1) Regarding the U.S. balance of payments, capital account items are relatively minor
compared to the financial account items.
2) The standard deviation should be applied to values rather than percentage
movements when comparing volatility among currencies.
3) Because of errors in cash flow or exchange rate estimates, the estimated net present
value of acquiring a foreign target could be underestimated.
4) Government controls can only affect the supply of a given currency for sale and not
the demand.
5) In the United States, government rescues are not as common as in other countries.
Assuming that this is expected to continue in the future, the risk premium on a given
level of debt would be higher for U.S. firms than for firms of other countries,
everything else being equal.
6) There is an active secondary market for banker’s acceptances.
7) An acquirer based in a low-tax country may be able to generate higher cash flows
from acquiring a foreign target than an acquirer based in a high-tax country.
8) Forward contracts are usually liquidated by actual delivery of the currency, while
futures contracts are usually liquidated by offsetting transactions.
9) In multinational capital budgeting, depreciation is treated as a cash outflow.
10) The relative form of purchasing power parity (PPP) accounts for the possibility of
market imperfections such as transportation costs, tariffs, and quotas in establishing a
relationship between inflation rates and exchange rate changes.
11) Cross exchange rates are used to determine the relationship between the dollar and
two nondollar currencies.
12) The value of an MNC (from the parent’s perspective) is independent of the MNC’s
desired scheduling of remitted funds from the target.
13) Three common methods to incorporate an adjustment for risk into the capital
budgeting analysis are the use of risk-adjusted discount rates, sensitivity analysis, and
simulation.
14) Both call and put option premiums are affected by the level of the existing spot rate
relative to the strike price, the length of time before the expiration date, and the
potential variability of the currency.
15) Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S.
nominal interest rate decreases while the Chilean nominal interest rate remains stable.
According to the international Fisher effect, this implies expectations of ____ than
before, and that the Chilean peso should ____ against the dollar.
a.lower U.S. inflation; depreciate
b.lower U.S. inflation; appreciate
c.higher U.S. inflation; depreciate
d.higher U.S. inflation; appreciate
16) Which of the following is an example of direct intervention in foreign exchange
markets?
a.lowering interest rates
b.increasing the inflation rate
c.exchanging dollars for foreign currency
d.imposing barriers on international trade
17) The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The
spot rate for the British pound is $1.50. According to the international Fisher effect
(IFE), the British pound should adjust to a new level of:
a.$1.47
b.$1.53
c.$1.43
d.$1.57
18) Transaction exposure reflects:
a.the exposure of a firm’s international contractual transactions to exchange rate
fluctuations
b.the exposure of a firm’s local currency value to transactions between foreign exchange
traders
c.the exposure of a firm’s financial statements to exchange rate fluctuations
d.the exposure of a firm’s cash flows to exchange rate fluctuations
19) Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S.
is 8%. According to PPP, the Singapore dollar should ____ by ____%.
a.appreciate; 4.85
b.depreciate; 3,11
c.appreciate; 3.11
d.depreciate; 4.85
20) According to the text, the forward rate is commonly used for:
a.hedging
b.immediate transactions
c.previous transactions
d.bond transactions
21) Over the last several years, international trade has generally:
a.increased for most major countries
b.decreased for most major countries
c.stayed about constant for most major countries
d.increased for about half the major countries and decreased for the others
22) The U.S. dollar is not ever used as a medium of exchange in:
a.industrialized countries outside the U.S
b.in any Latin American countries
c.in Eastern European countries where foreign exchange restrictions exist
d.none of the above
23) A ____ gives its owner the right to enter into a swap.
a.basis swap
b.swaption
c.callable swap
d.putable swap
24) Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit
(MYR) receivables. For the next month, Money has identified its net exposure to the
ringgit as being MYR1,500,000. The 30-day forward rate is $.23. Furthermore, Money’s
financial center has indicated that the possible values of the Malaysian ringgit at the end
of next month are $.20 and $.25, with probabilities of .30 and .70, respectively. Based
on this information, the revenue from hedging minus the revenue from not hedging
receivables is____.
a.$0
b.-$7,500
c.$7,500
d.none of the above
25) International money market transactions normally represent:
a.the equivalent of $1 million or more
b.the equivalent of $1,000 to $10,000
c.the equivalent of between $10,000 and $100,000
d.the equivalent of between $100,000 and $200,000
26) Which of the following theories suggests that the percentage change in spot
exchange rate of a currency should be equal to the inflation differential between two
countries?
a.purchasing power parity (PPP)
b.triangular arbitrage
c.international Fisher effect (IFE)
d.interest rate parity (IRP)
27) Assume that interest rates of most industrialized countries are similar to the U.S.
