CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
1. Multinational financial management requires that financial analysts consider the effects of changing currency values.
a.
True
b.
False
True
EASY
19-2 Multinational Versus Domestic Financial Management
2. Legal and economic differences among countries, although important, do NOT pose significant problems for most
multinational corporations when they coordinate and control worldwide operations and subsidiaries.
a.
True
b.
False
False
EASY
19-2 Multinational Versus Domestic Financial Management
3. When the value of the U.S. dollar appreciates against another country’s currency, we may purchase more of the foreign
currency with the U.S. dollar.
a.
True
b.
False
True
EASY
19-3 The International Monetary System
4. The United States and most other major industrialized nations currently operate under a system of floating exchange
rates.
a.
True
b.
False
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
True
EASY
19-3 The International Monetary System
5. Exchange rate quotations consist solely of direct quotations.
a.
True
b.
False
False
EASY
19-4 Foreign Exchange Rate Quotations
6. Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as
a base.
a.
True
b.
False
True
EASY
19-4 Foreign Exchange Rate Quotations
7. A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
a.
True
b.
False
True
EASY
19-9 International Money and Capital Markets
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
8. LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks
to smaller U.S. corporations on all deposits.
a.
True
b.
False
False
EASY
19-9 International Money and Capital Markets
LIBOR
9. Exchange rate risk is the risk that the cash flows from a foreign project, when converted to the parent company’s
currency, will be worth less than was originally projected because of exchange rate changes.
a.
True
b.
False
True
EASY
19–10 Investing Overseas
10. Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial
analysis.
a.
True
b.
False
False
EASY
19–11 International Capital Budgeting
Eurodollars
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
11. Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the
process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to
depreciate.
a.
True
b.
False
False
MODERATE
19-5 Trading in Foreign Exchange
FOFM.BRIG.16.19.05 – Trading in Foreign Exchange
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Forward market hedge
Bloom’s: Comprehension
12. If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the
forward currency is said to be selling at a discount to the spot rate.
a.
True
b.
False
True
MODERATE
19-5 Trading in Foreign Exchange
FOFM.BRIG.16.19.05 – Trading in Foreign Exchange
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Discount on forward rate
Bloom’s: Comprehension
13. If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward
currency is said to be selling at a premium to the spot rate.
a.
True
b.
False
True
MODERATE
19-5 Trading in Foreign Exchange
FOFM.BRIG.16.19.05 – Trading in Foreign Exchange
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Premium on forward rate
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Political risk
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
14. A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the
amount by which its inflation rate exceeds that of the United States.
a.
True
b.
False
True
MODERATE
19-8 Inflation, Interest Rates, and Exchange Rates
15. The cash flows relevant for a foreign investment should, from the parent company’s perspective, include the financial
cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the
foreign country.
a.
True
b.
False
False
MODERATE
19–11 International Capital Budgeting
16. The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign
projects may be more or less risky.
a.
True
b.
False
True
MODERATE
19–11 International Capital Budgeting
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
17. When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk
while lower risk might result from international diversification.
a.
True
b.
False
True
1
MODERATE
19–11 International Capital Budgeting
FOFM.BRIG.16.19.11 – International Capital Budgeting
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Risk and int’l. investment
Bloom’s: Comprehension
18. Which of the following are reasons why companies move into international operations?
a.
To take advantage of lower production costs in regions where labor costs are relatively low.
b.
To develop new markets for the firm’s products.
c.
To better serve their primary customers.
d.
Because important raw materials are located abroad.
e.
All of the above.
e
1
EASY
19-1 Multinational, or Global, Corporations
FOFM.BRIG.16.19.01 – Multinational, or Global, Corporations
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Motive for going global
Bloom’s: Comprehension
Multiple Choice: Conceptual
19. Multinational financial management requires that
a.
the effects of changing currency values be included in financial analyses.
b.
legal and economic differences need not be considered in financial decisions because these differences are
insignificant.
c.
political risk should be excluded from multinational corporate financial analyses.
d.
traditional U.S. and European financial models incorporating the existence of a competitive marketplace not
be recast when analyzing projects in other parts of the world.
e.
cultural differences need not be accounted for when considering firm goals and employee management.
a
1
19-2 Multinational Versus Domestic Financial Management
FOFM.BRIG.16.19.02 – Multinational Versus Domestic Financial Management
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
20. In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In the
United States, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%.
All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that
interest rate parity holds in all markets, which of the following statements is most CORRECT?
a.
The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
b.
The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 180-day forward market.
c.
The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day
forward market.
d.
The yen-dollar exchange rate in the 180-day forward market equals the yen-dollar exchange rate in the 90-day
spot market.
e.
The relationship between spot and forward interest rates cannot be inferred.
19-6 Interest Rate Parity
FOFM.BRIG.16.19.06 – Interest Rate Parity
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Interest rate parity
Bloom’s: Analysis
Multiple Choice: Conceptual
21. If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the
British pound will
a.
appreciate against the U.S. dollar.
b.
depreciate against the U.S. dollar.
c.
remain unchanged against the U.S. dollar.
d.
appreciate against other major currencies.
e.
appreciate against the dollar and other major currencies.
19-8 Inflation, Interest Rates, and Exchange Rates
FOFM.BRIG.16.19.08 – Inflation, Interest Rates, and Exchange Rates
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Currency depreciation
Bloom’s: Comprehension
Multiple Choice: Conceptual
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Multinational fin. mgmt.
Bloom’s: Comprehension
Multiple Choice: Conceptual
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
22. Which of the following statements is NOT CORRECT?
a.
Any bond sold outside the country of the borrower is called an international bond.
b.
Foreign bonds and Eurobonds are two important types of international bonds.
c.
Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which
the issue is sold.
d.
The term Eurobond applies only to foreign bonds denominated in U.S. currency.
e.
A Eurodollar is a U.S. dollar deposited in a bank outside the U.S.
19-9 International Money and Capital Markets
FOFM.BRIG.16.19.09 – International Money and Capital Markets
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Int’l. bond markets
Bloom’s: Comprehension
Multiple Choice: Conceptual
23. Currently, a U.S. trader notes that in the 6-month forward market, the Japanese yen is selling at a premium (that is,
you receive more dollars per yen in the forward market than you do in the spot market), while the British pound is selling
at a discount. Which of the following statements is CORRECT?
a.
If interest rate parity holds, 6-month interest rates should be the same in the U.S., Britain, and Japan.
b.
If interest rate parity holds among the three countries, the United States should have the highest 6-month
interest rates and Japan should have the lowest rates.
c.
If interest rate parity holds among the three countries, Britain should have the highest 6-month interest rates
and Japan should have the lowest rates.
d.
If interest rate parity holds among the three countries, Japan should have the highest 6-month interest rates and
Britain should have the lowest rates.
e.
If interest rate parity holds among the three countries, the United States should have the highest 6-month
interest rates and Britain should have the lowest rates.
19-6 Interest Rate Parity
FOFM.BRIG.16.19.06 – Interest Rate Parity
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Interest rate parity
Bloom’s: Analysis
Multiple Choice: Conceptual
24. Today in the spot market $1 = 1.82 Swiss francs and $1 = 130 Japanese yen. In the 90-day forward market, $1 = 1.84
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
Swiss francs and $1 = 127 Japanese yen. Assume that interest rate parity holds worldwide. Which of the following
statements is most CORRECT?
a.
Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Swiss
securities.
b.
Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Japanese
securities.
c.
Interest rates on 90-day risk-free U.S. securities equal the interest rates on 90-day risk-free Japanese securities.
d.
Since interest rate parity holds interest rates should be the same in all three countries.
e.
Interest rates on 90-day risk-free U.S. securities equal the interest rates on 90-day risk-free Swiss securities.
CHALLENGING
19-6 Interest Rate Parity
FOFM.BRIG.16.19.06 – Interest Rate Parity
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Interest rate parity
Bloom’s: Analysis
Multiple Choice: Conceptual
25. If one Swiss franc can purchase $0.76 U.S. dollars, how many Swiss francs can one U.S. dollar buy?
a.
0.9592
b.
1.0658
c.
1.1842
d.
1.3158
e.
1.4474
EASY
19-4 Foreign Exchange Rate Quotations
FOFM.BRIG.16.19.04 – Foreign Exchange Rate Quotations
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – OH – DISC.FOFM.BRIG.16.13 – Multinational financial management
Bloom’s: Analysis
Multiple Choice: Problem
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
26. If one U.S. dollar buys 1.64 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?
a.
0.5488
b.
0.6098
c.
0.6707
d.
0.7378
e.
0.8116
EASY
19-4 Foreign Exchange Rate Quotations
27. If one British pound can purchase $1.98 U.S. dollars, how many British pounds can one U.S. dollar buy?
a.
0.5051
b.
0.5556
c.
0.6111
d.
0.6722
e.
0.7394
a
EASY
19-4 Foreign Exchange Rate Quotations
28. If one U.S. dollar buys 0.63 euro, how many dollars can you purchase for one euro?
a.
1.0414
b.
1.1571
c.
1.2857
d.
1.4286
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
e.
1.5873
e
EASY
19-4 Foreign Exchange Rate Quotations
29. If one U.S. dollar sells for 0.60 British pound, how many dollars should one British pound sell for?
a.
1.0935
b.
1.2150
c.
1.3500
d.
1.5000
e.
1.6667
e
EASY
19-4 Foreign Exchange Rate Quotations
30. Suppose 144 yen could be purchased in the foreign exchange market for one U.S. dollar today. If the yen depreciates
by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
a.
155.5200
b.
163.2960
c.
171.4608
d.
180.0338
e.
189.0355
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
31. Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk
domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 9% after-tax is the investor’s
required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?
a.
9.11%
b.
10.13%
c.
11.25%
d.
12.50%
e.
13.75%
EASY
19-9 International Money and Capital Markets
32. Suppose DeGraw Corporation, a U.S. exporter, sold a solar heating station to a Japanese customer at a price of 143.5
million yen, when the exchange rate was 140 yen per dollar. In order to close the sale, DeGraw agreed to make the bill
payable in yen, thus agreeing to take some exchange rate risk for the transaction. The terms were net 6 months. If the yen
fell against the dollar such that one dollar would buy 154.4 yen when the invoice was paid, what dollar amount would
DeGraw actually receive after it exchanged yen for U.S. dollars?
a.
$757,005.48
b.
$796,847.88
c.
$838,787.24
d.
$882,933.94
e.
$929,404.15
EASY
19-5 Trading in Foreign Exchange
CHAPTER 19—MULTINATIONAL FINANCIAL MANAGEMENT
e
EASY
19–10 Investing Overseas
33. Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between
the U.S. dollar and the euro is $1.00 = 0.64 euro. What is the cross rate of Swiss francs to euros? (In other words, how
many Swiss francs are needed to purchase one euro?)
a.
1.9828
b.
2.2031
c.
2.4234
d.
2.6658
e.
2.9324
MODERATE
19-4 Foreign Exchange Rate Quotations
34. Suppose that currently, 1 British pound equals 1.98 U.S. dollars and 1 U.S. dollar equals 1.02 Swiss francs. How many
Swiss francs are needed to purchase 1 pound?
a.
1.9691
b.
2.0196