CHAPTER 17—MULTINATIONAL FINANCIAL MANAGEMENT
TRUE/FALSE
1. Multinational financial management requires that financial analysts consider the effects of changing
currency values.
2. Legal and economic differences among countries, although important, do NOT pose significant
problems for most multinational corporations when they coordinate and control worldwide operations
of subsidiaries.
3. Exchange rate quotations consist solely of direct quotations.
4. Calculating a currency cross rate involves determining the exchange rate for two currencies by using a
third currency as a base.
5. When the value of the U.S. dollar appreciates against another country’s currency, we may purchase
more of the foreign currency with a dollar.
6. If the United States is running a deficit trade balance with China, then in a free market we would
expect the value of the Chinese yuan to depreciate against the U.S. dollar.
7. The United States and most other major industrialized nations currently operate under a system of
floating exchange rates.
8. Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent
company’s currency, will be worth less than was originally projected because of exchange rate
changes.
9. A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
10. The Eurodollar market is essentially a long-term market; most loans and deposits in this market have
maturities longer than one year.
11. LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered
by London banks to smaller U.S. corporations.
12. Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate
financial analysis.
13. Credit policy for multinational firms is generally more risky due in part to the additional consideration
of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign
customers.
14. Due to advanced communications technology and the standardization of general procedures, working
capital management for multinational firms is no more complex than it is for large domestic firms.
15. Exchange rates influence a multinational firm’s inventory policy because changing currency values can
affect the value of inventory.
16. The threat of expropriation creates an incentive for the multinational firm to minimize inventory
holdings in certain countries and to bring in goods only as needed.
17. Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure.
Essentially, the process involves simultaneously selling the currency expected to appreciate in value
and buying the currency expected to depreciate.
18. If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot
market, then the forward currency is said to be selling at a discount to the spot rate.
19. If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market,
then the forward currency is said to be selling at a premium to the spot rate.
20. A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate
approximately equal to the amount by which its inflation rate exceeds that of the United States.
21. The interest rate paid on Eurodollar deposits depends on the particular bank’s lending rate and on rates
available on U.S. money market instruments.
22. The cash flows relevant for a foreign investment should, from the parent company‘s perspective,
include the financial cash flows that the subsidiary can legally send back to the parent company plus
the cash flows that must remain in the foreign country.
23. The cost of capital may be different for a foreign project than for an equivalent domestic project
because foreign projects may be more or less risky.
24. When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk
and political risk while lower risk might result from international diversification.
MULTIPLE CHOICE
25. Which of the following is NOT a reason why companies move into international operations?
a.
To develop new markets for the firm’s products.
b.
To better serve their primary customers.
c.
Because important raw materials are located abroad.
d.
To increase their inventory levels.
e.
To take advantage of lower production costs in regions where labor costs are relatively
low.
26. If the inflation rate in the United States is greater than the inflation rate in Britain, other things held
constant, the British pound will
a.
Depreciate against the U.S. dollar.
b.
Remain unchanged against the U.S. dollar.
c.
Appreciate against other major currencies.
d.
Appreciate against the dollar and other major currencies.
e.
Appreciate against the U.S. dollar.
27. In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized
return. In the United States, 90-day securities have a 4% annualized return and 180-day securities have
an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated
in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the
following statements is most CORRECT?
a.
The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day
forward market.
b.
The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange
rate in the 180-day forward market.
c.
The spot rate equals the 90-day forward rate.
d.
The spot rate equals the 180-day forward rate.
e.
The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day
forward market.
28. Which of the following statements is NOT CORRECT?
a.
Foreign bonds and Eurobonds are two important types of international bonds.
b.
Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of
the country in which the issue is sold.
c.
The term Eurobond applies only to foreign bonds denominated in U.S. currency.
d.
A foreign bond might pay a higher nominal interest rate than a U.S. bond.
e.
Any bond sold outside the country of the borrower is called an international bond.
29. If it takes $0.71 U.S. dollars to purchase one Swiss franc, how many Swiss francs can one U.S. dollar
buy?
a.
0.50
b.
0.71
c.
1.00
d.
1.41
e.
2.81
30. If 1.64 Canadian dollars can purchase one U.S. dollar, how many U.S. dollars can you purchase for
one Canadian dollar?
a.
0.37
b.
0.61
c.
1.00
d.
1.64
e.
3.28
31. Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen
depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
a.
155.5 yen
b.
144.0 yen
c.
133.5 yen
d.
78.0 yen
e.
72.0 yen
32. Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an
equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners.
If 9% after-tax is the investor’s required return, what before-tax rate would the domestic bond need to
pay to provide the required after-tax return?
a.
9.00%
b.
10.20%
c.
11.28%
d.
12.50%
e.
13.57%
33. Suppose Yates Inc., a U.S. exporter, sold a consignment of antique American muscle-cars to a
Japanese customer at a price of 143.5 million yen, when the exchange rate was 140 yen per dollar. In
order to close the sale, Yates agreed to make the bill payable in yen, thus agreeing to take some
exchange rate risk for the transaction. The terms were net 6 months. If the yen fell against the dollar
such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would Yates
actually receive after it exchanged yen for U.S. dollars?
a.
$1,075,958
b.
$1,025,000
c.
$1,000,000
d.
$975,610
e.
$929,404
34. Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange
rate between the U.S. dollar and the euro is $1.00 = 1.64 euros. What is the cross-rate of Swiss francs
to euros?
a.
