assume that inflation in the United States (our home country, infh) will be
2% and inflation in Japan will be 1% (our foreign country, inff), what will the price of the boots
be at the end of the year?
A) The U.S. boot price is $76.50 and we do not know the Japanese boot price.
B) The U.S. boot price is $76.50 and the Japanese boot price is ¥11,110.
C) The Japanese boot price is ¥11,110 and we do not know the U.S. boot price.
D) We cannot determine either boot price.
20) If £1 buys $1.41, then the reciprocal states that $1 buys what?
A) £0.7480
B) £0.7292
C) £0.7092
D) £0.7000
21) The beginning-of-the-year prices for a pair of boots are $90 in the United States and ¥14,000
in Japan. We know that prices in the United States and Japan will change over the coming year
due to inflation. If we assume that inflation in the United States (our home country, infh) will be
1% and inflation in Japan will be -1% (our foreign country, inff), what will the price of the boots
be at the end of the year?
A) The U.S. boot price is $90.90 and the Japanese boot price is ¥13,860.
B) The U.S. boot price is $89.10 and the Japanese boot price is ¥14,140.
C) The U.S. boot price is $90.90 and the Japanese boot price is ¥14,140.
D) The U.S. boot price is $89.10 and the Japanese boot price is ¥13,860.
22) The current indirect rate is 105, the interest rate in the foreign country is 6%, and the interest
rate in the home country is 3%. What is the forward indirect rate if t = 1?
A) 105.00
B) 108.06
C) 109.00
D) 109.32
23) The current indirect rate is 151, the interest rate in the foreign country is 12%, the interest
rate in the home country is 5%. What is the forward indirect rate if t = 2?
A) 183.66
B) 171.80
C) 161.07
D) 153.26
24) The current indirect rate is 100, the interest rate in the foreign country is 5%, the interest rate
in the home country is 5%. What is the forward indirect rate if t = 3?
A) 0.94
B) 100.00
C) 105.00
D) 105.25
25) Which of the statements below is TRUE?
A) Spot rates are based upon the interest rates for two countries.
B) Forward Indirect Ratet = Current Indirect Rate × .
C) There is no way to lock in future currency exchange rates.
D) What the International Fisher Effect really tells us is that inflation rates the world round are
the same and that one cannot exploit different inflation rates across different countries.
26) Which of the statements below is TRUE?
A) When illustrating triangular arbitrage, you start from the bottom of the triangle with an initial
amount of money and, moving in a clockwise manner, you can see the three currency exchanges
and the resulting currency amounts at each corner of the triangle.
B) When illustrating triangular arbitrage, you start from the top of the triangle with an initial
amount of money and, moving in a clockwise manner, you can see the three currency exchanges
and the resulting currency amounts at each corner of the triangle.
C) When illustrating triangular arbitrage, you start from the bottom of the triangle with an initial
amount of money and, moving in a counter-clockwise manner, you can see the three currency
exchanges and the resulting currency amounts at each corner of the triangle.
D) When illustrating triangular arbitrage, you start from the top of the triangle with an initial
amount of money and, moving in a counter-clockwise manner, you can see the three currency
exchanges and the resulting currency amounts in the middle of the triangle.
27) We can write any ________ as a function of the difference between the expected inflation
rates of two countries and the current or spot exchange rate.
A) anticipated forward exchange rate
B) known forward exchange rate
C) anticipated spot rate
D) unanticipated forward exchange rate
28) Which of the statements below is FALSE?
A) Forward rates play an important part in currency exchange because you can lock in future
currency exchanges with these forward rates.
B) From a business perspective, forward contracts are hedging tools for companies. By locking
in a future exchange rate, companies can avoid unfavorable movements in exchange rates.
C) When you convert your currency today, you are exchanging currency in the spot market.
D) The International Fisher effect tells us that inflation rates are the same the world over.
29) The Big Mac Index demonstrates the concept of Purchasing Power Parity. If the current price
of a Big Mac hamburger in the United States is $3.55, and the current price of the same burger in
Germany is €3.15, what is the implied exchange rate of dollars per euro?
A) $0.8873/€
B) $1.1270/€
C) $1.2421/€
D) $1.3333/€
30) The Big Mac Index demonstrates the concept of Purchasing Power Parity. If the price of a
Big Mac burger in the United States is $3.95 and the current €/$ exchange rate is €0.8535/$1,
what is the implied price of a Big Mac in France?
A) $3.37
B) €3.37
C) €3.17
D) €3.06
31) In the United States, we can buy a road bicycle for 3,500 USD. These bikes are identical in
every way, shape, and form to road bikes from Taiwan that be purchased for 100,000 TWD
(Taiwanese New Dollars) including shipping costs. From whom should we order the bike if we
can exchange 1 USD for 30 TWD?
A) Buy from the USA, as we save $166.67.
B) Buy from Taiwan, as we save $166.67.
C) Buy from the USA, as we save $134.00.
D) It does not matter because the prices are identical.
32) In the United States, we can buy road bicycle for 3,500 USD. These bikes are identical in all
aspects to bicycles from Taiwan that be purchased for 100,000 TWD (Taiwanese New Dollars)
including shipping costs. What percentage (relative to $3,500 U.S. cost) can we save by buying
the bike in Taiwan if the exchange rate is 1 USD for 30 TWD?
A) 4.76%
B) 5.00%
C) 5.25%
D) 5.33%
33) If €1 buys $1.17, then the reciprocal states that $1 buys what?
A) €0.8547
B) €0.8500
C) €0.8433
D) €0.8344
34) The beginning-of-the-year price for a 33 pound bag of premium dog food is $45.00 in the
United States and ¥4,400 in Japan. We know that prices in the United States and Japan will
change over the coming year due to inflation. If we assume that inflation in the United States
(our home country, infh) will be 3% and inflation in Japan will be 2% (our foreign country, inff),
what will the price of the dog food be at the end of the year?
A) The U.S. price is $46.35 and we do not know the Japanese price.
B) The U.S. price is $45.90 and the Japanese price is ¥4,438.
C) The Japanese price is ¥4,488 and the U.S. price will be $45.35.
D) We cannot determine either price.
35) If £1 buys $1.33, then the reciprocal states that $1 buys what?
A) £0.6537
B) £0.6700
C) £0.7519
D) £1.3300
36) The current indirect rate is 0.8500, the interest rate in the foreign country is 3%, and the
interest rate in the home country is 4%. What is the forward indirect rate if t = 1?
A) 0.8418
B) 0.8429
C) 0.8441
D) 0.8496
37) The current indirect rate is 133, the interest rate in the foreign country is 4%, and the interest
rate in the home country is 1%. What is the forward indirect rate if t = 2?
A) 143.69
B) 141.02
C) 148.59
D) 156.34