1) The maximum one-day loss estimated using the value-at-risk (VAR) method is
independent of the confidence level used.
2) Even after an MNC’s accept/reject decision of a foreign acquisition has been made, it
should be reassessed at various times. In fact, this analysis may indicate that a
previously accepted project should be divested.
3) A product cycle is the process by which a firm provides a specialized sales or service
strategy, support assistance, and possibly an initial investment in the franchise in
exchange for periodic fees.
4) Centralized cash management is more complicated when the MNC uses multiple
currencies.
5) While acquisitions of privatized businesses may be attractive because of the potential
for MNCs to increase their efficiency, the valuation of these businesses is generally
more difficult.
6) Country differences, such as differences in the risk-free interest rate and differences
in risk premiums across countries, can cause the cost of capital to vary across countries.
7) An MNC has determined that the degree of appreciation for the Singapore dollar that
equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less
than 2%, the investment in Singapore will be more attractive.
8) Trade-related foreign exchange transactions are more responsive to news than
financial flow transactions.
9) The transaction exposure of two inflow currencies is offset when the correlation
between the currencies is high.
10) Dollar cash flows associated with two foreign inflow currencies will normally be
less volatile if the standard deviations of the individual currencies are lower.
11) If a U.S. firm sets up a plant in Mexico to benefit from low cost labor, it will likely
have a comparative advantage over other firms in Mexico that sell the same product.
12) The government of a country may prevent a foreign firm from acquiring local
targets and downsizing the targets.
13) An MNC’s parent or subsidiary in need for funds commonly determines whether
there are any available internal funds before searching for outside funding.
14) Purchasing power parity is used in:
a.technical forecasting
b.fundamental forecasting
c.market-based accounting
d.all of the above
15) If an MNC sells a product in a foreign country and imports partially manufactured
components needed for production to that country from the U.S., then the local
economy’s inflation will have:
a.a more pronounced impact on revenues than on costs
b.a less pronounced impact on revenues than on costs
c.the same impact on revenues as on costs
d.none of the above
16) If the foreign exchange market is ____ efficient, then historical and current
exchange rate information is not useful for forecasting exchange rate movements.
a.weak-form
b.semistrong-form
c.strong form
d.all of the above
17) When evaluating international project cash flows, which of the following factors is
relevant?
a.future inflation
b.blocked funds
c.exchange rates
d.all of the above
18) Which of the following is true regarding the options markets?
a.Hedgers and speculators both attempt to lower risk
b.Hedgers attempt to lower risk, while speculators attempt to make riskless profits
c.Hedgers and speculators are both necessary in order for the market to be liquid
d.all of the above
19) According to the IFE, if British interest rates exceed U.S. interest rates:
a.the British pound’s value will remain constant
b.the British pound will depreciate against the dollar
c.the British inflation rate will decrease
d.the forward rate of the British pound will contain a premium
e.today’s forward rate of the British pound will equal today’s spot rate
20) Due to the risks involved in international business, firms should:
a.only consider international business in major countries
b.maintain international business to no more than 20% of total business
c.maintain international business to no more than 35% of total business
d.none of the above
21) Assume that the New Zealand inflation rate is higher than the U.S. inflation rate.
This will cause U.S. consumers to ____ their imports from New Zealand and New
Zealand consumers to ____ their imports from the U.S. According to purchasing power
parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).
a.reduce; increase; appreciation
b.increase; reduce; depreciation
c.reduce; increase; depreciation
d.reduce; increase; appreciation
22) J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L
typically invoices these goods in euros and is concerned that the euro will depreciate in
the near future. Which of the following is not an appropriate technique under these
circumstances?
a.purchase euro put options
b.sell euros forward
c.sell euro futures contracts
d.sell euro put options
23) Which of the following would result in a profit of a futures contract when the
underlying currency depreciates?
a.Buy a futures contract; sell a futures contract after the currency has depreciated
b.Sell a futures contract; buy a futures contract after the currency has depreciated
c.Buy a futures contract; buy an additional futures contract after the currency has
depreciated
d.None of the above would result in a profit when the underlying currency of the
futures contract depreciates.
24) ____ is (are) not a limitation of hedging translation exposure.
a.Inaccurate stock price forecasts
b.Inadequate forward contracts for some currencies
c.Taxation on gains from forward contracts
d.Increased transaction exposure
25) If a foreign country’s consumers tend to only purchase products that are produced
locally, the least effective strategy for a U.S. firm is to:
a.use a licensing arrangement with a local firm in that country
b.enter into a joint venture in that country
c.develop a subsidiary (under the U.S. name) that manufactures and sells products in
that country
d.develop a subsidiary (under the U.S. name) that manufactures products in that country
and exports them to border countries
26) ____ is (are) not a form of political risk.
a.Exchange rate movements
b.Attitude of consumers in the host country
c.Actions of the host government
d.Blockage of fund transfers
e.All of the above are forms of political risk
27) MNCs can purchase insurance to cover the risk of expropriation. Which of the
following is not a source of this type of insurance?
a.the World Bank
b.the Overseas Private Investment Corporation (OPIC)
c.the International Monetary Fund (IMF)
d.all of the above are sources for insurance against expropriation
28) A bill of exchange requesting the bank to pay the face amount at a future date is a:
a.banker’s acceptance
b.time draft
c.letter of credit
d.sight draft
29) Other things being equal, the financial leverage of MNCs will be higher if the
governments of their home countries are ____ likely to rescue them (in the event of
failure), and if their home countries are ____ likely to experience a recession.
