Comparative advantage in the 21st century is based more on services and their cross
border facilitation by telecommunications and the Internet.
In recent years the trend has been for markets to increasing focus on the global
stakeholders.
If exchange markets were not efficient, it would pay for a firm to spend resources on
forecasting exchange rates.
Currency trading is a service center rather than a profit center for commercial and
investment banks.
Sovereign credit risk is the global financial market’s assessment of the ability of a
sovereign borrower to repay USD denominated debt.
If a central bank wishes to “defend its currency,” it might follow an expansive monetary
policy, which would drive real rates of interest up.
FEW governments rely on income taxes, both personal and corporate, for their primary
revenue source.
In practice, when expanding into other countries, firms have been observed to follow a
sequential search pattern as described in the behavioral theory of the firm.
The territorial approach, also referred to as the source approach to tax policy, levies
taxes on the income earned by firms that are incorporated in the host country, regardless
of where the income was earned (domestically or abroad).
Investor protection is typically better in countries with codified civil law (the Code
Napoleon) than in countries with a legal system based in English common law.
Expenditures by U.S. students abroad and foreign students pursuing studies in the
United States would be considered a services trade and part of the U.S. current account.
SEC rule 144A permits institutional buyers to trade privately placed securities without
the previous holding periods restrictions and without requiring SEC registration.
All that is required for a covered interest arbitrage profit is for interest rate parity to not
hold.
Because of the international diversification of cash flows, the risk of bankruptcy for
MNEs is significantly lower than that for purely domestic firms.
Because international capital budgeting is so difficult, time consuming, expensive, and
uncertain, firms generally forego any type of additional sensitivity analysis after
completing a base-case scenario.
According to the Boston Consulting Group analysis gloabl challengers have been able
to have both volume and margin.
When estimating a capital budget, it is common to separate cash flows into: 1) the
initial investment, 2) incremental cash flows over the life of the project, and 3) a
terminal value.
A letter of credit is an agreement by the bank to pay against documents rather than the
actual merchandise.
Domestic firms do not have foreign exchange risk.
Eurocurrencies are NOT the same as the euro developed for the common European
currency.
Based on the premise that, other things equal, countries would prefer a fixed exchange
rate: Variable rates provide stability in international prices for the conduct of trade.
Small- and medium-size firms often attract foreign investors and achieve a global cost
of capital.
All indications are that the value-added tax will soon be the dominant form of taxation
in the U.S.
Foreign exchange markets are a relatively recent phenomenon, beginning with the
agreement at Bretton Woods.
A global portfolio is an index of all the securities in the world, whereas a world
portfolio represents those securities actually available to an investor.
The Eurocurrency market continues to thrive because it is a large international money
market relatively free of governmental regulation and interference.
The IMF’s methodology for classifying exchange rate regimes today is based on the
official policy statement of the respective governments, de jure classification.
It is highly unusual for a multinational firm to have both integrated foreign entities
AND self-sustaining foreign entities.
The real exposure of an interest or currency swap is not the total notional principal, but
the mark-to-market values of differentials in interest or currency interest payments
since the inception of the swap agreement.
International diversification benefits may induce investors to demand foreign securities.
In theory multinational firms are in a better position than domestic firms to support
higher debt ratios.
Many problems such as poverty, environmental concerns, and cyber attacks are beyond
the capabilities of MNEs alone to correct and require government participation as well.
A swap agreement may involve currencies or interest rates, but never both.
To constitute a true letter of credit transaction, the bank’s commitment must be
open-ended and cannot have a stated maximum amount of money.
The expected change in the option premium from a small change in the foreign interest
rate (foreign currency) is term vega.
Which of the following statements is NOT true?
A) International diversification benefits induce investors to demand foreign securities.
B) An international security adds value to a portfolio if it reduces risk without reducing
return.
C) Investors will demand a security that adds value.
D) All of the above are true.
