1) A subsidiary will normally have a more difficult time forecasting future outflow
payments if its purchases are international rather than domestic.
2) The feasibility of a multinational project from the parent’s perspective is dependent
not on the subsidiary cash flows but on the cash flows that it ultimately receives.
3) Portfolio investment represents transactions involving long-term financial assets
(such as stocks and bonds) between countries that do not affect the transfer of control.
4) The lower bound of the call option premium is the greater of zero and the difference
between the spot rate and the exercise price; the upper bound of a currency call option
is the spot rate.
5) Managers of MNCs are typically expected to use currency derivatives for speculation
in order to improve profits.
6) The tradeoff when considering alternative call options to hedge a currency position is
that an MNC can obtain a call option with a higher exercise price, but would have to
pay a higher premium.
7) Firms with more in foreign costs than in foreign revenues will be favorably affected
by a stronger foreign currency.
8) The translation gain (or loss) is simply a paper gain (or loss). Conversely, the gain (or
loss) resulting from a hedge strategy is a real gain (or loss).
9) Although netting typically increases the need for foreign exchange conversion, it
generally reduces the number of cross border transactions between subsidiaries.
10) A country with a currency board does not have control over its local interest rates.
11) If the parent charges the subsidiary administrative fees, the earnings from the
project will appear low to the parent and high to the subsidiary.
12) An MNC should periodically reassess its investments to determine whether to
divest them.
13) A motivation for forecasting exchange rate volatility is to obtain a range
surrounding the forecast.
14) To hedge a payable position in a foreign currency with a money market hedge, the
MNC would borrow the foreign currency, convert it to dollars, and invest that amount
in the U.S. until the payable is due.
15) ____ is not a factor that affects the bid/ask spread.
a.Order costs
b.Inventory costs
c.Volume
d.All of the above factors affect the bid/ask spread
16) Assume that you forecast the value of the euro as follows for the next year:
Percentage ChangeProbability of Occurrence
-2%30%
3%40%
5%30%
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
17) Which of the following is a reason why commercial banks can facilitate
international trade?
a.The exporter may not wish to accept credit risk of the importer
b.The government may impose exchange contracts that prevent payment by the
importer to the exporter
c.The exporter may need financing until payment for the goods is received
d.All of the above
18) If you expect the euro to depreciate, it would be appropriate to ____ for speculative
purposes.
a.buy a euro call and buy a euro put
b.buy a euro call and sell a euro put
c.sell a euro call and sell a euro put
d.sell a euro call and buy a euro put
19) Country risk analysis is important because it:
a.can be used by MNCs as a screening device to avoid countries with excessive risk
b.can be used by MNCs to monitor countries where the MNC is presently engaged in
international business
c.can be used to improve the analysis used to make long-term investing or financing
decisions
d.all of the above
20) Assume the following bid and ask rates of the pound for two banks as shown below:
BidAsk
Bank C$1.61$1.63
Bank D$1.58$1.60
As locational arbitrage occurs:
a.the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will
increase
b.the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will
decrease
c.the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will
decrease
d.the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will
increase
21) A foreign project generates a negative cash flow in year 1 and positive cash flows in
years 2 through 5. The NPV for this project will be higher if the foreign currency ____
in year 1 and ____ in years 2 through 5.
a.depreciates; depreciates
b.appreciates; appreciates
c.depreciates; appreciates
d.appreciates; depreciates
22) To diversify internationally for the purpose of reducing risk, which strategy is
appropriate?
a.Establish subsidiaries in markets whose business cycles are the same as those where
existing subsidiaries are based
b.Establish a subsidiary in a market that has relatively low cost of labor or land
c.Establish a subsidiary in a market where the local currency is weak but is expected to
appreciate over time
d.Establish subsidiaries in markets whose business cycles differ from those where
existing subsidiaries are based
23) If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is
receiving 100,000 in 90 days, it could:
a.obtain a 90-day forward purchase contract on euros
b.obtain a 90-day forward sale contract on euros
c.purchase euros 90 days from now at the spot rate
d.sell euros 90 days from now at the spot rate
24) If a foreign currency is expected to ____ substantially against the parent’s currency,
the parent may prefer to ____ the remittance of subsidiary earnings.
a.weaken; delay
b.weaken; expedite
c.appreciate; expedite
d.none of the above
25) Petrus Company has a unique opportunity to invest in a two-year project in
Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the
first year and 2,000,000 Australian dollars in the second. Petrus would have to invest
$1,500,000 in the project. Petrus has determined that the cost of capital for similar
projects is 14%. What is the net present value of this project if the spot rate of the
Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?
