In part because of access to global markets, MNEs are better able than their domestic
counterparts to maintain their desired debt ratio even when raising new capital.
Direct intervention for currency valuation involves limiting the ability to exchange
domestic currency for foreign currency.
The Tokyo exchange is the number one choice of firms looking to gain liquidity by
cross-listing their equity securities.
When the cross rate for currencies offered by two banks differs from the exchange rate
offered by a third bank, a triangular arbitrage opportunity exists.
The European Central Bank is a strong and independent central bank that has
completely replaced the individual central banks of the countries that use the euro as
their currency.
Even though contracts are often fixed in the short run, as time passes, prices and costs
can be changed to reflect the new competitive realities caused by a change in exchange
rates.
In the case of international trade, the risk of nonpayment is essentially eliminated with
the use of a letter of credit issued through a trustworthy bank.
The drivers of international merger and acquisitions are only MACRO in scope.
The stakeholder capitalism model assumes that only systematic risk “counts” or is a
prime concern for management.
If a firm’s expected returns are more volatile than the expected return for the market
portfolio, it will have a beta less than 1.0.
The temporal rate method is the most prevalent method today for the translation of
financial statements.
State Owned Enterprises (SOEs) by their very name cannot be traded on stock
exchanges because they are government owned.
Because of stringent SEC rules, American companies typically do not find foreign
disclosure rules to be overly onerous.
Capital market segmentation is a financial market imperfection caused mainly by
government constraints, institutional practices, and investor perceptions.
The stakeholder capitalism model does not assume that equity markets are either
efficient or inefficient.
Companies that are delisted cease to trade.
The premium or discount on forward currency exchange rates between any two
countries is visually obvious when you plot the interest rates of each country on the
same yield curve. The currency of the country with the higher yield curve should be
selling at a forward discount.
A sight draft is payable on presentation to the drawee; a time draft allows a delay in
payment.
All exchange rate regimes must deal with the trade-off between rules and discretion as
well as between cooperation and independence.
For at least the last decade, the United States has consistently run a surplus in services
trade income.
The WACC is usually used as the risk-adjusted required rate of return for new projects
that are of the same average risk as the firm’s existing projects.
One of the motivations for capital controls is to insulate an economy from foreign
political risks.
Among the G7 nations, the U.S. has a below average corporate income tax rate that
makes it attractive for other countries to invest in the U.S.
Essentially, the Eximbank lends dollars to borrowers inside the United States for the
purchase of U.S. goods and services.
Non-Anglo-American markets are dominated by the “one-vote-one-share” rule.
A revocable L/C is intended to serve as a means of arranging payment but not as a
guarantee of payment.
The authors claim that random events, institutional frictions, and technical factors may
cause currency values to deviate significantly from their long-term fundamental path.
A criticism of adjusting the discount rate to account for political risk is that adjusting
the discount rate for political risk penalizes early cash flows too heavily while not
penalizing distant cash flows enough.
A confusing “quirk” of international exchange rates occurs when calculating the
percentage change in spot rates from one period to another. The percent change in the
spot rate from one period to another when quoted using foreign currency terms is
always greater than the percent changes quoted when using home currency terms.
For individuals and firms involved in the import and export of goods and services
,using the foreign exchange market is necessary, but incidental, to their underlying
commercial or investment purpose.
Empirical studies show that the Fisher Effect works best for short-term securities.
As you might expect, the foreign exchange daily trading volume in in New York City is
roughly twice as large as the daily trading volume in London.
A foreign firm that is 20% to 49% owned by a parent is called a/an:
A) subsidiary.
B) affiliate.
C) partner.
D) rival.
The buyer (long) of a put option:
A) has a maximum loss equal to the premium paid.
B) has a gain equal to but opposite in sign to the writer of the option.
C) has maximum gain potential limited to the difference between the strike price and
the premium paid.
D) all of the above
________ make money on currency exchanges by the difference between the ________
price, or the price they offer to pay, and the ________ price, or the price at which they
offer to sell the currency.
A) Dealers; ask; bid
B) Dealers; bid; ask
C) Brokers; ask; bid
D) Brokers; bid; ask
The Phi of an option is defined as:
A) expected change in the option premium for a small change in time to expiration.
B) expected change in the option premium for a small change in volatility.
C) expected change in the option premium for a small change in the foreign interest
rate.
D) expected change in the option premium for a small change in the domestic interest
rate.
A value-added tax has gained widespread usage in Western Europe, Canada, and parts
of Latin America.
Governance risk due to goal conflict between an MNE and its host government is the
main political ________ risk.
A) firm-specific
B) country-specific
C) global-specific
D) cultural-specific
Assume the current U.S. dollar-British spot rate is 0.6993£/$. If the current nominal
one-year interest rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is
the approximate forward exchange rate for 360 days?
A) £1.42/$
B) £1.43/$
C) £0.6993/$
D) £0.7060/$
The twin agency problems limiting financial globalization are caused by these two
groups acting in their own self-interests rather than the interests of the firm.
A) rulers of sovereign states and unsavory customs officials
B) corporate insiders and attorneys
C) corporate insiders and rulers of sovereign states
D) attorneys and unsavory customs officials
Strategic alliances are normally formed by firms that expect to gain synergies from
which of the following?
