Chapter 18—INTERNATIONAL FINANCIAL MANAGEMENT
MULTIPLE CHOICE
1. Which of the following actions would not tend to increase the value of a country’s currency?
a.
relatively low interest rates
b.
government trade policies that limit imports
c.
relatively low rate of inflation
d.
restrictions on foreign exchange transactions
2. When interest rate parity exists, the forward rate will differ from the spot rate by just enough to ____.
a.
offset the difference in the real rate of return
b.
permit the buyer of a covered option to make a profit
c.
offset the interest rate differential between the two currencies
d.
result in a perfect interest rate arbitrage
3. The ____ states that the differences in interest rates between two countries should be offset by equal,
but opposite, changes in the future spot exchange rate.
a.
expectations theory
b.
interest rate parity
c.
purchasing power parity
d.
international Fisher effect
4. Which of the following is not a primary category of foreign exchange risk that multinational firms
must consider?
a.
economic exposure
b.
operating exposure
c.
translation exposure
d.
transaction exposure
5. Motorola has a contract to deliver cellular telephones in Japan in 6 months from now and the payment
for these telephones will be in Japanese yen. What type of foreign exchange risk does Motorola face?
a.
economic exposure
b.
operating exposure
c.
transaction exposure
d.
translation exposure
6. When a multinational firm has one or more foreign subsidiaries with assets and liabilities denominated
in a foreign currency, it faces ____ exposure.
a.
economic
b.
operating
c.
translation
d.
transaction
7. Under current accounting procedures, all of the following balance sheet items are translated into
dollars at the rate of exchange prevailing on the date of the balance sheet except:
a.
stockholder’s equity
b.
fixed assets
c.
current liabilities payable in a foreign currency
d.
long-term liabilities payable in a foreign currency
8. An increase in the value of a foreign currency relative to the U.S. dollar ____ the conversion value of
the foreign subsidiary’s liabilities.
a.
decreases
b.
increases
c.
has no effect on
d.
none of the above
9. To protect itself against transaction exchange rate risk, a U.S. company that purchases automobiles
from a Japanese manufacturer may use all of the following techniques except:
a.
borrow U.S. funds and invest them in interest-bearing Japanese securities
b.
execute a contract in the forward exchange market
c.
sell yen in the spot market at the time of each transaction
d.
execute a contract in the foreign exchange futures market
10. Firms engaged in international transactions incur ____ because of fluctuations in the exchange rates
among currencies.
a.
credit risk
b.
political risk
c.
market risk
d.
exchange rate risk
11. The theory of interest rate parity states that the annual percentage differential in the forward market for
a currency quoted in terms of another currency is equal to the approximate difference in ____
prevailing in the two countries.
a.
inflation rates
b.
interest rates
c.
trade deficit rates
d.
GNP growth rates
12. A European currency unit is a
a.
monetary unit used in transactions between European central banks
b.
monetary unit used in providing capital to the World Bank
c.
monetary unit used in transactions between Common Market countries
d.
composite currency whose value is based on the weighted value of several European
currencies
13. A parent company’s foreign investment risk exposure depends on the foreign subsidiary’s net ____
position.
a.
cash
b.
equity
c.
present value
d.
working capital
14. A U.S. company that purchases goods on credit from a German supplier can protect itself against
transaction exchange risk by
a.
executing a contract in the forward exchange market
b.
borrowing U.S. funds and investing in interest-bearing German securities
c.
borrowing German funds and investing in interest-bearing U.S. securities
d.
executing a contract in the forward exchange market and borrowing U.S. funds and
investing in interest-bearing German securities
15. Primary sources of demand for British pounds in the foreign exchange market include
a.
foreign buyers of British exports who must pay for their purchases in pounds
b.
foreign investors who desire to make investments in physical or financial assets in Great
Britain
c.
speculators who expect British pounds to increase in value relative to other currencies
d.
All of these answers are correct.
16. Primary sources of supply of British pounds in the foreign exchange market include:
a.
