Moody’s rates international bonds at the request of the issuer with the stipulation that
Moody’s will publish the ratings even if the ratings are unfavorable.
TRANSACTION exposure measures gains or losses that arise from the settlement of
existing financial obligations whose terms are stated in a foreign currency.
A MNEs marginal cost of capital is constant for considerable ranges in its capital
budget, but this statement cannot be made for most domestic firms.
Swap rates are derived from the yield curves in each major currency.
One case of inversion is when a U.S. company is merged with a large foreign firm and
the new combined entity is incorporated in the foreign country. The added stipulation to
be a valid inversion is that the previous U.S. ownership must have a position of less
than 80% ownership in the new combined entity.
The majority of the option premium is lost in the final days prior to expiration.
In general, NDF markets normally develop for country currencies having large
cross-border capital movements, but still subject to convertibility restrictions.
According to the terminology associated with changes in currency values, depreciation
is a case when a currency’s value relative to other currencies is changed by a
government.
The biggest advantage of the current rate method of reporting translation adjustments is
the fact that the gain or loss goes directly to the reserve account on the consolidated
balance sheet and does not pass through the consolidated income statement.
The more efficient the foreign exchange market is, the more likely it is that exchange
rate movements are random walks.
The temporal method of foreign currency translation gains or losses resulting from
remeasurement are carried directly to current consolidated income and thus introduces
volatility to consolidated earnings.
The first owner of the bankers’ acceptance created from an international trade
transaction will be the importer, who receives the endorsed draft back after the bank has
stamped it “accepted.”
The growth in the influence and self-enrichment of organizational insiders is seen as an
impediment to the growth of financial globalization in general.
The single most important element of technical analysis is that future exchange rates are
based on the current exchange rate.
Local partners in a foreign country and in a joint venture with an MNE are likely to
make decisions that maximize the value of the subsidiary. Such actions probably will
not maximize the value of the entire firm.
Systematic risk can be eliminated through portfolio diversification.
According to the authors, dual classes of voting stock are the norm in
non-Anglo-American markets.
A country’s overall level of interest rates should have an impact on the financial account
of the BOP. Relatively low real interest rates should normally stimulate an outflow of
capital seeking higher interest rates in other country currencies.
The fall in the value of the domestic currency will sharply reduce the purchasing power
of foreign tourists in the country whose currency values are falling.
Hedging transaction exposure with option contracts allows the firm to benefit if
exchange rates are favorable but protects the firm if exchange rates turn unfavorable.
Moody’s assesses the investor’s risk caused by changing exchange rates in the
investment.
The Foreign Credit Insurance Association is a branch of the U.S. federal government.
For purposes of international capital budgeting, evaluation of a project from the
PARENT viewpoint serves some useful purposes, but it should be subordinated to
evaluation from the LOCAL’s viewpoint.
Significant amounts of United States Treasury issues are purchased by foreign
investors, therefore the U.S. must earn foreign currency to repay this debt.
Currency trading lacks profitability for large commercial and investment banks but is
maintained as a service for corporate and institutional customers.
Financial practice suggests that there is a range for an optimal capital structure for a
firm within an industry rather than a specific optimal ratio of debt to equity.
The asset market approach to forecasting is not applicable to emerging markets.
Dollarization is a common solution for countries suffering from currency revaluation.
The Bretton Woods era realized a great expansion of international trade in goods and
services.
The level of debt places an enormous burden on cash flow for debt service and requires
a number of additional levels of risk reduction.
The biggest problem that China faces in maintaining a stable value for their currency,
the yuan, is their lack of foreign exchange reserves.
Agency theory states that unsystematic risk can be eliminated through diversification.
Bretton Woods required less in the way of cooperation among countries than did the
gold standard.
Technical analysts, traditionally referred to as chartists, focus on fundamental data to
determine past trends that are expected to continue into the future.
A firm with fixed-rate debt that expects interest rates to fall may engage in a swap
agreement to:
A) pay fixed-rate interest and receive floating rate interest.
