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If the financial statements of the foreign subsidiary are maintained in the local currency
and the U.S. dollar is the functional currency, they are remeasured by the temporal
method.
Private equity funds are best known for buying control of private owned firms, taking
them publicly, improving management, and then reselling them after one to three years.
MNEs that are resident in liquid and unsegmented capital markets are more likely to be
able to demonstrate financial strength by achieving and maintaining a global cost and
availability of capital.
In their approximate form, PPP, IRP, and forward rates as an unbiased predictor of the
future spot rate lead to similar forecasts of the future spot rate.
The final component of the equation for the Fisher Effect, (r)(π), where r = the real rate
of return and π = the expected rate of inflation, is often dropped from the equation
because the number is simply too large for most Western economies.
Firms acquire debt in either the form of loans from commercial banks, or by selling
new common stock.
The higher the delta the greater the probability of the option expiring in-the-money.
A contract to deliver dollars for euros in six months is both "buying euros forward for
dollars" and "selling dollars forward for euros."
By and large, high capital mobility is forcing emerging market nations to choose
between the two extremes of a free floating exchange rate or a hard peg regime.
The treasury function of most firms, the group typically responsible for transaction
exposure management, is NOT usually considered a profit center.
The roots of the Asian currency crisis extended from a fundamental change in the
economics of the region, the transition of many Asian nations from being net importers
to net exporters.
Expenditures by U.S. tourists in foreign countries for foreign goods or services are
factored into BOP calculations.
Debt is usually a large component of project financing.
When engaged in international capital budgeting, the analyst must identify the initial
amount of capital invested or put at risk.
A country wishing for its currency to fall in value, particularly when confronted with a
continual appreciation of its value against major trading partner currencies, the central
bank may work to lower real interest rates, reducing the returns to capital.
If a foreign exchange transaction calls for payment in the exporter's currency, the
importer has the foreign exchange risk.
In effect, the forfaiter functions both as a money market firm and a specialist in
packaging financial deals involving country risk.
The members of the EU do have relative freedom to set their own fiscal policies—
government spending, taxation, and the creation of government surpluses or deficits.
They are expected to keep deficit spending within limits.
The balance of payments:
A) determines the eligibility of countries for IMF aid.
B) adds up the value of all assets and liabilities of a country on a specific date.
C) records all international transactions for a country over a period of time.
D) all of the above
The particular strategy of trying to offset stable inflows of cash from one country with
outflows of cash in the same currency is known as:
A) hedging.
B) diversification.
C) matching.
D) balancing.
The following are examples of degrees of internationalization of an international
currency EXCEPT:
A) First degree of internationalization is when an international currency becomes
readily accessible for trade.
B) A second degree of internationalization is when an international currency is used for
international investment.
C) A third degree of internationalization is when an international currency is used for
international investment.
D) A third degree of internationalization is when an international currency takes the role
of a reserve currency.
Level I ADRs trade primarily:
A) on the New York Stock Exchange.
B) on the American Stock Exchange.
C) over the counter or pink sheets.
D) Level I ADRs typically do not trade at all, but instead are privately issued and held
until maturity.
A ________ is a direct reduction of taxes whereas a ________ reduces the taxable
income before taxes.
A) foreign tax credit; domestic tax credit
B) tax deduction; tax credit
C) tax credit; tax deduction
D) none of the above
Which of the following is NOT a factor in determining the premium price of a currency
option?
A) the present spot rate
B) the time to maturity
C) the standard deviation of the daily spot price movement
D) All of the above are factors in determining the premium price.
Capital controls may take a variety of forms EXCEPT:
A) currency boards
B) taxes
C) quotas
D) prohibitions
Empirical evidence shows that new issues of equity by domestic firms in the U.S.
market typically has a ________ stock price reaction and new equity issues in the U.S.
markets by foreign firms with segmented domestic markets have a ________ stock
price reaction.
A) negative; negative
B) positive; negative
C) negative; positive
D) positive; positive
A well-established, large U.S.-based MNE will probably NOT be able to overcome
which of the following obstacles to maximizing firm value?