interest rate. In the last few months, the currencies of all industrialized countries
weakened substantially against the U.S. dollar. If non-U.S. firms based in these
countries financed with U.S. dollars during this period (even when they had no
receivables in dollars), their effective financing rate would have been:
a.negative
b.zero
c.positive, but lower than the interest rate of their respective countries
d.higher than the interest rate of their respective countries
28) According to the text, in order to develop a distribution of possible net present
values from international projects, a firm should use:
a.a risk-adjusted discount rate
b.a payback period
c.certainty equivalents
d.simulation
29) If a U.S. firm’s sales in Australia are much greater than its cost of goods sold in
Australia, the appreciation of the Australian dollar has a ____ impact on the firm’s
____.
a.positive; interest expenses
b.positive; gross profit
c.negative; interest expenses
d.negative; gross profit
30) An MNC issues ten-year bonds denominated in 500,000 Philippines pesos (PHP) at
par. The bonds have a coupon rate of 15%. If the peso remains stable at its current level
of $.025 over the lifetime of the bonds and if the MNC holds the bonds until maturity,
the financing cost to the MNC will be:
a.10.0%
b.12.5%
c.15.0%
d.none of the above
31) Laketown Co. has some expenses and revenue in euros. If its expenses are more
sensitive to exchange rate movements than revenue, it could reduce economic exposure
by ____. If its revenues are more sensitive than expenses, it could reduce economic
exposure by ____.
a.decreasing foreign revenues; decreasing foreign expenses
b.decreasing foreign revenues; increasing foreign expenses
c.increasing foreign revenues; decreasing foreign revenues
d.decreasing foreign expenses; increasing foreign revenues
32) 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
33) Which of the following is not a technique to optimize cash flows?
a.Accelerate cash inflows
b.Minimize currency conversion costs
c.Manage blocked funds
d.All of the above are techniques to optimize cash flows
34) The best means of using direct foreign investment (DFI) to fully benefit from cheap
foreign factors of production is probably to:
a.acquire a competitor that has controlled its local market
b.establish a subsidiary in a new market that can sell products produced elsewhere; this
allows for increased production and possibly greater production efficiency
c.establish a subsidiary in a market that has relatively low costs of labor and land; sell
the finished product to countries where the cost of production is higher
d.establish a subsidiary in a market in which raw materials are cheap and accessible;
sell the finished product to countries in which the raw materials are more expensive
35) Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank
Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank
V. Given this information, what would be your gain if you use $1,000,000 and execute
locational arbitrage? That is, how much will you end up with over and above the
$1,000,000 you started with?
a.$10,003
b.$12,063
c.$14,441
d.$16,393
e.$18,219
36) A country’s net outflow of funds ____ affect its interest rates, and ____ affect its
economic conditions.
a.does; does
b.does; does not
c.does not; does not
d.does not; does
37) Quasik Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days.
Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is
available. Also, a 90-day put option with an exercise price of $.73 and a premium of
$.01 is available. Quasik plans to purchase options to hedge its receivable position.
Assuming that the spot rate in 90 days is $.71, what is the net amount received from the
currency option hedge?
a.$219,000
b.$222,000
c.$216,000
d.$213,000
38) Exhibit 20-3
Cameron Corporation would like to simultaneously borrow Japanese yen () and
Sudanese dinar (SDD) for a six-month period. Cameron would like to determine the
expected financing rate and the variance of a portfolio consisting of 30% yen and 70%
dinar. Cameron has gathered the following information:
Mean effective financing rate of Japanese yen for six months4%
Mean effective financing rate of Sudanese dinar for six months1%
Standard deviation of Japanese yen’s effective financing rate.10
Standard deviation of Sudanese dinar’s effective financing rate.20
Correlation coefficient of effective financing rates of these two currencies.23
Refer to Exhibit 20-3. What is the expected standard deviation of the portfolio
contemplated by Cameron?
a.2.24%
b.14.98%
c.2.89%
d.17.00%
e.none of the above
39) According to your text, ____ is a country that has been perceived as one of the most
attractive sources of new demand.
a.Paraguay
b.Morocco
c.Sweden
d.China
40) One argument for why subsidiaries should be only partly-owned by the parent is:
a.that the potential conflict of interests between the MNC’s managers and shareholders
is avoided
b.that the potential conflict of interests between the MNC’s majority shareholders and
minority shareholders is avoided
c.that the potential conflict of interests between the MNC’s existing creditors is avoided
d.to motivate subsidiary managers by allowing them partial ownership