B) pay floating rate and receive fixed rate.
C) pay fixed rate and receive fixed rate.
D) pay floating rate and receive floating rate.
By 2001, crisis conditions had revealed three very important underlying problems
Argentina’s economy EXCEPT:
A) The Argentine peso was overvalued.
B) The currency board regime had eliminated monetary policy alternatives for
macroeconomic policy.
C) The printing of paper money without restrictions, resulting in hyperinflation.
D) The Argentina government budget deficit was out of control – government spending
continued to increased but tax receipts did not.
If a firm’s subsidiary is using the local currency as the functional currency, which of the
following is NOT a circumstance that could justify the use of a balance sheet hedge?
A) The foreign subsidiary is about to be liquidated, so that the value of its Cumulative
Translation Adjustment (CTA) would be realized.
B) The firm has debt covenants or bank agreements that state the firm’s debt/equity
ratio will be maintained within specific limits.
C) The foreign subsidiary is operating is a hyperinflationary environment.
D) All of the above are appropriate reasons to use a balance sheet hedge.
In determining why a firm becomes multinational there are many reasons. One reason is
that the firm is a market seeker. Which of the following is NOT a reason why
market-seeking firms produce in foreign countries?
A) satisfaction of local demand in the foreign country
B) satisfaction of local demand in the domestic markets
C) political safety and small likelihood of government expropriation of assets
D) All of the above are market-seeking activities.
For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4, after
an increase in annual volatility of 1 percent point – for example from 10% to 11% – the
new optiom premium would be:
A) $0.036/£.
B) $0.037/£.
C) $0.004/£.
D) $1.54/£.
________ is the possibility that the borrower’s creditworthiness is reclassified by the
lender at the time of renewing credit. ________ is the risk of changes in interest rates
charged at the time a financial contract rate is set.
A) Credit risk; Interest rate risk
B) Repricing risk; Credit risk
C) Interest rate risk; Credit risk
D) Credit risk; Repricing risk
A call option whose exercise price is less than the spot price is said to be:
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) under-the-spot.
Which of the following is NOT a contributing factor to the segmentation of capital
markets?
A) lack of transparency
B) asymmetric availability of information
C) insider trading
D) All of the above are contributing factors.
The United States taxes all earnings on U.S. soil by both domestic and foreign firms.
This is an example of a ________ approach to levying taxes.
A) worldwide
B) neutral
C) territorial
D) none of the above
Interest spreads in the eurocurrency market are small for many reasons EXCEPT:
A) Eurocurrency loans are secured loans.
B) Eurocurrency deposits and loans are made in amounts of $500,000 or more on an
unsecured basis.
C) The eurocurrency is a wholesale market.
D) Borrowers are usually large corporations or government entities.
Which of the following purposes is NOT served by the bill of lading?
A) It acts as a receipt.
B) It acts as a contract.
C) It acts as a document of title.
D) It acts as all of the above.
For financial reporting purposes, U.S. firms must consolidate the earnings of any
subsidiary that is over ________ owned.
A) 20%
B) 40%
C) 50%
D) 75%
The potential exposure that any individual firm bears that the second party to any
financial contract will be unable to fulfill its obligations under the contract is called:
A) interest rate risk.
B) credit risk.
C) counterparty risk.
D) clearinghouse risk.
Which one of the following management techniques is likely to best offset the risk of
long-run exposure to payables denominated in a particular foreign currency?
A) Borrow money in the foreign currency in question.
B) Lend money in the foreign currency in question.
C) Rely on the Federal Reserve Board to enact monetary policy favorable to your
exposure risk.
D) none of the above
The exporter-importer relationship to a corporation of a foreign importer that has not
previously conducted business with the firm would be an:
A) unaffiliated known.
B) affiliated party.
C) unaffiliated unknown.
D) any of the above
Which of the following is NOT true regarding nondeliverable forward (NDF) contracts?