A) an open market place
B) high quality strategic management
C) access to capital
D) none of the above
Imports have the potential to lower a country's inflation rate because of each of the
following EXCEPT:
A) the import of lower priced goods limits what domestic competitors can charge for
goods.
B) the import of lower priced services limits what domestic competitors can charge for
services.
C) the higher prices of foreign goods spurs domestic competitors to cut prices.
D) all of the above
NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment from The
Allofit Territories Company (ATC) located in Canada. With the steady decline of the
U.S dollar against the Canadian dollar NRI is finding a continued relationship with ATC
to be an increasingly difficult proposition. In response to NRI's request, ATC has
proposed the following risk-sharing arrangement. First, set the current spot rate of
C$1.20/$ as the base rate. As long as spot rates stay within 5% (up or down) NRI will
pay at the base rate. Any rate outside of the 5% range, ATC will share equally with NRI
the difference between the spot rate and the base rate. If NRI had a payable of
C$100,000 due today and the current spot rate were C$1.17/$, how much does would
NRI owe in U.S. dollars?
A) $83,333
B) $85,470
C) $85,837
D) $117,000
Which of the following is NOT a portfolio diversification technique used by portfolio
managers?
A) diversify by type of security
B) diversify by the size of capitalization of the securities held
C) diversify by country
D) All of the above are diversification techniques.
A Canadian firm with a U.S. subsidiary and a U.S. firm with a Canadian subsidiary
agree to a parallel loan agreement. In such an agreement, the Canadian firm is making
a/an ________ loan to the ________ subsidiary while effectively financing the
________ subsidiary.
A) indirect; U.S.; Canadian
B) indirect; Canadian; U.S.
C) direct; U.S.; Canadian
D) direct; Canadian; U.S.
According to the U.S. school of thought, the worldwide trend toward fuller and more
standardized disclosure rules should ________ the cost of equity capital.
A) increase
B) decrease
C) have no impact on
D) none of the above
TABLE 15.1
Use the information to answer following question(s).
BayArea Designs Inc., located in Northern California, has two international
subsidiaries, one located in the Ukraine, the other in Korea. Consider the information
below to answer the next several questions.
Refer to Table 15.1. If BayArea set the payout rate from the Ukraine subsidiary at 25%,
how should BayArea set the payout rate of the Korean subsidiary (approximately) to
more efficiently manage its total foreign tax bill?
A) 28.5%
B) 24.5%
C) 42.6%
D) 82.3%
The four currencies that constitute about 80% of all foreign exchange trading are:
A) U.K pound, Chinese yuan, euro, and Japanese yen.
B) U.S. dollar, euro, Chinese yuan, and U.K. pound.
C) U.S. dollar, Japanese yen, euro, and U.K. pound.
D) U.S. dollar, U.K. pound, yen, and Chinese yuan.
If we set the real effective exchange rate index between the United Kingdom and the
United States equal to 100 in 2005, and find that the U.S. dollar has changed to a value
of 91.4, then from a competitive perspective the U.S. dollar is:
A) overvalued.
B) undervalued.
C) equally valued.
D) There is not enough information to answer this question.
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars
from a manufacturer in Germany for euro 3,000,000. The purchase was made in June
with payment due six months later in December. Because this is a sizable contract for
the firm and because the contract is in euros rather than dollars, CVT is considering
several hedging alternatives to reduce the exchange rate risk arising from the sale. To
help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.250/euro
∙ The six month forward rate is $1.22/euro
∙ CVT's cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December call options for euro 750,000; strike price $1.28, premium price is 1.5%
∙ CVT's forecast for 6-month spot rates is $1.27/euro
∙ The budget rate, or the highest acceptable purchase price for this project, is $3,900,000
or $1.30/euro
Refer to Instruction 10.1. CVT would be ________ by an amount equal to ________
with a forward hedge than if they had NOT hedged and their predicted exchange rate
for 6 months had been correct.
A) better off; $150,000
B) better off; €150,000
C) worse off; $150,000
D) worse off; €150,000
The main advantage(s) of over-the-counter foreign currency options over exchange
traded options is (are):
A) expiration dates tailored to the needs of the client.
B) amounts that are tailor made.
C) client desired expiration dates.