0.43
b.
0.86
c.
1.41
d.
1.64
e.
2.27
35. Suppose that 1 British pound currently equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss
francs. What is the cross exchange rate between the pound and the franc?
a.
1 British pound equals 3.2400 Swiss francs
b.
1 British pound equals 2.6244 Swiss francs
c.
1 British pound equals 1.8588 Swiss francs
d.
1 British pound equals 1.0000 Swiss francs
e.
1 British pound equals 0.3810 Swiss francs
36. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97
shekels per dollar, then the forward rate for the Israeli shekel is selling at a ____ to the spot rate.
a.
premium of 8%
b.
premium of 18%
c.
discount of 18%
d.
discount of 8%
e.
premium of 16%
37. In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still sold
for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the
car be selling for today in U.S. dollars?
a.
$5.964
b.
$8,200
c.
$10,250
d.
$12,628
e.
$13,525
38. Suppose it takes 1.82 U.S. dollars today to purchase one British pound in the foreign exchange market,
and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over
the next 30 days. How many dollars will a pound buy in 30 days?
a.
1.12
b.
1.63
c.
1.82
d.
2.04
e.
3.64
39. A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for
39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase
are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to
eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward
rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm
have saved or lost in U.S. dollars by hedging its exchange rate exposure?
a.
−$396
b.
−$243
c.
$0
d.
$243
e.
$638
40. Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day)
return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly
(90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity
holds, what is the spot exchange rate?
a.
1 pound = $1.8000
b.
1 pound = $1.6582
c.
1 pound = $1.0000
d.
1 pound = $0.8500
e.
1 pound = $0.6031
41. Suppose 1 U.S. dollar equals 1.60 Canadian dollars in the spot market. 6-month Canadian securities
have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities
have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is
the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?
a.
1 U.S. dollar = 0.6235 Canadian dollars
b.
1 U.S. dollar = 0.6265 Canadian dollars
c.
1 U.S. dollar = 1.0000 Canadian dollars
d.
1 U.S. dollar = 1.5961 Canadian dollars
e.
1 U.S. dollar = 1.6039 Canadian dollars
42. A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. If
purchasing power parity (PPP) holds, what is the price of the product in Switzerland?
a.
123.75 Swiss francs
b.
454.55 Swiss francs
c.
750.00 Swiss francs
d.
1,237.50 Swiss francs
e.
1,650.00 Swiss francs
43. Suppose a carton of hockey pucks sell in Canada for 105 Canadian dollars, and 1 Canadian dollar
equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey pucks in
the United States?
a.
$14.79
b.
$63.00
c.
$74.55
d.
$85.88
e.
$147.88
44. A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States.
Assuming that purchasing power parity (PPP) holds, what is the current exchange rate?
a.
1 U.S. dollar equals 0.69 Swiss francs
b.
1 U.S. dollar equals 0.85 Swiss francs
c.
1 U.S. dollar equals 1.21 Swiss francs
d.
1 U.S. dollar equals 1.29 Swiss francs
e.
1 U.S. dollar equals 1.44 Swiss francs
45. Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury bill at a price of $9,708.74,
with a maturity value of $10,000. The exchange rate at that time was 1.420 Swiss francs per dollar.
Today, at maturity, the exchange rate is 1.324 Swiss francs per dollar. What is the annualized rate of
return to the Swiss investor?
a.
−7.92%
b.
−4.13%
c.
6.00%
d.
8.25%
e.
12.00%
46. Suppose Stackpool Inc. had inventory in Britain valued at 240,000 pounds one year ago. The exchange
rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S.
dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory
value in U.S. dollars as a result of the change in exchange rates?
a.
−$240,000
b.
−$43,200
c.
$0
d.
$43,200
e.
$47,473
47. A U.S.-based company, Stewart, Inc., arranged a 2-year, $1,000,000 loan to fund a project in Mexico.
The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal
semiannual payments. The exchange rate at the time of the loan was 5.75 pesos per dollar, but it
dropped to 5.10 pesos per dollar before the first payment came due. The loan was not hedged in the
foreign exchange market. Thus, Stewart must convert U.S. funds to Mexican pesos to make its
payments. If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period,
what effective interest rate will Stewart end up paying on the loan?
a.
10.36%
b.
11.50%
c.
17.44%
d.
20.00%
e.
21.79%
48. Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign
country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of
$4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8
million. In addition, due to political risk factors, Tashakori believes that there is a 50% chance that the
gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the
government of the host country will block 20% of all cash flows. Thus, cash flows that can be
repatriated are 80% of those projected. Tashakori’s cost of capital is 15%, but it adds one percentage
point to all foreign projects to account for exchange rate risk. Under these conditions, what is the
project’s NPV?
a.
$1.01 million
b.
$2.77 million
c.
$3.09 million
d.
$5.96 million
e.
$7.39 million
49. Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for
delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The
rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange
rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the
forward market today and buys enough Mexican pesos at the 90-day forward rate to completely cover
its trade obligation. Assume the spot rate in 90 days is 5.30 Mexican pesos per U.S. dollar. How much
in U.S. dollars did the firm save by eliminating its foreign exchange currency risk with its forward
market hedge?
a.
$0
b.
$1,834.86
c.
$4,517.26
d.
$5,712.31
e.
$7,547.17