A) NDFs are used primarily for emerging market currencies.
B) Pricing of NDFs reflects basic interest rate differentials plus an additional premium
charged for dollar settlement.
C) NDFs can only be traded by central banks.
D) All of the above are true.
In some respects, internationally diversified portfolios are different from a domestic
portfolio because:
A) investors may also acquire foreign exchange risk.
B) international portfolio diversification increases expected return but does not decrease
risk.
C) investors must leave the country to acquire foreign securities.
D) all of the above
Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a
corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year
period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to
be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit
annually. The current one-year rate is 5%.
Refer to Instruction 8.1. Which strategy (strategies) will eliminate credit risk?
A) Strategy #1
B) Strategy #2
C) Strategy #3
D) Strategies #1 and #2
The ________ is a derivative forward contract that was created in the 1990s. It has the
same characteristics and documentation requirements as traditional forward contracts
except that they are only settled in U.S. dollars and the foreign currency involved in the
transaction is not delivered.
A) nondeliverable forward
B) dollar only forward
C) virtual forward
D) internet forward
Which of the following is NOT true regarding the market for foreign exchange?
A) The market provides the physical and institutional structure through which the
money of one country is exchanged for another.
B) The rate of exchange is determined in the market.
C) Foreign exchange transactions are physically completed in the foreign exchange
market.
D) All of the above are true.
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 total Cypress can expect to receive if the firm
takes payment today?
A) $993,000
B) $995,000
C) $988,000
D) $996,000
The financial account consists COMPLETELY of which four components?
A) stock investment, bond investment, derivative investment, and mutual fund
investment
B) direct investment, stock investment, net financial derivatives, and bond investment
C) direct investment, portfolio investment, net financial derivatives, and other asset
investment
D) mutual fund investment, portfolio investment, derivative investment, and stock
investment
According to your authors, the main purpose of translation is:
A) to prepare consolidated financial statements.
B) to help management assess the performance of foreign subsidiaries.
C) to act as an interpreter for managers without foreign language skills.
D) none of the above
If we set the real effective exchange rate index between Canada and the United States
equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112.6, then
from a competitive perspective the U.S. dollar is:
A) overvalued.
B) undervalued.
C) very competitive.
D) There is not enough information to answer this question.
The 80% rule added in the American Jobs Creation Act (AJCA) of 2004 makes less
likely that the former parent company would continue to be treated as domestic.
Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a
corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year
period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to
be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit
annually. The current one-year rate is 5%.
Refer to Instruction 8.1. After the fact, under which set of circumstances would you
prefer strategy #3? (Assume your firm is borrowing money.)
A) Your credit rating stayed the same and interest rates went up.
B) Your credit rating stayed the same and interest rates went down.
C) Your credit rating improved and interest rates went down.
D) Not enough information to make a judgment.
Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The
proportion of net income paid back to the parent company as a dividend would be
recorded in the current account subcategory of:
A) services trade.
B) income trade.
C) goods trade.
D) current transfers.
The authors identify two tiers of foreign exchange markets:
A) bank and nonbank foreign exchange.
B) commercial and investment transactions.
C) interbank and client markets.
D) client and retail market.
Which of the following is the typical first step sourcing capital abroad?
A) an international bond issue placed on a more prestigious foreign market
B) an international bond issue in the eurobond market
C) an international bond issue placed on a less prestigious foreign market
D) issue equity in one of the less prestigious markets to attract the attention of
international investors first
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 NPV of the European expansion if Velo Rapid
Revolutions first computes the NPV in euros and then converts that figure to dollars
using the current spot rate?
A) $1,520,000
B) $1,684,210
C) -$75,310
D) -$71,544
TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to
an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and
the Euro appreciates against the dollar from $1.40/€ at the time the loan was made to
$1.45/€ at the end of the first year, how much interest will TropiKana pay at the end of
the first year (rounded)?
A) $55,000
B) $79,750
C) $77,000
D) $37,931