Imports have the potential to lower a country’s inflation rate. In particular, imports of
HIGHER-priced goods and services place a limit on what domestic competitors charge
for comparable goods and services.
Most swap dealers arrange swaps so that each firm that is a party to the transaction
knows who the counterparty is.
Because most international transactions are between affiliated parties, international
transaction contracts are less complex, but the management of the total value of the
MNE is more complex.
The relatively low cost of compliance with the Sarbanes-Oxley Act (SOX) has been a
surprising benefit of the act.
Although rarely acknowledged by the firms themselves, selective hedging is essentially
speculation.
The primary advantage of a letter of credit is that it reduces risk.
Licensing is a popular form of foreign investment because it does not need a sizable
commitment of funds, and political risk is often minimized.
Comparative advantage was once the cornerstone of international trade theory, but
today it is archaic, simplistic, and irrelevant for explaining investment choices made by
MNEs.
Having Anglo-Americans as members of the board of directors of a
non-Anglo-American firm signals poor corporate governance in the firm.
The opportunity set of projects is typically smaller for MNEs than for purely domestic
firms because international markets are typically specialized niches.
Banks, and a few nonbank foreign exchange dealers, operate ONLY in the interbank
markets.
Empirical tests of market efficiency fail to show that most major national markets are
reasonably efficient.
In efficient markets, interest rate parity should assure that the costs of a forward hedge
and money market hedge should be approximately the same.
Business firms in countries with exchange controls, for example, China (mainland),
often must surrender foreign exchange earned from exports to the central bank at the
daily fixing price.
When a firm borrows in a foreign currency, the effective cost is the foreign interest rate
plus an adjustment for changes in the exchange rate.
As a generalized rule, only realized foreign exchange losses are deductible for tax
purposes.
Dealers in the foreign exchange departments of large international banks often function
as “market makers.” Such dealers stand willing at all times to buy and sell those
currencies in which they specialize and thus maintain an “inventory” position in those
currencies.
A currency board exists when a country’s central bank commits to back its money
supply entirely with foreign reserves at all times.
In the United States, domestic taxpayers bear the cost of export credit insurance and
export financing provided by institutions like the FCIA and Eximbank to foreign buyers
in order to create employment and maintain a technological edge.
In international capital budgeting, the appropriate discount rate for determining the
present value of the
expected cash flows is always the firm’s domestic WACC.
The current U.S. dollar-yen spot rate is ¥125/$. If the 90-day forward exchange rate is
¥127/$ then the yen is at a forward premium.
Once a firm has “gone public,” it is open to a considerably higher level of public
scrutiny.
Issuing commercial papers to finance accounts receivable or short term financing needs
lies at the low end of the pecking order of trade financing alternatives.
Currency futures contracts have become standard fare and trade readily in the world
money centers.
Regime structures like the gold standard required no cooperative policies among
countries, only the assurance that all would abide by the “rules of the game.”
Under a floating exchange rate system, the government bears the responsibility to
ensure that the BOP is near zero.
The key arguments in opposition to currency hedging such as market efficiency, agency
theory, and diversification do not have financial theory at their core.
Most transactions in the interbank foreign exchange trading are primarily conducted via
telecommunication techniques and little is conducted face-to-face.
A country can react to the potential for blocked funds prior to making an investment,
during operations, or by investing in the local country in assets than maintain their
value.
Hedging, or reducing risk, is the same as adding value or return to the firm.
The Eurocurrency market continues to thrive because it is a large international money
market relatively free from governmental regulation and interference. Recent events
may lead to greater regulation.
One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that
time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on
the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian
dollars should be approximately:
A) $0.96/C$.
B) $1/C$.
C) $1.04/C$.
D) Relative PPP provides no guide for this type of question.
Empirical research has found that systematic risk for MNEs is greater than that for their
domestic counterparts. This could be due to:
A) the fact that the increase in the correlation of returns between the market and the
firm is less than the increase in the standard deviation of returns of the firm.
B) the fact that the decrease in the correlation of returns between the market and the
firm is greater than the increase in the standard deviation of returns of the firm.
C) the reduction in the correlation of returns between the firm and the market is less
than the increase in the variability of returns caused by factors such as asymmetric
information, foreign exchange risk, and the like.
D) None of the above; systematic risk is less for MNEs than for their domestic
counterparts.
________ is defined as the spread of a crisis in one country to its neighboring countries
and other countries with similar characteristics.
A) Speculation
B) Contagion
C) Capital market liquidity
D) Political science
A ________ loan, also known as ________ is a parent-to-affiliate loan channeled
through a financial intermediary such as a large commercial bank.
