1) Intracompany trade makes up approximately ____ percent of all international trade.
a. 50
b. 70
c. 25
d. 13
e. 5
2) At present, U.S. firms acquire more targets in the former Soviet Union than in any
other country.
a. True
b. False
3) An American tourist visiting Germany and spending money there (for lodging, food,
etc.) will reduce the U.S. current account deficit and reduce Germany’s current account
balance.
a. True
b. False
4) Which of the following is not a method that can be used to invest internationally?
a. Investment in MNC stocks
b. American depository receipts (ADRs)
c. World Equity benchmark Shares (WEBS)
d. International mutual funds
e. All of the above are methods that can be used to invest internationally
5) While an overall risk rating of a country can be useful, it cannot always detect
upcoming crises.
a. True
b. False
6) Generally, MNCs with less foreign revenues than foreign costs will be ____ affected
by a ____ foreign currency.
a. favorably; stronger
b. favorably; weaker
c. not; stronger
d. not; weaker
7) Assume a central bank exchanges its currency for other foreign currencies in the
foreign exchange market, but does not adjust for the resulting change in the money
supply. This is an example of:
a. pegged intervention
b. indirect intervention
c. nonsterilized intervention
d. sterilized intervention
e. A and D
8) Assume that you forecast the value of the euro as follows for the next year:
If the interest rate on the euro is 12%, the expected effective yield from a
euro-denominated deposit is:
a. 15.36%
b. 15.70%
c. 12.00%
d. 14.35%
e. none of the above
9) Eurobonds:
a. can be issued only by European firms
b. can be sold only to European investors
c. A and B
d. none of the above
10) You purchase a call option on pounds for a premium of $.03 per unit, with an
exercise price of $1.64; the option will not be exercised until the expiration date, if at
all. If the spot rate on the expiration date is $1.65, your net profit per unit is:
a. -$.03
b. -$.02
c. -$.01
d. $.02
e. none of the above
11) Given a home country and a foreign country, purchasing power parity suggests that:
a. the inflation rates of both countries will be the same
b. the nominal interest rates of both countries will be the same
c. A and B
d. none of the above
12) Which of the following statements is incorrect?
a. Transaction exposure represents only the exchange rate risk when converting net
foreign cash inflows to U.S. dollars or when purchasing foreign currencies to send
payments
b. Economic exposure represents any impact of exchange rate fluctuations on a firm’s
future cash flows
c. Firms can simply focus on hedging their foreign currency payables and/or receivables
to hedge economic exposure
d. The management of economic exposure tends to serve as a long-term solution rather
than just a short-term solution
13) The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the
Australian dollar was $0.69. The Australian dollar ____ by ____%.
a. depreciated; 5.80
b. depreciated; 4.00
c. appreciated; 5.80
d. appreciated; 4.00
14) If a foreign country’s interest rate is similar to the U.S. rate, the forward rate
premium or discount will be ____, meaning that the forward rate and spot rate will
provide ____ forecasts.
a. substantial; similar
b. substantial; very different
c. close to zero; similar
d. close to zero; very different
15) The capital asset pricing model suggests that the required return on a firm’s stock is
a positive function of:
a. the risk-free rate of interest
b. the market rate of return
c. the stock’s beta
d. all of the above
16) Futures contracts are sold on exchanges and are consequently ____ than forward
contracts, which can be ____ to satisfy an MNC’s needs.
a. more standardized; standardized
b. more standardized; custom-tailored
c. more custom-tailored; standardized
d. more custom-tailored; custom-tailored
e. less standardized; custom-tailored
17) The most important variable in determining a country’s degree of overall country
risk:
a. is political risk
b. is financial risk
c. is the probability of a host government takeover
d. may often vary with the country of concern
18) If an MNC financed with a currency different from its invoice currency, it would
prefer that the loan be denominated in a currency that:
a. exhibits a low interest rate and is expected to appreciate
b. exhibits a low interest rate and is expected to depreciate
c. exhibits a high interest rate and is expected to depreciate
d. exhibits a high interest rate and is expected to appreciate
19) To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars
and simultaneously ____ Treasury securities.
a. buy; sell
b. sell; sell
c. sell; buy
d. buy; sell
20) A risk-averse firm would prefer to borrow ____ when the expected financing costs
are similar in a foreign country as in the local country.
a. locally
b. in the foreign country
c. either A or B
d. part of the funds locally, and part from the foreign country
21) The term “eurobor” is widely used to reflect the total amount of euros borrowed by
the firms in Europe per month to finance their growth.
a. True
b. False
22) ____ are beneficial because they may reduce transaction costs. However, MNCs
may not be able to obtain all the funds that they need.
a. Private placements
b. Domestic equity offerings
c. Global equity offerings
d. Global debt offerings
23) 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
24) If exchange rate movements are less volatile in the past than in the future, the
estimated maximum expected loss derived from the VAR method will be
underestimated.
a. True
b. False
25) When a foreign currency has a greater impact on cash outflows than on cash
inflows, one possibility in restructuring operations is to reduce foreign sales.
a. True
b. False
26) Country risk can affect an MNC’s cash flows but cannot affect its cost of capital.
a. True
b. False
27) If a parent’s perspective is used in analyzing a multinational project, the relevant
cash flows are the dollars ultimately received by the parent as a result of the project; the
relevant initial outlay is the investment by the parent.
a. True
b. False
28) 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:
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
29) A strong dollar places ____ pressure on inflation, which in turn places ____
pressure on the dollar.
a. upward; upward
b. downward; upward
c. upward; downward
d. downward; downward
30) Vermont Co. has foreign expenses denominated in euros that exceed foreign
revenues. Appreciation of the euro relative to the U.S. dollar will cause this firm’s
reported earnings (from the consolidated income statement) to ____. If a firm desired to
protect against this possibility, it could stabilize its reported earnings by ____ euros
forward in the foreign exchange market.
a. decrease; purchasing
b. decrease; selling
c. increase; selling
d. increase; purchasing
31) The Fed may use a stimulative monetary policy with least concern about causing
inflation if the dollar’s value is expected to:
a. remain stable
b. strengthen
c. weaken
d. none of the above will have an impact on inflation
32) An MNC’s cost of capital may differ from that of domestic firms because of their
access to international capital markets, their exposure to exchange rate risk, and other
characteristics.
a. True
b. False
33) 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
34) If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will
be periodically sent to the parent, the ideal situation from the parent’s perspective is a
____ after the subsidiary is established.
a. strengthening euro
b. stable euro
c. weak euro
d. B and C are both ideal
35) A weak home currency may not be a perfect solution to correct a balance of trade
deficit because:
a. it reduces the prices of imports paid by local companies
b. it increases the prices of exports by local companies
c. it prevents international trade transactions from being prearranged
d. foreign companies may reduce the prices of their products to stay competitive
36) If the Fed desires to weaken 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 valuation of an MNC is reduced if the required return on its investments in
foreign countries is reduced.
a. True
b. False