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Chapter 21 Test Bank – Static Key
1. The North American Free Trade Association (NAFTA) continues to generate more foreign trade despite
some negative political views.
2. During the global financial crisis that began in late 2008, the dollar fell in value relative to the British
pound and the euro.
3. All of the countries that joined the “Eurozone” were able to enjoy economic benefits for various reasons.
4. One benefit in joining the “Eurozone” was to have easy access to borrowing.
5. When a country has a weak currency relative to other countries, visiting that country is much more
expensive for people that don’t live in that country.
6. An exporter is able to satisfy foreign demand for a product while avoiding long-term investment in that
foreign country, although this method is considered riskier than all other alternatives.
7. Companies such as Coca-Cola and McDonald’s generate more than 50% of their sales revenues from
foreign activities.
8. A joint venture with a private entrepreneur in a host country exposes the multinational corporation to the
least amount of political risk.
9. In recent years, fully owned foreign subsidiaries are experiencing increased political pressure from
foreign governments.
10. A foreign affiliate may be an exporter, a joint venture, or a fully owned foreign subsidiary.
11. A foreign affiliate lowers the portfolio risk of its parent company because the foreign and domestic
economies tend to be fairly similar.
12. Multinational firms tend to have a lower level of portfolio risk than comparable U.S. firms.
13. Investors and firms who diversify their U.S. portfolios by buying foreign stocks or investing in foreign
subsidiaries take on a much higher level of portfolio risk than if they had invested in domestic stocks or
companies only.
14. There is no guarantee that any currency will stay strong relative to other currencies, but the dollar is an
exception.
15. A forward exchange rate can be used to help establish the value of a currency at a future point in time.
16. Currency exchange rates may be either floating or fixed.
17. In a free market, the exchange rate between two currencies is determined by the supply of and demand
for those currencies with the influence of the central bank.
18. A foreign exchange rate specifies how much a currency is worth in terms of another currency.
19. The purchasing power parity theory of exchange rates suggests that exchange rates will adjust until the
cost of equivalent goods is approximately equal in each country.
20. The purchasing power parity theory states that currency exchange rates tend to vary inversely with their
respective purchasing powers in order to provide similar purchasing powers.
21. “Balance of payments” is a method of keeping the foreign exchange market in equilibrium.
22. A “bear market” (declining stock prices) will tend to exert a depressing effect on the value of a country’s
currency.
23. According to the interest rate parity theory, interest rates along with exchange rates adjust until the
foreign exchange market and the money market are in equilibrium.
24. The term balance of payments refers to the flow of economic transactions between the residents of one
country and the residents of another.
25. Political risk and labor unrest will tend to strengthen a country’s currency.
26. The expected future value of a currency is reflected in its spot rate.
27. The future rates of currency tend to increase for dates further in the future because of the increasing
uncertainty over time.
29. Foreign exchange risk is the risk that a person or business will not be able to exchange currencies.
30. Translation exposure occurs because of changes in foreign exchange rates.
31. Transaction exposure results in foreign exchange gains and losses.
32. Transaction exposure associated with changes in the exchange rate between countries can be hedged
with a currency futures contract.
33. A money market hedge does not require the use of a futures exchange.
34. A firm that perhaps suffers a loss as a result of a decline in the value of the Japanese yen could offset
part of that risk by selling Japanese yen futures.
35. Political risks include the possibility that a government may expropriate a firm’s profits, or worse,
repatriate all of the firm’s assets.
36. In Germany, restrictions limiting labor layoffs have encouraged companies to reduce investment there.
Thus, in the long run, these labor protection laws actually can be expected to result in higher
unemployment in Germany.
37. When a bank issues a “letter of credit,” the bank absorbs ALL of the credit risk of the exporter.
38. In the financing of a foreign affiliate, the simplest and most common arrangement is a direct loan from
the parent company to the subsidiary.
39. In a fronting loan arrangement, the intermediary bank extends a risk-free loan to the foreign affiliate.
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40. A fronting loan disguises the identity of a parent multinational corporation that infuses money into a
foreign subsidiary. This technique is intended to reduce the political risk of operating a subsidiary in a
foreign country.
41. The lending rate for borrowers in the Eurodollar market is based on the prime lending rate.
42. The most widely used currency in the Eurobond market is the euro.
43. Eurobond issues are sold simultaneously in several national capital markets, but denominated in a
currency different from that of the nation in which the bonds are issued.
44. Selling common stock to residents of foreign countries is illegal in most countries, although it minimizes
risk for any multinational corporation.
45. Because of political risk, it is generally disadvantageous for U.S. firms to list their stocks on the world
stock exchanges.
46. When the euro rises and the dollar falls, foreign travel to Europe becomes cheaper for Americans.
47. A rising euro and a falling dollar will cause an increase in U.S. exports to Europe.
48. A licensing agreement provides a U.S. multinational corporation with a guarantee that it will be able to
export the product to the foreign market.
49. As inflation in any “Eurozone” country increases, while the U.S. experiences no change in inflation, the
exchange rate of the euro to the dollar will increase.
50. The possibility of political risk may be excluded when an investor considers maximizing expected
returns.
51. An example of comparing cross rates for countries is like comparing the U.S. dollar to the Japanese
yen.
52. A multinational corporation may be defined as
53. Multinational corporations (MNC) may take several forms. An exporter could be described as
54. In a licensing agreement, the multinational corporation will very likely
55. A form of multinational corporation (MNC) that exposes the firm to the least amount of political risk, and
is therefore the preferred arrangement by both business and foreign governments, is called
56. Legal, political, and economic factors are most conducive to which form of multinational corporation
(MNC) organization?
57. For a U.S. company, foreign business operations are more complex because the
58. A fully owned foreign subsidiary is a form of MNC (multinational corporation) in which
59. A particular country‘s pattern of importing more than is being exported is likely to
60. Which of the following is NOT an accusation made against multinational corporations (MNCs) by
foreign countries?
61. If one Czech crown is equal to $.05 U.S. dollar, the U.S. dollar is equal to how many Czech crowns?
62. As exchange rates change, the rates
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63. If prices double in New York while the prices in Germany remain the same, the purchasing power of the
dollar relative to the euro
64. When Country A’s currency strengthens against Country B’s, citizens of Country A will
65. You travel to Cancun Mexico for spring break. The current exchange rate is 13 pesos to the dollar.
When you arrive, you convert $1,000 into how many pesos?
66. You are leaving Mexico and have 290 pesos to change into dollars. The exchange rate is now 12 pesos
to the dollar. Approximately how many dollars will you receive?
67. In the past, the U.S. dollar’s exchange rate with the Iceland krona was .0008 dollars per krona. If today
the exchange rate is .0006 dollars per krona, the dollar