A) fronting; link financing
B) parallel; a back-to-back loan
C) fronting; a back-to-back loan
D) link financing; parallel loan
Purely domestic firms will be at a disadvantage to MNEs in the event of market
disequilibria because:
A) domestic firms lack comparative data from its own sources.
B) international firms are already so large.
C) all of the domestic firm’s raw materials are imported.
D) None of the above; domestic firms are not at a disadvantage.
Which of the following is NOT an argument against dollarization?
A) Dollarization causes a loss of sovereignty over domestic monetary policy.
B) Dollarization removes currency volatility against the dollar.
C) Dollarization causes the country to lose the power of seignorage.
D) The central bank of the dollarized country loses the role of lender of last resort.
The International Monetary Fund (IMF):
A) in recent years has provided large loans to Russia, South Korea, and Brazil.
B) was created as a result of the Bretton Woods Agreement.
C) aids countries with balance of payment and exchange rate problems.
D) is all of the above.
As a general statement, it is safe to say that businesses generally use the ________ for
foreign currency option contracts, and individuals and financial institutions typically
use the ________.
A) exchange markets; over-the-counter
B) over-the-counter; exchange markets
C) private; government sponsored
D) government sponsored; private
The term “euro” as used in the euro equity market implies:
A) the issuers are located in Europe.
B) the investors are located in Europe.
C) both A and B
D) none of the above
It is characteristic of foreign exchange dealers to:
A) bring buyers and sellers of currencies together but never to buy and hold an
inventory of currency for resale.
B) act as market makers, willing to buy and sell the currencies in which they specialize.
C) trade only with clients in the retail market and never operate in the wholesale market
for foreign exchange.
D) All of the above are characteristics of foreign exchange dealers.
Which of the following is NOT a potential disadvantage of licensing relative to FDI?
A) possible loss of quality control
B) establishment of a potential competitor in third-country markets
C) possible improvement of the technology by the local licensee, which then enters the
original firm’s home market
D) All of the above are potential disadvantages to licensing.
The ________ approach to the determination of spot exchange rates hypothesizes that
the most important factors are the relative real interest rate and a country’s outlook for
economic growth and profitability.
A) balance of payments
B) parity conditions
C) managed float
D) asset market
Which of the following is NOT a key variable in the equation for the capital asset
pricing model?
A) the risk-free rate of interest
B) the expected rate of return on the market portfolio
C) the marginal tax rate
D) All are important components of the CAPM.
Which financial economists are most closely associated with the financial theory of
optimal capital structure?
A) Modigliani and Miller
B) Fama, Fisher, Jensen, and Roll
C) Black and Scholes
D) Markowitz and Sharpe
Which of the following international transactions would NOT be counted as a balance
of payments (BOP) transaction?
A) An American tourist purchases cheese in Milwaukee, Wisconsin.
B) The U.S. subsidiary of a British firm pays profits (dividends) back to its parent firm
in London.
C) A Canadian lumber baron purchases a U.S. corporate bond through an investment
broker in
Seattle.
D) All of the above are considered BOP transactions.
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 depreciates against the dollar from $1.40/€ at the time the loan was made to
$1.35/€ at the end of the first year, how much interest and principle will TropiKana pay
at the end of the first year if they repay the entire loan plus interest (rounded)?
A) $1,477,000
B) $1,055,000
C) €1,424,250
D) $1,424,250
According to a survey by Bank of America, the type of foreign exchange risk most
often hedged by firms is:
A) translation exposure.
B) transaction exposure.
C) contingent exposure.
D) economic exposure.
Under a fixed exchange rate system, the government bears the responsibility to ensure
that the BOP is near zero. If the sum of the current and capital accounts do not
approximate zero, the government is expected to intervene in the foreign exchange
market by buying or selling official foreign exchange reserves. If the sum of the first
two accounts is LESS THAN ZERO, a ________ demand for the domestic currency
exists in the world. To preserve the fixed exchange rate, the government must then
intervene in the foreign exchange market and ________ domestic currency for foreign
currencies or gold so as to bring the BOP back near zero.
A) surplus; sell
B) surplus; buy
C) deficit; sell
D) deficit; buy
For most firms, the cost of capital decreases to a low point as the firm ________ debt
financing. At some point beyond this optimal level, the cost of capital increases as the
amount of debt ________.
A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases
The risk of noncompletion is most important when:
A) the international trade is recurrent in nature.
B) there is a sustained relationship between the buyer and seller.
C) with an outstanding agreement for recurring shipments.
D) when the relationship is between countries whose currencies are considered strong.