A) economies of scale
B) economies of scope
C) complementary marketing
D) all of the above
The phase of the globalization process characterized by imports from foreign suppliers
and exports to foreign buyers is called the:
A) domestic phase.
B) multinational phase.
C) international trade phase.
D) import-export banking phase.
China today is a clear example of a nation that has chosen the following policies
EXCEPT:
A) control and manage the value of its currency
B) conduct an independent monetary policy
C) full financial integration in an attempt to stimulate its domestic economy
D) restrict the flow of capital into and out of the country
Translation exposure may also be called ________ exposure.
A) transaction
B) operating
C) accounting
D) currency
The authors describe the multinational phase of globalization for a firm as one
characterized by the:
A) ownership of assets and enterprises in foreign countries.
B) potential for international competitors or suppliers even though all accounts are with
domestic firms and are denominated in dollars.
C) imports from foreign suppliers and exports to foreign buyers.
D) requirement that all employees be multilingual.
A U.S. timber products firm has a long-term contract to import unprocessed logs from
Canada. To avoid occasional and unpredictable changes in the exchange rate between
the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms
the impact of any exchange rate movement. This type of agreement is referred to as:
A) risk-sharing.
B) currency-switching.
C) matching.
D) a natural hedge.
The traditional financial analysis applied to foreign or domestic projects, to determine
the project’s value to the firm is called:
A) cost of capital analysis.
B) capital budgeting.
C) capital structure analysis.
D) agency theory.
A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent
in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian
dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the
subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10%
against the U.S. dollar. In this example, the Canadian subsidiary will record a:
A) 10% foreign exchange loss on the U.S. dollar accounts receivable.
B) 10% foreign exchange gain on the U.S. dollar accounts receivable.
C) Since the Canadian firm is a U.S. subsidiary, neither a gain nor loss will be recorded.
D) Any gain or loss will be recorded only by the parent firm.
In general, which has the shorter maturity and is more appropriate for funding
short-term inventory needs?
A) commercial paper
B) Euro-Medium-Term notes (EMTNs)
C) the international bond market
D) all of the above
Dash Brevenshure works for the currency trading unit of ING Bank in London. He
speculates that in the coming months the dollar will rise sharply vs. the pound. What
should Dash do to act on his speculation?
A) Buy a call on the pound.
B) Sell a call on the pound.
C) Buy a put on the pound.
D) Sell a put on the pound.
While trading in foreign exchange takes place worldwide, the major currency trading
centers are located in:
A) London, New York, and Tokyo.
B) New York, Zurich, and Bahrain.
C) Paris, Frankfurt, and London.
D) Los Angeles, New York, and London.
Which of the following is NOT a motivation for a government or central bank to
manipulate domestic currency valuation?
A) fight inflation
B) slow too rapid economic growth
C) spur too slow economic growth
D) All of the above are motivations for the government or central bank to manipulate
currency values.
Refer to Instruction 15.1. If the U.S. treated the taxes paid on income earned in the host
country as a tax-credit, then Green Valley’s total U.S. corporate tax on the foreign
earnings would be:
A) $51,250.
B) $35,000.
C) $26,250.
D) $10,000.
If all capital markets are fully integrated, securities of comparable expected return and
risk should have the same required rate of return in each national market after adjusting
for:
A) time of day and language requirements.
B) political risk and time lags.
C) foreign exchange risk and political risk.
D) foreign exchange risk and the spot rate.
The authors identify four distinct periods of capital mobility since 1860. Which do they
term as a “period of global economic destruction”?
A) 1860 – 1914
B) 1914 – 1945
C) 1945 – 1971
D) 1971 – 2007
________ are negotiable certificates issued by a bank to represent the underlying shares
of stock, which are held in trust at a foreign custodian bank.
A) Negotiable CDs
B) International mutual funds
C) Depositary receipts
D) Eurodeposits
When determining a firm’s weighted average cost of capital (wacc) which of the
following terms is NOT necessary?
A) the firm’s tax rate
B) the firm’s cost of debt
C) the firm’s cost of equity
D) All of the above are necessary.
Which of the following is NOT an advantage to a joint venture?
A) Possible loss of opportunity to enter the foreign market with FDI later.
B) The local partner understands the customs and mores of the foreign market.
C) The local partner can provide competent management at many levels.
D) May be a realistic alternative when 100% foreign ownership is not allowed.
This dollar-based fixed exchange rate system gave rise to a long period of economic
recovery and growing openness of both international trade and capital flows in and out
of more and more countries.
A) The Gold Standard, 1860-1914
B) The Interwar Years , 1914-1945
C) The Bretton Woods Era, 1945-1971
D) The Floating Era, 1971-1997
The territorial approach to taxation policy is also termed the ________ approach.
A) source
B) ethical
C) greedy
D) location
Generally speaking, translation methods by country define the translation process as a
function of what two factors?
A) size; location
B) a firm’s functional currency; location
C) location; foreign subsidiary independence
D) foreign subsidiary independence; a firm’s functional currency
If China wished to reduce their accumulation of foreign exchange reserves they could:
A) allow their currency, the yuan, to float freely in the market place.
B) reduce their current account surplus by importing more goods than they export.
C) undertake both of the activities identified in choices A and B.
D) dig a big hole and bury the reserves.
