CHAPTER 22: INTERNATIONAL FINANCIAL MANAGEMENT
1. Which of the following actions would not tend to increase the value of a country’s currency?
a. relatively low interest rates
b. government trade policies that limit imports
c. relatively low rate of inflation
d. restrictions on foreign exchange transactions
2. When interest rate parity exists, the forward rate will differ from the spot rate by just enough to .
a. offset the difference in the real rate of return
b. permit the buyer of a covered option to make a profit
c. offset the interest rate differential between the two currencies
d. result in a perfect interest rate arbitrage
3. The states that the differences in interest rates between two countries should be offset by equal, but
opposite, changes in the future spot exchange rate.
a. expectations theory
b. interest rate parity
c. purchasing power parity
d. international Fisher effect
4. Which of the following is not a primary category of foreign exchange risk that multinational firms must
consider?
a. economic exposure
b. operating exposure
c. translation exposure
d. transaction exposure
5. Motorola has a contract to deliver cellular telephones in Japan in 6 months from now and the payment for these
telephones will be in Japanese yen. What type of foreign exchange risk does Motorola face?
a. economic exposure
b. operating exposure
c. transaction exposure
d. translation exposure
Chapter 22: International Financial Management
6. When a multinational firm has one or more foreign subsidiaries with assets and liabilities denominated in a
foreign currency, it faces exposure.
a. economic
b. operating
c. translation
d. transaction
7. Under current accounting procedures, all of the following balance sheet items are translated into dollars at the
rate of exchange prevailing on the date of the balance sheet except:
a. stockholder’s equity
b. fixed assets
c. current liabilities payable in a foreign currency
d. long-term liabilities payable in a foreign currency
8. An increase in the value of a foreign currency relative to the U.S. dollar the conversion value of the
foreign subsidiary’s liabilities.
a. decreases
b. increases
c. has no effect on
d. is an average of
9. To protect itself against transaction exchange rate risk, a U.S. company that purchases automobiles from a
Japanese manufacturer may use all of the following techniques except:
a. borrow U.S. funds and invest them in interest-bearing Japanese securities
b. execute a contract in the forward exchange market
c. sell yen in the spot market at the time of each transaction
d. execute a contract in the foreign exchange futures market
10. Firms engaged in international transactions incur because of fluctuations in the exchange rates among
currencies.
a. credit risk
b. political risk
c. market risk
d. exchange rate risk
Chapter 22: International Financial Management
11. The theory of interest rate parity states that the annual percentage differential in the forward market for a
currency quoted in terms of another currency is equal to the approximate difference in prevailing in the
two countries.
a. inflation rates
b. interest rates
c. trade deficit rates
d. GNP growth rates
12. A euro is a
a. monetary unit used in transactions between European central banks
b. monetary unit used in providing capital to the World Bank
c. monetary unit used in transactions between Common Market countries
d. composite currency whose value is based on the weighted value of several European currencies
13. A parent company’s foreign investment risk exposure depends on the foreign subsidiary’s net position.
a. cash
b. equity
c. present value
d. working capital
14. A U.S. company that purchases goods on credit from a German supplier can protect itself against transaction
exchange risk by
a. executing a contract in the forward exchange market
b. borrowing U.S. funds and investing in interest-bearing German securities
c. borrowing German funds and investing in interest-bearing U.S. securities
d. executing a contract in the forward exchange market, and by borrowing U.S. funds and investing in interest-
bearing German securities
15. Primary sources of demand for British pounds in the foreign exchange market include
a. foreign buyers of British exports who must pay for their purchases in pounds
b. foreign investors who desire to make investments in physical or financial assets in Great Britain
c. speculators who expect British pounds to increase in value relative to other currencies
d. all of these answers are correct
Chapter 22: International Financial Management
16. Primary sources of supply of British pounds in the foreign exchange market include:
a. British importers who need to convert their pounds into foreign currency to pay for purchases
b. foreign investors who desire to make investments in physical or financial assets in Great Britain
c. speculators who expect British pounds to increase in value relative to other currencies
d. U.S. importers who need to convert dollars to pounds to pay for purchases
17. Government trade policies that restrict imports into a country tend to the supply of the country’s currency
in the foreign exchange market and tend to the value of the country’s currency with respect to other
currencies.
