Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
As a foreign exchange hedging tool, options have all of the following characteristics EXCEPT
1)
A)
specifies price.
B)
the right to buy or sell an amount of foreign currency.
C)
specifies time period.
D)
represents an obligation to buy or sell.
2)
The risk attached to international cash flows are all of the following EXCEPT
2)
A)
inflation and foreign exchange risks.
B)
business and financial risks.
C)
political risks.
D)
risk of local management.
D
3)
The risk resulting from the effects of changes in foreign exchange rates on the firm’s value is
3)
A)
macro political risk.
B)
economic exposure.
C)
accounting exposure.
D)
micro political risk.
B
4)
If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of
inflation is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per
Euro exchange rate in one year?
4)
A)
0.7955
B)
1.145
C)
0.8730
D)
1.257
B
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D
5)
When fewer units of a foreign currency are required to buy one euro, the currency is said to have
________ with respect to the euro.
5)
A)
depreciated
B)
consolidated
C)
remained fixed
D)
appreciated
6)
The risk of an investment in a Eurodollar deposit is partially due to
6)
A)
the fact that these instruments only pay interest at maturity.
B)
the fact that the center of the Eurodollar market is in London.
C)
the presence of some foreign exchange risk.
D)
the fact that the majority of these deposits are not in the form of U.S. dollars.
7)
As a foreign exchange hedge, currency swaps have all of the following characteristics EXCEPT
7)
A)
principal amounts are reversed at the spot rate at maturity.
B)
principal amounts are reversed at a pre–agreed rate at maturity.
C)
an initial exchange by two parties of two principal amounts in two different currencies.
D)
each party pays the other’s interest payment.
8)
If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of
inflation is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per
Euro exchange rate in one year?
8)
A)
1.257
B)
1.145
C)
0.8730
D)
0.7955
9)
Foreign exchange risk refers to the risk created by ________.
9)
A)
the potential seizure of an MNC’s operations in a host country.
B)
the varying exchange rate between two currencies.
C)
the potential nationalization of the MNC’s operations by a host government.
D)
the fixed exchange rate between two currencies.
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10)
Between two major currencies, the spot exchange rate is the rate ________ and the forward
exchange rate is the rate ________.
10)
A)
at some specified future date; today
B)
on that date; at some specified future date
C)
today; on that date
D)
on that date; today
11)
If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the exchange rate
between the U.S. dollar and the Japanese yet is 120 Yen per dollar, then what is the Euro per Yen
exchange rate?
11)
A)
144.00
B)
100.00
C)
0.0100
D)
0.0069
12)
For ________ currencies, changes in the value of foreign exchange rates are called ________.
12)
A)
floating; revaluation or devaluation
B)
floating; appreciation
C)
fixed; appreciation or depreciation
D)
fixed; revaluation or devaluation
13)
All of the following are considered to be major or “hard” currencies EXCEPT
13)
A)
the Japanese yen.
B)
the U.S. dollar.
C)
the Mexican peso.
D)
the British pound.
14)
The risk resulting from the effects of changes in foreign exchange rates on the translated value of a
firm’s accounts denominated in a given foreign currency is
14)
A)
economic exposure.
B)
accounting exposure.
C)
micro political risk.
D)
macro political risk.
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TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
15)
Three basic types of risk associated with international cash flows are 1) business and financial risks,
2) inflation and foreign exchange risks, and 3) political risks.
15)
16)
In doing business in foreign countries, financing operations in the local market not only improves
the company’s business ties to the host community but also minimizes exchange rate risk.
16)
17)
The functional currency is the currency of the economic environment in which a business entity
primarily generates and expends cash, and in which its accounts are maintained.
17)
18)
When more units of a foreign currency are required to buy one euro, the currency is said to have
appreciated with respect to the euro.
18)
19)
Countries that experience high inflation rates will see their currencies decline in value relative to
the currencies of countries with lower inflation rates.
19)
20)
The forward exchange rate is the rate of exchange between two currencies on any given day.
20)
21)
Exchange rate risk hedging tools include Monte Carlo swaps, synthetic insurance contracts, and
inventory swaps.
21)
22)
Economic exposure is the risk resulting from the effects of changes in foreign exchange rates on the
firm’s value.
22)
23)
Although several economic and political factors can influence foreign exchange rate movements, by
far the most important explanation for long–term changes in exchange rates is a differing inflation
rate between two countries.
23)
24)
The spot exchange rate is the rate of exchange between two currencies at some specified future date.
24)
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25)
Fluctuations in foreign exchange markets can affect foreign revenues and profits of a multinational
company, but they have no impact on its overall value.
25)
26)
Exchange rate risk hedging tools include forward contracts, options, interest rate swaps, currency
swaps, and hybrid securities.
26)
27)
When more units of a foreign currency are required to buy one euro, the currency is said to have
appreciated with respect to the euro.
27)
28)
Hedging strategies are techniques used to offset or protect against risk; in the international context
these include borrowing or lending in different currencies, undertaking contracts in the forward,
futures, and/or options markets, and also swapping assets/liabilities with other parties.
28)
29)
Although several economic and political factors can influence foreign exchange rate movements, by
far the most important explanation for long–term changes in exchange rates is fiscal policy that a
country adopts.
29)
30)
In international trade when a U.S. company sells a product in France, the U.S. company experiences
an exchange rate gain if the franc depreciates against the dollar before the U.S. exporter collects on
its accounts receivable.
30)
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Answer Key
Testname: C25
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