a.$2,905,817
b.-$94,183
c.$916,128
d.none of the above
26) A micro-assessment of country risk:
a.is adjusted for the particular business of the firm involved
b.excludes all aspects relevant to a particular firm or project
c.A and B
d.none of the above
27) A mild form of political risk is a tendency of residents to purchase only:
a.imported products
b.locally produced products
c.products produced by MNCs
d.none of the above
28) A currency swap between two firms of different countries enables the exchange of
____ for ____ at periodic intervals.
a.stock; one currency
b.stock; a portfolio of foreign currencies
c.one currency; stock options
d.one currency; another currency
29) The most risky method(s) by which firms conduct international business is (are):
a.Franchising
b.The acquisitions of existing operations
c.The establishment of new subsidiaries
d.All of the above
e.B and C only
30) Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%.
According to the international Fisher effect, British pound’s spot exchange rate should
____ by about ____ over the year.
a.depreciate; 1.9%
b.appreciate; 1.9%
c.depreciate; 3.94%
d.appreciate; 3.94%
31) Which of the following is not a reason for devaluation of a currency?
a.high inflation
b.to reduce balance-of-trade deficit
c.to decrease the amount of imports
d.high unemployment
32) Under a fixed exchange rate system:
a.a foreign exchange market does not exist
b.central bank intervention in the foreign exchange market is not necessary
c.central bank intervention in the foreign exchange market is often necessary
d.central bank intervention in the foreign exchange market is not allowed
33) Generally, the financing costs associated with a foreign currency-denominated bond
will be ____ volatile than the financing costs of a domestic bond because of ____.
a.more; exchange rate movements
b.less; exchange rate movements
c.less; global economic conditions
d.none of the above
34) A U.S. corporation has purchased currency put options to hedge a 100,000
Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the
option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount
received by the corporation if it acts rationally?
a.$74,000
b.$84,000
c.$75,000
d.$85,000
35) Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro
is going to appreciate substantially over time. Assuming the firm is correct, the ideal
strategy is to:
a.sell euros forward
b.purchase euro currency put options
c.purchase euro currency call options
d.purchase euros forward
e.remain unhedged
36) According to information in the text, a host government would be least likely to
provide incentives for direct foreign investment (DFI) into its country if the firm
planning DFI:
a.would compete with local firms of the host country
b.would produce a good not currently available in the host country
c.would produce a good and export it to other countries
d.B and C
37) Assume the following information:
Predicted Value ofRealized Value of
PeriodNew Zealand DollarNew Zealand Dollar
1$.52$.50
2 .54 .60
3 .44 .40
4 .51 .50
Given this information, the mean absolute forecast error as a percentage of the realized
value is about:
a.1.5%
b.26%
c.6%
d.6.5%
e.none of the above
38) If you have bought a right to buy foreign currency, you are:
a.a call writer
b.a call buyer
c.a put writer
d.a put buyer
39) Which of the following is correct?
a.The longer the time to maturity, the less the value of a currency call option, other
things equal
b.The longer the time to maturity, the less the value of a currency put option, other
things equal
c.The higher the spot rate relative to the exercise price, the greater the value of a
currency put option, other things equal
d.The lower the exercise price relative to the spot rate, the greater the value of a
currency call option, other things equal
40) According to the text, the analysis of currencies forecasted with use of the forward
rate suggests that:
a.currencies exhibited about the same mean forecast errors as a percent of the realized
value
b.the Canadian dollar can be forecasted by U.S. firms with greater accuracy than other
currencies
c.the Swiss franc can be forecasted by U.S. firms with greater accuracy than other
currencies
d.none of the above
41) Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the
equilibrium prices of their currencies adjust to ____ changes in supply and demand
conditions.
a.less; even minor
b.less; only large
c.more; even minor
d.more; only large
e.none of the above
42) The ____ hedge is not a technique to eliminate transaction exposure discussed in
your text.
a.index
b.futures
c.forward
d.money market
e.currency option
43) A fundamental forecast that uses multiple values of the influential factors is an
example of:
a.sensitivity analysis
b.discriminant analysis
c.technical analysis
d.factor analysis
44) European currency options can be exercised ____; American currency options can
be exercised ____.
a.any time up to the expiration date; any time up to the expiration date
b.any time up to the expiration date; only on the expiration date
c.only on the expiration date; only on the expiration date
d.only on the expiration date; any time up to the expiration date