a. increase, decrease
b. increase, increase
c. decrease, decrease
d. decrease, increase
18. Which of the following trade policies will tend to decrease the supply of the country’s currency in the foreign
exchange market?
a. imposition of tariffs
b. imposition of export quotas
c. financing exports with low interest loans
d. imposition of tariffs and export quotas
19. When the Federal Reserve (acting through member commercial banks) sells U.S. dollars in the foreign
exchange market, it the supply of U.S. dollars and hence tends to the value of the U.S. dollar
relative to other currencies.
a. increases, raise
b. decreases, lower
c. increases, lower
d. decreases, raise
20. A high rate of inflation within a country will tend to the value of its currency with respect to the currencies
of other countries that are experiencing lower rates of inflation.
a. increase
b. decrease
c. have no effect on
d. cannot be determined because of insufficient information
Chapter 22: International Financial Management
21. The theory that the annual percentage differential in the forward market for a currency quoted in terms of
another currency is equal to the approximate difference in interest rates in the two countries is known as
a. covered interest arbitrage
b. inflation
c. hedging
d. interest rate parity
22. Firms transacting business with foreign companies can lower exchange rate risk exposure by
a. limiting transaction exposure
b. hedging
c. purchasing LIBORs
d. using the PPP to make exchange rate forecasts
23. Basic hedging techniques include all of the following except
a. money market hedge
b. forward market hedge
c. primary market hedge
d. none, because all are basic hedging techniques
24. In general, when a foreign subsidiary’s assets are than its liabilities, will occur when the exchange
rate on the currency of the country in which the foreign subsidiary operates loses value.
a. greater, currency exchange gains
b. greater, currency exchange losses
c. less, nothing
d. greater, nothing
25. What is the nominal interest rate in Canada if the real rate of return is 2.5% and the expected inflation rate was
4.5%
a. 7.00%
b. 6.89%
c. 7.11%
d. 7.07%
Chapter 22: International Financial Management
26. If U.S. prices are expected to rise by 3 percent over the coming year and prices in Switzerland are expected to
rise by 7 percent during the same time, what is the expected spot rate in one year of the Swiss franc given that
the current spot exchange rate is $0.168
a. $0.1612
b. $0.1613
c. $0.1617
d. $0.1745
27. If one year U.S. nominal interest rates are 4 percent, one year Canadian nominal interest rates are 7.5 percent,
and the current spot exchange rate, S0, is $0.587, then the expected spot rate in one year will be:
a. $0.568
b. $0.607
c. $0.564
d. $0.573
28. If the annual nominal interest rate on 5-year U.S. Government Treasury bonds is 7 percent and the annual
nominal interest rate on 5-year Canadian bonds is 7.75%, what is the expected future spot rate in 5 years given
that the current spot exchange rate between U.S. dollars and Canadian dollars is $0.739?
a. $0.734
b. $0.714
c. $0.765
d. $0.733
29. If the annual nominal interest rate on 5-year U.S. Government Treasury bonds is 7 percent, and the annual
nominal interest rate on 5-year Canadian bonds is 5.5 percent, what is the expected future spot rate in 5 years
given that the current spot exchange rate between U.S. dollars and Canadian dollars is $0.587?
a. $0.595
b. $0.547
c. $0.578
d. $0.630
Chapter 22: International Financial Management
30. Crown Honda purchased one of its most popular models for 965,600 yen. The exchange rate for the yen was
142 yen per U.S. dollar at the time of purchase but then rose to 171.8 yen by the time payment was made. What
was the dealer’s gain or loss on the change in rates?
a. gain of $1,180
b. loss of $1,427
c. loss of $1,180
d. gain of $1,427
31. Vroom Motors purchased several Mercedes Benz automobiles from its West German broker. The contract was
for 10,000,000 euros, due in 180 days. The present exchange rate is $0.51 per euro and the 180 day forward
rate is $0.514. If the rate actually goes to $0.50 in 180 days, what is the dollar gain or loss incurred if no hedge
is taken relative to a hedged position?
a. $392,157 gain
b. $40,000 loss
c. $100,000 gain
d. $140,000 gain
32. If the annual nominal interest rate on 10-year U.S. Government Treasury bonds is 7.35 percent and the annual
nominal interest rate on 10-year Japanese bonds is 5.75 percent, what is the expected future spot rate in 10
years given that the current spot exchange rate between U.S dollars and Japanese yen is $0.00959?
