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1) Which of the following would probably not cause the stock price of a foreign target
to decrease?
a. Its expected cash flows decline
b. General stock market conditions in the foreign country are deteriorating
c. Investors anticipate that the target will be acquired
d. All of the above will cause the target's stock price to decrease
2) Which of the following is not true regarding options?
a. The buyer of a call option has the right to buy the currency at the strike price
b. The writer of a call option has the obligation to sell the currency to the buyer if the
option if exercised
c. The buyer of a put option has the right to sell the currency at the strike price
d. The writer of a put option has the obligation to sell the currency to the buyer if the
option is exercised
3) Foreign exchange markets are generally found to be at least ____ efficient.
a. weak-form
b. semistrong-form
c. strong form
d. none of the above
4) One foreign project in Hungary and another in Japan had the same perceived value
from the U.S. parent's perspective. Then, the exchange rate expectations were revised,
upward for the value of the Hungarian forint and downward for the Japanese yen. The
break-even salvage value for the project in Japan would now be ____ from the parent's
perspective.
a. negative
b. higher than that for the Hungarian project
c. lower than that for the Hungarian project
d. the same as that for the Hungarian project
e. A and C
5) Which of the following are most commonly traded on an exchange?
a. forward contracts
b. futures contracts
c. currencies
d. none of the above
6) American style options can be exercised any time up to maturity.
a. True
b. False
7) Consider Firm A and Firm B that both produce the same product. Firm A would more
likely have more stable cash flows if its percentage of foreign sales were ____ and the
number of foreign countries it sold products to was ____.
a. higher; large
b. higher; small
c. lower; small
d. higher; large
8) If the foreign exchange market is ____ efficient, then technical analysis is not useful
in forecasting exchange rate movements.
a. weak-form
b. semistrong-form
c. strong form
d. all of the above
9) The sale of a subsidiary by an MNC is referred to as a divestiture.
a. True
b. False
10) Jensen Co. expects to pay 50,000 in one month for its imports from France. It also
expects to receive 200,000 for its exports to Belgium in one month. Jensen estimates
the standard deviation of monthly percentage changes of the euro to be 2.5 percent over
the last 50 months. Assume that these percentage changes are normally distributed.
Using the value-at-risk (VAR) method based on a 97.5% confidence level, what is the
maximum one month loss in dollars if the expected percentage change of the euro
during next month is 2%? Assume that current spot rate of the euro (before considering
the maximum one-month loss) is $1.35.
a. -$4,303
b. -$7,830
c. -$5,873
d. -$1,958
11) FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a
payable position. 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. FAB plans to purchase options to hedge its payable
position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid,
assuming FAB wishes to minimize its cost?
a. $144,000
b. $148,000
c. $152,000
d. $150,000
12) 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.
a. True
b. False
13) The value of euro was $1.30 last week. During last week the euro depreciated by
5%. What is the value of euro today?
a. $1.365
b. $1.235
c. $1.330
d. $1.30
14) Assume a forecasting model uses inflation differentials and interest rate differentials
to forecast the exchange rate. Assume the regression coefficient of the interest rate
differential variable is -.5, and the coefficient of the inflation differential variable is .4.
Which of the following is true?
a. The interest rate variable is inversely related to the exchange rate, and the inflation
variable is directly (positively) related to the interest rate variable
b. The interest rate variable is inversely related to the exchange rate, and the inflation
variable is directly related to the exchange rate
c. The interest rate variable is directly related to the exchange rate, and the inflation
variable is directly related to the exchange rate
d. The interest rate variable is directly related to the exchange rate, and the inflation
variable is directly related to the interest rate variable
15) Werner Corporation has a target capital structure that consists of 40% debt and 60%
equity. Werner can borrow at an interest rate of 10%. Also, Werner has determined its
cost of equity to be 14%. Werner's tax rate is 40%. What is Werner's weighted average
cost of capital?
a. 10.80%
b. 12.40%
c. 9.20%
d. None of the above
16) When expecting a foreign currency to depreciate, a possible way to speculate on
this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in
the foreign country, and use the proceeds from this investment to repay the dollar loan.
a. True
b. False
17) If graphical points lie above the perfect forecast line, than the forecast
overestimated the future value.
a. True
b. False
18) Kushter Inc. would like to finance in euros. European interest rates are currently
4%, and the euro is expected to depreciate by 2% over the next year. What is Kushter's
effective financing rate next year?
a. 1.92%
b. 2.00%
c. 6.08%
d. none of the above
19) One argument for why subsidiaries should be wholly-owned by the parent is that
the potential conflict of interests between the MNC's ____ is avoided.
a. managers and shareholders
b. majority shareholders and minority shareholders
c. existing creditors
d. managers and creditors
20) In ____, a bank arranges to fund a loan to pay the exporter instead of charging the
importer's account immediately.
a. refinancing of a sight letter of credit
b. a banker's acceptance
c. a short-term bank loan
d. accounts receivable financing
21) The forward market:
a. for euros is very illiquid
b. for Eastern European countries is very liquid
c. does not exist for some currencies
d. none of the above
22) Assume no transactions costs exist for any futures or forward contracts. The price of
British pound futures with a settlement date 180 days from now will:
a. definitely be above the 180-day forward rate
b. definitely be below the 180-day forward rate
c. be about the same as the 180-day forward rate
d. none of the above; there is no relation between the futures and forward prices
23) The strike price is also known as the premium price.
a. True
b. False
24) Purchasing power parity (PPP) focuses on the relationship between nominal interest
rates and exchange rates between two countries.
a. True
b. False
25) 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.
a. True
b. False
26) Since the results of both a money market hedge and a forward hedge are known
beforehand, an MNC can implement the one that is more feasible.
a. True
b. False
27) ____ involve(s) the collection of independent opinions on country risk without
group discussion by the assessors who provide these opinions.
a. The checklist approach
b. The Delphi technique
c. Quantitative analysis
d. Inspection visits
28) Two methods to assess exchange rate volatility are the volatility of historical
exchange rate movements and the exchange rate's implied standard deviation from the
currency option pricing model.
a. True
b. False
29) If the U.S. dollar appreciates, an MNC's:
a. U.S. sales will probably decrease
b. exports denominated in U.S. dollars will probably increase
c. interest owed on foreign funds borrowed will probably increase
d. exports denominated in foreign currencies will probably increase
e. all of the above
30) Currency options are only traded on exchanges. That is, there is no over-the-counter
market for options.
a. True
b. False
31) From a bank's viewpoint, issuing a letter of credit is analogous to making a loan as
far as risk is concerned.
a. True
b. False
32) A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the
plant was built, the MNC determines that its exchange rate forecasts, which had
previously indicated a slight appreciation in the Algerian dinar, were probably false.
Instead of a slight appreciation, the MNC now expects that the dinar will depreciate
substantially due to political turmoil in Algeria. This new development would likely
cause the MNC to ____ its estimate of the previously computed net present value.
a. lower
b. increase
c. lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease
in NPV
d. increase, but not necessarily if the MNC reduces its investment in Algeria by an
offsetting amount
e. none of the above
