1) Forecast errors tend to be large for short forecast horizons.
2) When viewed as a project, the international acquisition usually generates quicker and
larger cash flows than the establishment of a new subsidiary, but it also requires a larger
initial outlay.
3) Developing countries are mostly targeted because they have advanced technology.
4) A decentralized management style, where subsidiary managers make the relevant
decisions regarding their subsidiary, may result in better decision making, as subsidiary
managers are generally better informed about their subsidiary’s operations.
5) A major advantage of the euro is the complete elimination of exchange rate risk on
transactions between participating European countries, which encourages more trade
and capital flows within Europe.
6) A currency call option grants the right to sell a specific currency at a designated price
within a specific time period.
7) A put option essentially represents two swaps of currencies, one swap at the
inception of the loan contract and another swap at a specified date in the future.
8) Currency options are only traded on exchanges. That is, there is no over-the-counter
market for options.
9) If interest rate parity exists, financing with a foreign currency may still be feasible,
but it would have to be conducted on an uncovered basis (i.e., without use of a forward
hedge).
10) The payment method that affords the supplier the greatest degree of protection is
the prepayment method.
11) A foreign target’s expected future cash flows generally vary among different MNCs
valuing the target.
12) If positions in a specific currency among an MNC’s subsidiaries offset each other,
the decision by one subsidiary to hedge its position in that currency would increase the
MNC’s overall exposure.
13) The overall variability of a firm’s returns depends on the expected return of each
individual project, percentage of funds invested in each individual project, and
correlation coefficient of returns between the investments.
14) U.S.-based MNCs could avoid country risk by simply avoiding international
business.
15) Overhedging refers to the hedging of a larger amount in a currency than the actual
transaction amount.
16) Both call and put option premiums are affected by the level of the existing spot
price relative to the strike price; for example, a high spot price relative to the strike
price will result in a relatively high premium for a call option but a relatively low
premium for a put option.
17) Under the system known as the “dirty” float, official boundaries for the exchange
rate exist, but they are wider than they are under a fixed exchange rate system.
18) U.S. exporters may not necessarily benefit from weak-dollar periods if foreign
competitors are willing to reduce their profit margin.
19) If one foreign currency will appreciate against the dollar, then all foreign currencies
will appreciate against the dollar but by different degrees.
20) The main effect of interest rate movements on exchange rates is through their effect
on international trade.
21) Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80.
What is the value of the Canadian dollar in pounds?
a.2.0
b.2.40
c..80
d..50
e.none of the above
22) The following regression model was estimated to forecast the percentage change in
the Australian Dollar (AUD):
AUDt = a0 + a1INTt + a2INFt – 1 + mt,
where AUD is the quarterly change in the Australian Dollar, INT is the real interest rate
differential in period t between the U.S. and Australia, and INF is the inflation rate
differential between the U.S. and Australia in the previous period. Regression results
indicate coefficients of a0=.001; a1=-.8; and a2=.5. Assume that INFt – 1 = 4%.
However, the interest rate differential is not known at the beginning of period t and
must be estimated. You have developed the following probability distribution:
ProbabilityPossible Outcome
20%-3%
80%-4%
There is a 20% probability that the Australian dollar will change by ____, and an 80%
probability it will change by ____.
a.4.5%; 6.1%
b.6.1%; 4.5%
c.4.5%; 5.3%
d.None of the above
23) Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese
yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on
those exports.
a.sell yen put options
b.buy yen call options
c.buy futures contracts on yen
d.sell futures contracts on yen
24) Eurobonds:
a.are usually issued in bearer form
b.typically carry several protective covenants
c.cannot contain call provisions
d.A and B
25) Countries that have adopted the euro tend to have very similar ____.
a.interest rates
b.inflation rates
c.income tax rates
d.budget deficits
26) The ____, an accord among 117 nations, called for lower tariffs around the world.
a.General Agreement on Tariffs and Trade (GATT)
b.North American Free Trade Agreement (NAFTA)
c.Single European Act of 1987
d.European Union Accord
e.None of the above
27) Vermont Co. has one foreign subsidiary. Its translation exposure is directly affected
by each of the following, except:
a.the interest rate in the country of the subsidiary
b.proportion of business conducted by the subsidiary
c.its accounting method
d.the exchange rate movements of the subsidiary’s currency
28) Assume the following information:
You have $400,000 to invest:
Current spot rate of Sudanese dinar (SDD)=$.00570
90-day forward rate of the dinar=$.00569
90-day interest rate in the U.S.=4.0%
90-day interest rate in Sudan=4.2%
If you conduct covered interest arbitrage, what amount will you have after 90 days?
a.$416,000.00
b.$416,800.00
c.$424,242.86
d.$416,068.77
e.none of the above
29) An increase in U.S. interest rates relative to German interest rates would likely ____
the U.S. demand for euros and ____ the supply of euros for sale.
a.reduce; increase
b.increase; reduce
c.reduce; reduce
d.increase; increase
30) According to the text, international trade (exports plus imports combined) as a
percentage of GDP is:
a.higher in the U.S. than in European countries
b.lower in the U.S. than in European countries
c.higher in the U.S. than in about half the European countries, and lower in the U.S.