D) all of the above
An American tourist purchases a leather jacket while in Italy. Which of the following
statements is true?
A) The leather purchase would be considered an import for the U.S. BOP.
B) This transaction would be properly accounted for in the Current Account of the U.S.
BOP.
C) The leather purchase is considered an import of a good, and thus, considered part of
the balance of trade as well.
D) All of these statements are true.
In general there is consensus that ________ should be free, but there is no such
consensus that ________ should be free.
A) international investment; international goods trade
B) international investment; international trade
C) international trade; international goods trade
D) international trade; international investment
The ________ determines accounting policy for U.S. firms.
A) Securities and Exchange Commission (SEC)
B) Federal Reserve System (Fed)
C) Financial Accounting Standards Board (FASB)
D) General Agreement on Tariffs and Trade (GATT)
Instruction 16.1:
Use the information to answer the following question(s).
Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing
equipment to Landcaster's of Australia. Because the two companies have never done
business with each other, Cypress requires a banker's acceptance as payment for the
$1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and
payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the
bankers acceptance to its bank, the discount rate is 1.00% per annum.
Refer to Instruction 16.1. What is the size of the commission Cypress will pay the bank
for the banker's acceptance?
A) $7,000
B) $5,000
C) $12,000
D) $14,000
"Maximize corporate wealth":
A) is the primary objective of the non-Anglo-American model of management.
B) as a management objective treats shareholders on a par with other corporate
stakeholders such as creditors, labor, and local community.
C) has a broader definition than just financial wealth.
D) all of the above
Use the following terms for this question:
C = consumption
I = capital investment spending
G = government spending
X = exports of goods and services
M = imports of goods and services
BOP = balance of payments
GDP = gross domestic product
NPV = net present value
INF = inflation
R = real rate of return
The static equation for the nations GDP is:
A) GDP = C + I + G + (X + M ) × INF
B) GDP = C + I + G + X + M
C) GDP = C + I + G + X - M
D) GDP = C + I + X - M + R
Empirical tests have yielded ________ evidence about market efficiency with a general
consensus that developing foreign markets are ________.
A) conflicting; not efficient
B) conflicting; efficient
C) consistent; inefficient
D) none of the above
Recently the Canadian dollar realized an unexpected appreciation in value. Which of
the following actions being considered by Tall Timber Exports, a Canadian logging firm
specializing in exporting raw forest products, would be considered a highly unlikely
response to the appreciation of the Canadian dollar?
A) Tall Timber Exports might lower export prices in an effort to maintain market share.
B) Tall Timber Exports might raise export prices only slightly in an effort to increase
market share.
C) Tall Timber Exports might leave export prices as they are and wait to determine
what actions to take if any in the future.
D) all of the above
Which of the following did NOT contribute to the Russian currency crisis of 1998?
A) an accelerated flight of capital
B) generally deteriorating economic conditions
C) a surprisingly healthy government surplus that was neither funding internal
investment nor external debt service
D) all of the above
If a financial manager with an interest liability on a future date were to sell Futures and
interest rates end up going down, the position outcome would be:
A) Futures price falls; short earns a profit.
B) Futures price rises; short earns a loss.
C) Future price falls; long earns a loss.
D) Futures price rises; long earns a profit.
Toyota Motor Company operates in many different countries and pays taxes at many
different rates. However, they always pay the same rate as their local competitors.
Toyota Motor Company is operating in an environment of ________ tax policy.
A) domestic neutrality
B) foreign neutrality
C) territorial approach
D) none of the above
The travel services provided to international travelers by United Airlines would be
recorded in the current account subcategory of:
A) services trade.
B) income trade.
C) goods trade.
D) current transfers.
Which of the following is a way in which the euro affects markets?
A) Countries within the Euro zone enjoy cheaper transaction costs.
B) Currency risks and costs related to exchange rate uncertainty are reduced.
C) Consumers and business enjoy price transparency and increased price-based
competition.
D) all of the above
Blocked funds are cash flows that:
A) come in regular intervals in standardized amounts or blocks.
B) have been restricted in transfer out of a local country.
C) come from a certain sector or region of the world.
D) none of the above
