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In a typical international trade transaction, the order of activity would be which of the
following?
A) The foreign buyer places an order; The domestic manufacturer ships to the buyer;
The manufacturer's bank presents a draft and documents to the buyer's bank for
acceptance; The buyer's bank submits payment to the manufacturer's bank.
B) The domestic manufacturer ships to the buyer; The buyer's bank submits payment to
the manufacturer's bank; The foreign buyer places an order; The domestic manufacturer
ships to the buyer; The manufacturer's bank presents a draft and documents to the
buyer's bank for acceptance.
C) The foreign buyer places an order; The manufacturer's bank presents a draft and
documents to the buyer's bank for acceptance; The domestic manufacturer ships to the
buyer; The buyer's bank submits payment to the manufacturer's bank.
D) The domestic manufacturer ships to the buyer; The manufacturer's bank presents a
draft and documents to the buyer's bank for acceptance; The foreign buyer places an
order; The buyer's bank submits payment to the manufacturer's bank.
Losses from ________ exposure generally reduce taxable income in the year they are
realized. ________ exposure losses may reduce taxes over a series of years.
A) accounting; Operating
B) operating; Transaction
C) transaction; Operating
D) transaction; Accounting
The stakeholder capitalism model:
A) typically avoids the flaw of impatient capital.
B) tries to meet the desires of multiple stakeholders.
C) may leave management without a clear signal about tradeoffs among the several
stakeholders.
D) all of the above
Which of the following is generally NOT considered to be a viable operational goal for
a firm?
A) maintaining a strong local currency
B) maximization of after-tax income
C) minimization of the firm's effective global tax burden
D) correct positioning of the firm's income, cash flows and available funds as to country
and currency
TropiKana Inc., a U.S firm, has just borrowed $1,000,000 to make improvements to an
Italian fruit plantation and processing plant. If the interest rate is 6.00% per year, how
much interest will they pay in the first year?
A) $6,000
B) $60,000
C) $600,000
D) €60,000
Which of the following is NOT an advantage of cross-border acquisitions over
greenfield investments?
A) quicker
B) cost-effective
C) target firms to be undervalued
D) melding corporate cultures
In some respects, internationally diversified portfolios are the same in principle as a
domestic portfolio because:
A) the investor is attempting to combine assets that are perfectly correlated.
B) investors are trying to reduce systematic risk.
C) investors are trying to reduce the total risk of the portfolio.
D) all of the above
Empirical studies indicate that MNEs have higher costs of capital than purely domestic
firms. This could be due to higher levels of:
A) political risk.
B) exchange rate risk.
C) agency costs.
D) all of the above
For a $1.50/£ call option with an initial premium of $0.033/£ and a rho value of 0.2,
after an increase in the U.S. dollar rate from 8% to 9% - the new ATM optiom premium
would be:
A) $0.037/£.
B) $1.55/£.
C) $0.036/£.
D) $0.035/£.
Which of the following is NOT true regarding behavioral observations of firms making
a decision to invest internationally?
A) MNEs initially invest in countries with a similar "national psychic."
B) Firms eventually take greater risks in terms of the national psychic of countries in
which they invest.
C) Initial investments tend to be much larger than subsequent ones.
D) All of the above have been observed.
A foreign currency ________ option gives the holder the right to ________ a foreign
currency, whereas a foreign currency ________ option gives the holder the right to
________ an option.
A) call, buy, put, sell
B) call, sell, put, buy
C) put, hold, call, release
D) none of the above
Which of the following is NOT an example of a country-specific risk?
A) transfer risk
B) war and ethnic strife
C) cultural and religious heritage
D) All of the above are examples of country-specific risk.
Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign
currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$
and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to
¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot
price and sells within the next six months at ¥128/$, he will earn a profit of:
A) $146.09.
B) $101,460.94.
C) $1460.94.
D) nothing; he will lose money
As an option moves further in-the-money delta moves toward _______.
A) 0
B) -1
C) 1
D) large numbers
________ seek to profit from trading in the market itself rather than having the foreign
exchange transaction being incidental to the execution of a commercial or investment
transaction.
A) Speculators and arbitrageurs
B) Foreign exchange brokers
C) Central banks
D) Treasuries
Unsystematic risk can be defined as:
A) the total risk to the firm.
B) the risk of the individual security.
C) the added risk that a firm's shares bring to a diversified portfolio.
D) the risk of the market in general.
The ________ of the balance of payments measures all international economic
transactions of financial assets.
A) current account
B) merchandise trade account
C) services account
D) capital and financial accounts
Which of the following is NOT an example of diversifying operations?
A) diversifying sales
B) diversifying location of operations
C) raising funds in more than one country
D) sourcing raw materials in more than one country
The combination of a letter of credit, a sight draft, and an order bill of lading protect
both parties in international transactions from which of the following?
A) the risk of noncompletion
B) the risk of foreign exchange risk (when combined with a various hedging
techniques)
C) the risk that financing will not be available due to foreign exchange risk
D) All of these risks are reduced when using these trade implements.
The eurobond market owes its existence to all of the following reasons unique factors
EXCEPT:
A) free bond ratings
B) the absence of regulatory interference
C) less stringent disclosure practices
D) favorable tax treatment
Consider two different foreign subsidiaries of Georgia-Pacific Wood Products Inc. The
first subsidiary mills trees in Canada and ships its entire product to the Georgia-Pacific
U.S. The second subsidiary is also owned by the parent firm but is located in Japan and
retails tropical hardwood furniture that it buys from many different sources. The first
subsidiary is likely a/an ________ foreign entity with most of its cash flows in U.S.
dollars, and the second subsidiary is more of a/an ________ foreign entity.