When evaluating capital budgeting projects, which of the following would NOT
necessarily be an indicator of an acceptable project?
A) an NPV > $0
B) an IRR > the project’s required rate of return
C) an IRR > $0
D) All of the above are correct indicators.
A U.S. firm sells merchandise today to a British company for £150,000. The current
exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses
to avoid any hedging techniques designed to reduce or eliminate the risk of changes in
the exchange rate. If the exchange rate changes to $1.58/£ the U.S. firm will realize a
________ of ________.
A) loss; $4,500
B) gain; $4,500
C) loss; £4,500
D) gain; £4,500
Over the last two decades the surplus on U.S. services trade has typically been
________ the deficit on U.S. goods trade.
A) greater than
B) equal to
C) less than
D) The relationship is constantly shifting from greater than to less than.
One of the most important factors in making debt less expensive than equity is:
A) the tax deductibility of depreciation.
B) the tax deductibility of equity.
C) the tax deductibility of dividends.
D) the tax deductibility of interest.
A ________ is an exchange rate quoted today for settlement at some time in the future.
A) spot rate
B) forward rate
C) currency rate
D) yield curve
The Lambda of an option is defined as:
A) expected change in the option premium for a small change in time to expiration.
B) expected change in the option premium for a small change in volatility.
C) expected change in the option premium for a small change in the spot rate.
D) expected change in the option premium for a small change in the domestic interest
rate.
Balance of payment (BOP) data may be important for any of the following reasons:
A) BOP data helps to forecast a country’s market potential, especially in the short run.
B) the BOP is an important indicator of a country’s foreign exchange rate.
C) changes in a country’s BOP may signal a change in controls over payment of
dividends and interest.
D) all of the choices provided above
Which of the following domestic financial instruments have NOT been modified for use
in international financial management?
A) currency options and futures
B) interest rate and currency swaps
C) letters of credit
D) All of the above are domestic financial instruments that have also been modified for
use in international financial markets.
The Stakeholder Capitalism Model (SCM):
A) clearly places shareholders as the primary stakeholder.
B) combines the interests and inputs of shareholders, creditors, management,
employees, and society.
C) has financial profit as its goal and is often termed impatient capital.
D) is the Anglo-American model of corporate governance.
Portfolio investment is capital invested in activities that are ________ rather than made
for ________.
A) short term; the long term
B) long term; profit
C) profit motivated; control
D) control motivated; profit
The greatest volume of daily foreign exchange transactions are:
A) spot transactions.
B) forward transactions.
C) swap transactions.
D) This question is inappropriate because the volume of transactions are approximately
equal across the three categories above.
A ________ tax policy is one that has no impact on private decision-making, while a
________ policy is designed to encourage specific behavior.
A) flat; tax incentive
B) neutral; flat
C) neutral; tax incentive
D) none of the above
Of the following, which is NOT a trade-off that must be dealt with in any exchange rate
regime?
A) cooperation vs independence
B) rules vs discretionary action
C) dollars vs pounds
D) All of the above are rate regime trade-offs.
The buyer of a long call option:
A) has a maximum loss equal to the premium paid.
B) has a gain equal to but opposite in sign to the writer of the option.
C) has an unlimited maximum gain potential.
D) all of the above
In September 2009 a U.S. investor chooses to invest $500,000 in German equity
securities at a then current spot rate of $1.30/euro. At the end of one year the spot rate is
$1.35/euro.
Refer to Instruction 13.1. At an average price of €60/share, how many shares of stock
will the investor be able to purchase?
A) 8333 shares
B) 6410 shares
C) 6173 shares
D) 10,833 shares
Which of the following is NOT a possible and appropriate response by shareholders
dissatisfied with existing firm management of a publicly traded firm?
A) Shareholders could sell their shares of stock.
B) Shareholders could remain quietly disgruntled.
C) Shareholders, perhaps with the help of others, could attempt to initiate a takeover.