Use the following terms for this question:
(X-M) = Current Account Balance
(CI-CO) = Capital Account Balance
(FI-FO) = Financial Account Balance
(I-S) = Investment-Saving Balance
FXB = Reserve Balance
BOP = balance of payments
GDP = gross domestic product
C = consumption
I = capital investment spending
G = government spending
The static equation for the BOP is:
A) BOP = (X-M) – (CI-CO) – (FI-FO) + FXB
B) BOP = (X-M) + (I-S) + (FI-FO) + FXB
C) BOP = (X-M) + (CI-CO) + (FI-FO) + FXB
D) BOP = GDP – [C + I +G] + (FI-FO)
________ cash flows arise from intracompany and intercompany receivables and
payments, while ________ cash flows are payments for the use of loans and equity.
A) Financing; operating
B) Operating; financing
C) Operating; accounting
D) Accounting; financing
Based on observations of firms that have successfully invested abroad, we can conclude
that one of the competitive advantages enjoyed by MNEs is:
A) managerial expertise.
B) financial strength.
C) competitiveness of their home markets.
D) all of the above are competitive advantages.
The main technique to minimize translation exposure is called a/an ________ hedge.
A) balance sheet
B) income statement
C) forward
D) translation
Foreign bonds sold in the United States are nicknamed “Yankee bonds,” foreign bonds
sold in Japan are called “Samurai bonds.” What are foreign bonds sold in the United
Kingdom nicknamed?
A) “Union Jacks”
B) “Royalty”
C) “Bulldogs”
D) “Churchill’s”
Forming regional alliances is one way to help mitigate the practice of government
protectionism. Which of the following is NOT a regional trade organization formed by
government treaty?
A) EU
B) NAFTA
C) NATO
D) MERCOSUR
Which of the following is an unlikely objective of U.S. government policy for the
taxation of foreign MNEs?
A) to raise revenues
B) to provide an incentive for U.S. private investment in developing countries
C) to improve the U.S. balance of payments
D) All of the above are objectives.
Which of the following is NOT a factor critical to the success of project financing?
A) separability of the project from its investors
B) long-lived and capital intensive singular projects
C) cash flow predictability from third part commitments
D) All of the above are critical factors for project financing.
MNEs situated in countries with small illiquid and segmented markets are most like:
A) small domestic U.S. firms in that they must rely on internally generated funds and
bank borrowing.
B) large U.S. MNEs in that they are all MNEs and have worldwide markets and sources
of financing.
C) small domestic U.S. firms in that they have a strong niche market in the U.S.
D) None of the above is true.
Transaction exposure and operating exposure exist because of unexpected changes in
future cash flows. The difference between the two is that ________ exposure deals with
cash flows already contracted for, while ________ exposure deals with future cash
flows that might change because of changes in exchange rates.
A) transaction; operating
B) operating; transaction
C) operating; accounting
D) none of the above
An interbank-traded contract to buy or sell interest rate payments on a notional
principal is called a/an:
A) forward rate agreement.
B) interest rate future.
C) interest rate swap.
D) none of the above
Which of the following is NOT a difference between a currency futures contract and a
forward contract?
A) The futures contract is marked to market daily, whereas the forward contract is only
due to be settled at maturity.
B) The counterparty to the futures participant is unknown with the clearinghouse
stepping into each transaction, whereas the forward contract participants are in direct
contact setting the forward specifications.
C) A single sales commission covers both the purchase and sale of a futures contract,
whereas there is no specific sales commission with a forward contract because banks
earn a profit through the bid-ask spread.
D) All of the above are true.
Refer to Table 7.1. What was the closing price of the British pound on April 18, 2009?
A) $1.448/£
B) £1.448/$
C) $14.48/£
D) none of the above
TABLE 5.1
Use the table to answer following question(s).
Refer to Table 5.1. According to the information provided in the table, the 6-month yen
is selling at a forward ________ of approximately ________ per annum. (Use the mid
rates to make your calculations.)
A) discount; 2.09%
B) discount; 2.06%
C) premium; 2.09%
D) premium; 2.06%
The number of publicly traded firms:
A) peaked in the U.S. in 1996.
B) peaked worldwide in 1996.
C) increased significantly in 2009 as a result of the international financial crisis.
D) all of the above
Your firm is faced with paying a variable rate debt obligation with the expectation that
interest rates are likely to go up. Identify two strategies using interest rate futures and
interest rate swaps that could reduce the risk to the firm.
Explain how a central bank would engage in direct intervention to decrease the value of
its domestic currency. Since the 1970s it has been difficult for central banks alone to
engage in direct intervention to alter the value of their domestic currency. Identify and
explain at least two other activities in which a central bank could engage to alter the
value of their domestic currency.
Define spot, forward, and swap transactions in the foreign exchange market and give an
example of how each could be used.
What do theory and empirical evidence say about capital structure and the cost of
capital for MNEs versus their domestic counterparts?
List and explain three strategic motives why firms become multinationals and give an
example of each.