a. $0.00834
b. $0.01114
c. $0.00973
d. $0.00946
Chapter 22: International Financial Management
33. If the 182-day interest rate is 1.75 percent in the U.S. and 2.625 percent in Germany, and the current spot
exchange rate between dollars and euros is $0.583, what will the 180-day forward rate be if IRP holds?
a. $0.578
b. $0.588
c. $0.573
d. $0.581
34. If U.S. prices are expected to rise by 3.5 percent over the coming year and prices in Great Britain are expected
to rise by 5.25 percent during the same time, what is the expected spot rate in one year given that the current
spot exchange rate is $1.497?
a. $1.522
b. $1.470
c. $1.472
d. $1.499
35. What is the real rate of return if the risk-free rate is 3.25 percent and the expected rate of inflation is 2.75
percent?
a. 0.50%
b. 0.51%
c. 0.487%
d. 1.49%
36. What is the real rate of return if the risk-free rate is 4 percent and the expected rate of inflation is 2.5 percent?
a. 0.43%
b. 1.50%
c. 6.35%
d. 1.46%
Chapter 22: International Financial Management
37. The (6 month) interest rate on 180 day U.S. Treasury bills is 7.64%. In the foreign exchange markets, the spot
rate between U.S. dollars and British pounds is 1 pound = $1.5525. The 180-day (6 month) forward rate is 1
pound = $1.5188. Determine the expected rate of interest on 6 month British government debt securities,
assuming interest rate parity between the dollar and pound exists.
a. 13.52%
b. 5.47%
c. 7.31%
d. 10.03%
38.
The 6 month interest rate on 180 day U.S. Treasury Bills is 7.5 percent. In the foreign exchange markets, the spot
rate between U.S. dollars and Australian dollars is 1 Australian dollar= $0.452 and the 180 day (6 month) forward
rate is 1 mark= $0.46. Determine the expected rate of interest on 6 month Australian government debt securities,
assuming that the interest rate parity between the U.S. dollar and Australian dollar exists.
a. 7.35%
b. 1.77%
c. 5.63%
d. 3.82%
39.
If the spot rate (in U.S. dollars) for the Australian dollar is $0.559 and the 180 day forward rate is trading at a
premium of2.86%, then the 180 day forward rate is:
a. $0.551
b. $0.567
c. $0.575
d. $0.583
Chapter 22: International Financial Management
40.
Today, short-term interest rates in Australia are 8.50% and the corresponding U.S. rate is 6.0%. The current
discount on forward Australian dollars is 2.0%. Can a U.S. trader use covered interest arbitrage to take
advantage of this situation? If so what is the net effect?
a.
No. Lose 1/2%
b.
No. Lose 2 1/2%
c.
Yes. Gain 112%
d.
Yes. Gain 2 112%
41.
The law of one price, an economic principle, means that the price of a product in different markets should be:
a.
the same if the raw materials were obtained from a single source.
b.
the same if adjusted for inflation.
c.
the same if taxes are adjusted based on a single currency.
d.
the same if there are no significant costs associated with moving between markets.
42. In considering purchasing power parity, the relationship is:
I. not applicable due to tariffs.
II. is applicable in spite of trade barriers.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
43. A less restrictive form of purchasing power parity is:
a. Omnipotent purchasing power parity
b. Relative purchasing power parity
c. Absolute purchasing power parity
d. Exchange parity
44. All of the following items are needed to compute relative purchasing power parity EXCEPT:
a. spot price
b. home country interest rate
c. benchmark tax rate
d. expected foreign country inflation rate
Chapter 22: International Financial Management
45. According to Fisher, in the absence of government interference and holding risk constant, real rates of return
across countries will be equalized through a process of .
a. margining accounts
b. transaction transference
c. arbitrage
d. equalization of costs
46. The international Fisher effect theory states that differences in interest rates between two countries will be
offset by equal but opposite changes in
a. the future spot rate
b. the future interest rate
c. the American dollar
d. the euro
47. Name the factors that affect exchange rates.
48. How does a firm manage economic exposure due to changes in exchange rates?
Chapter 22: International Financial Management
49. What are two hedging techniques that a U.S. company might use to protect itself against foreign exchange risk
with regard to transaction exposure?
50. How do market forces support the relative purchasing power parity?
51. There are two methods used to forecast future exchange rates. What are they and how do companies use
them to protect against risk?