D) All of these responses may be possible and appropriate.
One of the most important factors in making debt less expensive than equity is:
A) the seniority of equity obligations to debt claims.
B) the tax deductibility of dividends.
C) the tax deductibility of equity.
D) the seniority of debt obligations to equity claims.
A/An ________ is defined as one that is targeted at investors in a single country and
underwritten in whole or part by investment institutions from that country.
A) SEC rule 144a placement
B) directed public share issue
C) Euroequity public issue
D) strategic alliance
Historical exchange rates may be used for ________, while current exchange rates may
be used for ________.
A) fixed assets and current assets; income and expense items
B) equity accounts and fixed assets; current assets and liabilities
C) current assets and liabilities; equity accounts and fixed assets
D) equity accounts and current liabilities; current assets and fixed assets
A speculator in the futures market wishing to lock in a price at which they could
________ a foreign currency will ________ a futures contract.
A) buy; sell
B) sell; buy
C) buy; buy
D) none of the above
The relationship between the percentage change in the spot exchange rate over time and
the differential between comparable interest rates in different national capital markets is
known as:
A) absolute PPP.
B) the law of one price.
C) relative PPP.
D) the international Fisher Effect.
An alternative strategy to engaging in bribery in international investments include:
A) refuse bribery outright.
B) retain local advisors to diffuse requests for bribes.
C) educate management and local employees about the firm’s bribery policy.
D) all of the above
Under the Shareholder Wealth Maximization Model (SWM) of corporate governance,
poor firm performance is likely to be faced with all but which of the following?
A) sale of shares by disgruntled current shareholders
B) shareholder activism to attempt a change in current management
C) as a maximum threat, initiation of a corporate takeover
D) prison time for executive management
OPIC stands for:
A) Organization for the Prevention of Insufficient Capitalization.
B) Organization of Petroleum Importing Countries.
C) Overseas Private Investment Corporation.
D) Overseas Public Insurance Commission.
Which of the following would NOT be a way to implement comparative advantage?
A) IBM exports computers to Egypt.
B) Computer hardware is designed in the United States but manufactured and
assembled in Korea.
C) Water of the greatest purity is obtained from wells in Oregon, bottled, and exported
worldwide.
D) All of the above are examples of ways to implement comparative advantage.
A foreign exchange ________ is the price of one currency expressed in terms of another
currency. A foreign exchange ________ is a willingness to buy or sell at the announced
rate.
A) quote; rate
B) quote; quote
C) rate; quote
D) rate; rate
Tax treaties typically result in ________ between the two countries in question.
A) lower property taxes for U.S. citizens overseas
B) elimination of differential tax rates
C) increased double taxation
D) reduced withholding tax rates
If the British subsidiary of a European firm has net exposed assets of £250,000, and the
pound drops in value from €1.35/£ to €1.30/£, the European firm has a translation:
A) gain of €12,500.
B) loss of €12,500.
C) loss of £12,500.
D) gain of £12,500.
Which of the following is NOT true for the writer of a put option?
A) The maximum loss is limited to the strike price of the underlying asset less the
premium.
B) The gain or loss is equal to but of the opposite sign of the buyer of a put option.
C) The maximum gain is the amount of the premium.
D) All of the above are true.
Which of the following is cited as a good reason for NOT hedging currency exposures?
A) Shareholders are more capable of diversifying risk than management.
B) Currency risk management through hedging does not increase expected cash flows.
C) Hedging activities are often of greater benefit to management than to shareholders.
D) All of the above are cited as reasons NOT to hedge.
Which of the following is NOT likely to occur in the quantity adjustment phase of the
J-Curve adjustment path?
A) Imports become relatively more expensive.
B) Exports become relatively less expensive.
C) The balance of trade gets worse.
D) All of the above are true.
Which of the following is NOT one of the stages at which MNEs can react to the
potential for blocked funds?