a.more; more
b.less; more
c.less; less
d.more; less
30) The Direct Loan Program is administered by the:
a.Private Export Funding Corporation (PEFCO)
b.Overseas Private Investment Corporation (OPIC)
c.Ex-Imbank
d.Foreign Credit Insurance Association (FCIA)
31) Assume that U.S. inflation is expected to surge in the near future. The expectation
of surge in inflation will most likely place ____ pressure on U.S. dollar immediately.
a.upward
b.downward
c.no
d.cannot be determined
32) Assume the following information:
You have $900,000 to invest:
Current spot rate of Australian dollar (A$)=$.62
180-day forward rate of the Australian dollar=$.64
180-day interest rate in the U.S.=3.5%
180-day interest rate in Australia=3.0%
If you conduct covered interest arbitrage, what is the dollar profit you will have realized
after 180 days?
a.$56,903
b.$61,548
c.$27,000
d.$31,500
33) Crown Co. is expecting to receive 100,000 British pounds in one year. Crown
expects the spot rate of British pound to be $1.49 in a year, so it decides to avoid
exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at
$1.51. The strike price of put and call options are $1.54 and $1.53 respectively. The
premium on both options is $.03. The one-year forward rate exhibits a 2.65% premium.
Assume there are no transaction costs. What is the best possible hedging strategy and
how many U.S. dollars Crown Co. will receive under this strategy?
a.buy a put option and receive $150,000
b.sell pounds forward and receive $155,000
c.sell a call option and receive $156,000
d.sell a put option and receive $157,000
34) Assume that Japan and the United States frequently trade with each other. Under the
freely floating exchange rate system, high inflation in the U.S. will place ____ pressure
on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____
inflation in Japan.
a.upward; reduce; unchanged
b.upward; increase; higher
c.downward; reduce; unchanged
d.downward; increase; higher
35) Consider a country that presently has a high level of unemployment because of
weak economic conditions. Its income levels are very low. This country may be an
attractive target as a result of ____ motives by U.S. firms that engage in direct foreign
investment.
a.revenue-related
b.cost-related
c.A and B
d.none of the above
36) According to the international Fisher effect, if investors in all countries require the
same real rate of return, the differential in nominal interest rates between any two
countries:
a.follows their exchange rate movement
b.is due to their inflation differentials
c.is zero
d.is constant over time
e.C and D
37) Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million.
Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its
interest expense on Canadian loans is C$4 million. Given these exact figures above, the
dollar value of Whitewater’s “earnings before interest and taxes” would ____ if the
Canadian dollar appreciates; the dollar value of Whitewater’s cash flows would ____ if
the Canadian dollar appreciates.
a.increase; increase
b.decrease; increase
c.decrease; decrease
d.increase; decrease
e.increase; be unaffected
38) Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit
(MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What
will be the profit for an investor who has $500,000 available to conduct locational
arbitrage?
a.$2,041,667
b.$9,804
c.$500
d.$1,639
39) If a speculator expects that the Fed will intervene by exchanging dollars for
Japanese yen, she would most likely ____ to capitalize on this intervention.
a.purchase yen put options
b.sell yen futures contracts
c.purchase yen call options
d.buy U.S. Treasury bonds
40) A previously undertaken project in a foreign country may no longer be feasible
because:
a.interest rates have declined
b.the MNC’s cost of capital has decreased
c.the host government has increased its tax rates substantially
d.exchange rate projections changed from a depreciation to an appreciation of the
foreign currency
41) A negative effective financing rate indicates that an MNC:
a.paid only a small amount in interested over and above the amount borrowed
b.has been negatively affected by a large appreciation of the foreign currency
c.actually paid fewer dollars to repay the loan than it borrowed
d.would have been better off borrowing in the U.S
42) Consider an exporter that is willing to send goods to the importer without a
guaranteed payment by the bank. The bank provides a loan to the exporter that is
backed by the value of the exported goods. This reflects:
a.accounts receivable financing
b.forfaiting
c.factoring
d.a letter of credit
43) Other things being equal, firms from a particular home country will engage in more
international acquisitions if they expect foreign currencies to ____ against their home
currency, and if their cost of capital is relatively ____.
a.appreciate; low
b.appreciate; high
c.depreciate; high
d.depreciate; low
44) If the Fed ____ the interest rates when inflationary expectations remain unchanged,
the most likely result is that the value of dollar will ____ and the economy may ____.
a.increases; appreciate; weaken
b.decreases; appreciate; weaken
c.increases; depreciate; strengthen
d.decreases; appreciate; strengthen
45) Which of the following is not directly considered in the decision by a U.S.-based
MNC to divest a subsidiary?
a.the required rate of return on the subsidiary
b.forecasted exchange rates of the subsidiary’s currency relative to the dollar
c.the initial outlay on the project
d.the possible selling price of the project
46) The discrepancy between the feasibility of a project in a host country from the
perspective of the U.S. parent versus the subsidiary administering the project is likely to
be greater for projects in countries where:
a.the taxes are the same as in the U.S
b.there are no blocked fund restrictions
c.the currency of the host country is expected to depreciate consistently
d.none of the above; a discrepancy is not possible