A) domestic; integrated
B) self-sustaining; domestic
C) integrated; self-sustaining
D) self-sustaining; integrated
The ________ approach argues that equilibrium exchange rates are achieved when the
net inflow of foreign exchange arising from current account activities is equal to the net
outflow of foreign exchange arising from financial account activities.
A) balance of payments
B) monetary
C) asset market
D) law of one price
When categorizing investments for the financial account component of the balance of
payments the ________ is an investment where the investor has no control whereas the
________ is an investment where the investor has control over the asset.
A) direct investment; portfolio investment
B) direct investment; indirect investment
C) portfolio investment; indirect investment
D) portfolio investment; direct investment
Other things equal, a firm that must obtain its long-term debt and equity in a highly
illiquid domestic securities market will probably have a:
A) relatively low cost of capital.
B) relatively high cost of capital.
C) relatively average cost of capital.
D) cost of capital that we cannot estimate from this question.
The stages in the life of a transaction exposure can be broken into three distinct time
periods. The first time period is the time between quoting a price and reaching an actual
sale agreement or contract. The next time period is the time lag between taking an order
and actually filling or delivering it. Finally, the time it takes to get paid after delivering
the product. In order, these stages of transaction exposure may be identified as:
A) backlog, quotation, and billing exposure.
B) billing, backlog, and quotation exposure.
C) quotation, backlog, and billing exposure.
D) quotation, billing, and backlog exposure.
________ states that the spot exchange rate should change in an equal amount but in the
opposite direction to the difference in interest rates between two countries.
A) Fisher-open
B) Fisher-closed
C) The Fisher Effect
D) none of the above
Of the following capital budgeting decision criteria, which does NOT use discounted
cash flows?
A) net present value
B) internal rate of return
C) accounting rate of return
D) All of these techniques typically use discounted cash flows.
Which of the following would NOT be considered a typical BOP transaction?
A) Toyota U.S.A. is a U.S. distributor of automobiles manufactured in Japan by its
parent company.
B) The U.S. subsidiary of European financial giant, Credit Suisse, pays dividends to its
parent in Zurich.
C) A U.S. tourist purchases gifts at a museum in London.
D) All are example of BOP transactions.
Instruction 18.1:
Use the information to answer the following question(s).
The Velo Rapid Revolutions Inc., a company that produces bicycles, elliptical trainers,
scooters and other wheeled non-motorized recreational equipment is considering an
expansion of their product line to Europe. The expansion would require a purchase of
equipment with a price of euro 1,200,000 and additional installation of euro 300,000
(assume that the installation costs cannot be expensed, but rather, must be depreciated
over the life of the asset). Because this would be a new product, they will not be
replacing existing equipment. The new product line is expected to increase revenues by
euro 600,000 per year over current levels for the next 5 years, however; expenses will
also increase by euro 200,000 per year. (Note: Assume the after-tax operating cash
flows in years 1-5 are equal, and that the terminal value of the project in year 5 may
change total after-tax cash flows for that year.) The equipment is multipurpose and the
firm anticipates that they will sell it at the end of the five years for euro 500,000. The
firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is
straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial
investment (at year 0) also requires an increase in NWC of euro 100,000 (to be
recovered at the sale of the equipment at the end of five years). The current spot rate is
$0.95/euro , and the expected inflation rate in the U.S. is 4% per year and 3% per year
in Europe.
Refer to Instruction 18.1. What is the IRR of the Velo Rapid Revolutions expansion?
A) 14.4%
B) 10.3%
C) 12.0%
D) 8.6%
Refer to Table 7.1. The May call option on pounds with a strike price of 1440 mean:
A) $88/£ per contract.
B) $0.88/£.
C) $0.0088/£.
D) none of the above
A British firm and a U.S. Corporation each wish to enter into a currency swap hedging
agreement. The British firm is receiving U.S. dollars from sales in the U.S. but wants
pounds. The U.S. firm is receiving pounds from sales in Britain but wants dollars.
Which of the following choices would best satisfy the desires of the firms?
A) The British firm pays dollars to a swap dealer and receives pounds from the dealer.
The U.S. firm pays pounds to the swap dealer and receives dollars.
B) The U.S. firm pays dollars to a swap dealer and receives pounds from the dealer. The
British firm pays pounds to the swap dealer and receives dollars.
C) The British firm pays pounds to a swap dealer and receives pounds from the dealer.
The U.S. firm pays dollars to the swap dealer and receives dollars.
D) The British firm pays dollars to a swap dealer and receives dollars from the dealer.
The U.S. firm pays pounds to the swap dealer and receives pounds.
Short-term foreign exchange forecasts are often motivated by such activities as
________ whereas long-term forecasts are more likely motivated by ________.
A) long-term investment; long-term capital appreciation
B) long-term capital appreciation; desire to hedge a receivable
C) the desire to hedge a payable; the desire for long-term investment
D) the desire for long-term investment; the desire to hedge a payable
According to the Big Mac Index, the implied PPP exchange rate is Mexican peso
8.50/$1 but the actual exchange rate is peso 10.80/$1. Thus, at current exchange rates
the peso appears to be ________ by ________.
A) overvalued; approximately 21%
B) overvalued; approximately 27%
C) undervalued; approximately 21%
D) undervalued; approximately 27%