than the others
d.about the same in the U.S. as in European countries
31) Small Corporation would like to forecast the value of the Cyprus pound (CYP) five
years from now using forward rates. Unfortunately, Small is unable to obtain quotes for
five-year forward contracts. However, Small observes that the five-year interest rate in
the U.S. is 11%, while the Cyprus five-year interest rate is 15%. Based on this
information, the Cyprus pound should ____ by ____% over the next five years.
a.appreciate; 16.22
b.depreciate; 16.22
c.appreciate; 6.66
d.depreciate; 6.66
e.none of the above
32) The premium of a currency put option will increase if:
a.the volatility of the underlying asset goes up
b.the time to maturity goes up
c.the spot rate declines
d.none of the above
33) Gamma Corporation has incurred large losses over the last ten years due to
exchange rate fluctuations of the Egyptian pound (EGP), even though the company has
used a market-based forecast based on the forward rate. Consequently, management
believes its forecasts to be biased. The following regression model was estimated to
determine if the forecasts over the last ten years were biased:
St = a0 + a1Ft – 1 + mt,
where St is the spot rate of the pound in year t and Ft – 1 is the forward rate of the
pound in year t-1. Regression results reveal coefficients of a0 = 0 and a1 = 1.3. Thus,
Gamma has reason to believe that its past forecasts have ____ the realized spot rate.
a.overestimated
b.underestimated
c.correctly estimated
d.none of the above
34) The most useful measure of an MNC’s liquidity is its:
a.cash balance
b.amount of securities held as investments
c.political risk rating
d.potential access to funds
35) The real interest rate adjusts the nominal interest rate for:
a.exchange rate movements
b.income growth
c.inflation
d.government controls
e.none of the above
36) If the Fed desires to strengthen the dollar without affecting the dollar money supply,
it should:
a.exchange dollars for foreign currencies, and sell some of its existing Treasury security
holdings for dollars
b.exchange foreign currencies for dollars, and sell some of its existing Treasury security
holdings for dollars
c.exchange dollars for foreign currencies, and buy existing Treasury securities with
dollars
d.exchange foreign currencies for dollars, and buy existing Treasury securities with
dollars
37) The World Bank extends loans only to developed nations, while the International
Development Association (IDA) extends loans only to developing nations.
38) ____ exposure is the degree to which the value of contractual transactions can be
affected by exchange rate fluctuations.
a.Transaction
b.Economic
c.Translation
d.None of the above
39) The following is not a limitation of technical forecasting:
a.It’s not suitable for long-term forecasts of exchange rates
b.It doesn’t provide point estimates or a range of possible future values
c.It cannot be applied to currencies that exhibit random movements
d.It cannot be applied to currencies that exhibit a continuous trend for short-term
forecast
40) Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the
return on the stock market overall is expected to be 13%. What is the required rate of
return on Zoro stock?
a.21%
b.41%
c.16%
d.13%
e.none of the above
41) When a foreign subsidiary is not wholly owned by the parent and a foreign project
is partially financed with retained earnings of the parent and of the subsidiary, then:
a.the parent’s perspective should be used to evaluate a foreign project
b.the subsidiary’s perspective should be used to evaluate a foreign project
c.the foreign project should enhance the value of both the parent and the subsidiary
d.none of the above
42) ____ typically have maturities of less than one year.
a.Eurobonds
b.Euro-commercial paper
c.Euronotes
d.ADRs
43) You are the treasurer of Arizona Corporation and must decide how to hedge (if at
all) future receivables of 350,000 Australian dollars (A$) 180 days from now. Put
options are available for a premium of $.02 per unit and an exercise price of $.50 per
Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is:
Future Spot RateProbability
$.4620%
$.4830%
$.5250%
The 90-day forward rate of the Australian dollar is $.50.
What is the probability that the put option will be exercised (assuming Arizona
purchased it)?
a.0%
b.80%
c.50%
d.none of the above
44) Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In
order to do so, it has applied regression analysis to determine whether the percentage
change in its total cash flow is related to the percentage change in the euro. A ____ and
statistically significant slope coefficient resulting from this analysis implies that the
cash flows are ____ related to the percentage changes in the euro.
a.positive; positively
b.positive; negatively
c.negative; positively
d.B and C
e.none of the above
45) Which of the following is probably not appropriate for an MNC wishing to reduce
its exposure to British pound payables?
a.Purchase pounds forward
b.Buy a pound futures contract
c.Buy a pound put option
d.Buy a pound call option
46) Which of the following is true according to the text?
a.Forecasts in recent years have been very accurate
b.Use of the absolute forecast error as a percent of the realized value is a good measure
to use in detecting a forecast bias
c.Forecasting errors are smaller when focused on longer term periods
d.None of the above
47) Which of the following is not true regarding a banker’s acceptance?
a.It can be beneficial to the exporter, as he does not have to worry about the credit risk
of the importer
b.It can be beneficial to the importer, as he may have greater access to foreign markets
when purchasing supplies
c.It can be beneficial to the bank accepting the draft in that it earns a commission for
creating an acceptance
d.It is a sight draft
e.All of the above are true
48) Assume a U.S.-based subsidiary wants to raise $1,000,000 by issuing a bond
denominated in Pakistani rupees (PKR). The current exchange rate of the rupee is $.02.
Thus, the MNC needs ____ rupees to obtain the $1,000,000 needed.
a.50,000,000
b.20,000
c.1,000,000
d.none of the above