A) prior to investing
B) during operations
C) reinvesting in the local country when funds cannot be moved
D) all of the above are stages at which MNEs can react
Business involves the interaction of individuals and individual organizations for the
exchange of products, services, and capital through markets. The global capital markets
are critical for the conduct of this exchange. The authors suggest that one way to
characterize the global financial marketplace is through its assets, institutions, and
linkages. Explain how each of the three dimensions characterize the global financial
marketplace.
There are as many different approaches to foreign exchange transaction exposure
management as there are firms and no real consensus exists regarding the best
approach. List and discuss three different exposures you can hedge and three different
types of hedges (for example option hedges versus non-option hedges).
Currency risk management techniques include forward hedges, money market hedges,
and option hedges. Draw a diagram showing the possible outcomes of these hedging
alternatives for a foreign currency receivable contract. In your diagram, be sure to label
the X and Y-axis, the put option strike price, and show the possible results for a money
market hedge, a forward hedge, a put option hedge, and an uncovered position. (Note:
Assume the forward currency receivable is British pounds and the put option strike
price is $1.50/£, the price of the option is $0.04 the forward rate is $1.52/£ and the
current spot rate is $1.48/£.)
Dutch Disease is a term applied to a problem in the 1970 whereby the Netherlands were
experiencing massive and sudden inflows of capital from abroad. What was the cause of
this sudden influx of capital, and what types of potential problems did it have for the
Dutch or could it have for any small single resource country?
Describe the structural and managerial changes and challenges experienced by a firm as
it moves its operations from domestic to global (globalization process).
Define protectionism and identify the industries that are typically protected. Explain the
“infant industry” argument for protectionism.
What is a banker’s acceptance? How are they initiated? Why are they desirable for the
exporter?
One of the most challenging issues in the financial management of the enterprise is the
possible separation of ownership from management resulting in the so-called principal
agent problem. Define the agency problem, explain possible ways to alleviate the
agency problem and discuss differences in across global markets.
What are some of the reasons central banks and treasuries enter the foreign exchange
markets, and in what important ways are they different from other foreign exchange
participants?
Compare and contrast foreign currency options and futures. Identify situations when
you may prefer one vs. the other when speculating on foreign exchange.
The two methods for the translation of foreign subsidiary financial statements are the
current rate and temporal methods. Briefly, describe how each of these methods
translates the foreign subsidiary financial statements into the parent company’s
consolidated statements. Identify when each technique should be used and the major
advantage(s) of each.
In 1991, Argentina adopted a currency board (the Argentine peso had been pegged to
the U.S. dollar at a one-to-one rate of exchange) to fight hyperinflation. This currency
board lasted for a decade until the economic crisis of 2001. Discuss : 1) the pros and
cons of a currency board policy, 2) the crisis condition of the Argentina’s economy by
2001, and 3) the lessons to be drawn from the the Argentina story.
Describe a balance sheet hedge and give at least two examples of when such a hedge
could be justified.
There are potential benefits and risks from raising capital on global markets. Discuss
the pros and cons in terms of risk of raising capital on global markets.
An unexpected change in exchange rates impacts a firm’s expected cash flows at three
levels, depending on the time horizon used (Short Run, Medium Run, and Long Run).
Describe the three operating exposure’s phases of adjustment assuming that parity
conditions do not hold among foreign exchange rates, national inflation rates, and
national interest rates (disequilibrium).
Why are foreign currency futures contracts more popular with individuals and banks
while foreign currency forwards are more popular with businesses?
Very often governments seek to alter the market’s valuation of their currency by
influencing relative interest rates, thus influencing the economic fundamentals of
exchange rate determination rather than through direct intervention in the foreign
exchange markets. Describe how this strategy works. Describe the case of the U.S. or
China where the opposite effect, to the suggest here, have occurred.
Explain how political risk and exchange rate risk increase the uncertainty of
international projects for the purpose of capital budgeting.