British importers who need to convert their pounds into foreign currency to pay for
purchases
b.
foreign investors who want to make investments in physical or financial assets in Great
Britain
c.
speculators who expect British pounds to increase in value relative to other currencies
d.
speculators who expect British pounds to decrease in value relative to other currencies
17. Government trade policies that restrict imports into a country tend to ____ the supply of the country’s
currency in the foreign exchange market and tend to ____ the value of the country’s currency with
respect to other currencies.
a.
increase, decrease
b.
increase, increase
c.
decrease, decrease
d.
decrease, increase
18. Which of the following trade policies will tend to decrease the supply of the country’s currency in the
foreign exchange market?
a.
imposition of tariffs
b.
imposition of export quotas
c.
financing exports with low interest loans
d.
imposition of tariffs and quotas
19. When the Federal Reserve (acting through member commercial banks) sells U.S. dollars in the foreign
exchange market, it ____ the supply of U.S. dollars and hence tends to ____ the value of the U.S.
dollar relative to other currencies.
a.
increases, raise
b.
decreases, lower
c.
increases, lower
d.
decreases, raise
20. A high rate of inflation within a country will tend to ____ the value of its currency with respect to the
currencies of other countries that are experiencing lower rates of inflation.
a.
increase
b.
decrease
c.
have no effect on
d.
cannot be determined from the information provided
21. The theory that the annual percentage differential in the forward market for a currency quoted in terms
of another currency is equal to the approximate difference in interest rates in the two countries is
known as
a.
covered interest arbitrage
b.
inflation
c.
hedging
d.
interest rate parity
22. Firms transacting business with foreign companies can lower exchange rate risk exposure by
a.
limiting transaction exposure
b.
hedging
c.
purchasing LIBORs
d.
making all their direct investments in foreign subsidiaries in one particular country
23. Basic hedging techniques include all of the following except
a.
money market hedge
b.
forward market hedge
c.
primary market hedge
d.
all are basic hedging techniques
24. In general, when a foreign subsidiary’s assets are ____ than its liabilities, ____ will occur when the
exchange rate on the currency of the country in which the foreign subsidiary operates loses value.
a.
greater, currency exchange gains
b.
greater, currency exchange losses
c.
less, nothing
d.
greater, nothing
25. A multinational firm ____.
a.
has direct investments in manufacturing facilities in more than one country
b.
exports finished goods for sale in another country
c.
imports raw materials from another country
d.
has a manufacturing representative in another country
26. The interest rate at which banks in the Eurocurrency market lend to each other is known as the
a.
Eurocurrency currency rate (ECR)
b.
London interbank offer rate
c.
exchange rate
d.
interest rate parity
27. If Japanese yen are deposited in a bank in Paris, the deposits would be called ____.
a.
Eurofrancs
b.
European currency unit
c.
Eurobond
d.
Euroyen
28. An exchange rate quoted as $1.47 per British pound is known as a ____ quote.
a.
hedge
b.
direct
c.
futures
d.
indirect
29. If the spot rate for Swiss francs is $0.6658/franc and the 180-day forward rate is $0.6637, the market is
indicating that the Swiss franc is expected to
a.
strengthen relative to the dollar
b.
weaken relative to the ECU
c.
lose value relative to the dollar over the next 6 months
d.
gain value relative to the dollar over the next 6 months
30. Which of the following is not a correct statement about foreign currency futures?
a.
futures contracts have a standardized maturity date
b.
futures contracts are an exchange-traded agreement
c.
futures contracts are not liquid
d.
futures contracts are “marked to market” daily
31. Eurodollars are U.S. dollars that have been deposited in
a.
foreign banks
b.
foreign branches of U.S. banks
c.
foreign subsidiaries
d.
foreign banks and foreign branches of U.S. banks
32. If the exchange rate from U.S. dollars to Canadian dollars is $0.80/Canadian dollar, then the exchange
rate from Canadian dollars to U.S. dollars is
a.
$0.80 Canadian $/U.S. dollar
b.
$1.25 Canadian $/U.S. dollar
c.
$1.20 Canadian $/U.S. dollar
d.
$8.00 Canadian $/U.S. dollar
33. If the exchange rate from U.S. dollars to Swiss francs is $0.20/franc, then the exchange rate from
francs to dollars is
a.
0.20 francs/dollar
b.
0.80 francs/dollar
c.
5.0 francs/dollar
d.
2.0 francs/dollar
34. If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717,
then the Yen is trading at a(n) ____.
a.
expected gain
b.
premium
c.
reciprocal
d.
discount
35. If the forward (direct quote) exchange rate is lower than the spot rate, then the currency is said to be
trading at a ____.
a.
forward premium
b.
forward gain
c.
forward discount
d.
forward loss
36. If the spot rate for the British pound is $1.5077 and the 180-day forward rate is $1.4934, what is the
annualized premium (discount)?
a.
premium of 1.90%
b.
premium of 0.97%
c.
discount of -1.90%
d.
discount of -0.97%
37. If the spot rate for the Japanese yen is $0.009204 and the 90-day forward rate is $0.009227, what is the
annualized premium (discount)?
a.
premium of 1.00%
b.
premium of 0.50%
c.
discount of -0.99%
d.
premium of 0.25%
38. What is the nominal interest rate in Canada if the real rate of return is 2.5% and the expected inflation
rate was 4.5%?
a.
7.00%
b.
6.89%
c.
7.11%
d.
7.07%
39. If U.S. prices are expected to rise by 3 percent over the coming year and prices in France are expected
to rise by 7 percent during the same time, what is the expected spot rate in one year of the French franc
given that the current spot exchange rate is $0.168?
a.
$0.1612
b.
$0.1613
c.
$0.1617
d.
$0.1745
40. If one year U.S. nominal interest rates are 4 percent, one-year German nominal interest rates are 7.5
percent, and the current spot exchange rate, S0, is $0.587, then the expected spot rate in one year will
be:
a.
$0.568
b.
$0.607
c.
$0.564
d.
$0.573
41. Crown Honda purchased one of its most popular models for 965,600 yen. The exchange rate for the
yen was 142 yen per U.S. dollar at the time of purchase but then rose to 171.8 yen by the time payment
was made. What was the dealer’s gain or loss on the change in rates?
a.
gain of $1,180
b.
loss of $1,427
c.
loss of $1,180
d.
gain of $1,427
42. HBA Limited purchased several Mercedes Benz automobiles from its German broker. The contract
was for 10,000,000 euros, due in 180 days. The present exchange rate is $0.51 per euro and the 180
day forward rate is $0.514. If the rate actually goes to $0.50 in 180 days, what is the dollar gain or loss
incurred if no hedge is taken relative to a hedged position?
a.
$392,157 gain
b.
$ 40,000 loss
c.
$100,000 gain
d.
$140,000
43. If the 182-day interest rate is 1.75 percent in the U.S. and 2.625 percent in Germany, and the current
spot exchange rate between dollars and euros is $0.583, what will the 180-day forward rate be if IRP
holds?
a.
$0.578
b.
$0.588
c.
$0.573
d.
$0.581
44. If U.S. prices are expected to rise by 3.5 percent over the coming year and prices in Great Britain are
expected to rise by 5.25 percent during the same time, what is the expected spot rate in one year given
that the current spot exchange rate is $1.497?
a.
$1.522
b.
$1.470
c.
$1.472
d.
$1.499
45. What is the real rate of return if the risk-free rate is 3.25 percent and the expected rate of inflation is
2.75 percent?
a.
0.50%
b.
0.51%
c.
0.487%
d.
1.49%
46. What is the real rate of return if the risk-free rate is 4 percent and the expected rate of inflation is 2.5
percent?
a.
0.43%
b.
1.50%
c.
6.35%
d.
1.46%
47. The (6 month) interest rate on 180 day U.S. Treasury bills is 7.64%. In the foreign exchange markets,
the spot rate between U.S. dollars and British pounds is 1 pound = $1.5525. The 180-day (6 month)
forward rate is 1 pound = $1.5188. Determine the expected rate of interest on 6 month British
government debt securities, assuming interest rate parity between the dollar and pound exists.
a.
13.52%
b.
5.47%
c.
7.31%
d.
10.03%
48. The 6 month interest rate on 180 day U.S. Treasury Bills is 7.5 percent. In the foreign exchange
markets, the spot rate between U.S. dollars and Australian dollars is 1 Australian dollar = $0.452 and
the 180 day (6 month) forward rate is 1 mark = $0.46. Determine the expected rate of interest on 6
month Australian government debt securities, assuming that the interest rate parity between the U.S.
dollar and Australian dollar exists.
a.
7.35%
b.
1.77%
c.
5.63%
d.
3.82%
49. If the spot rate (in U.S. dollars) for the Australian dollar is $0.559 and the 180 day forward rate is
trading at a premium of 2.86%, then the 180 day forward rate is:
a.
$0.551
b.
$0.567
c.
$0.575
d.
$0.583
50. If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717,
then the Yen is trading at an annualized
a.
premium of 4.04%
b.
premium of 3.98%
c.
premium of 3.91%
d.
discount of 3.89%
ESSAY
1. What is the difference between a spot rate and a forward rate?
2. List some factors that affect exchange rates.