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1) Which of the following is not a way in which country risk analysis can be used?
a. to monitor countries where an MNC is currently doing business
b. as a screening device to avoid conducting business in countries with excessive risk
c. to revise an MNC's financing decisions
d. to determine the degree to which the MNC is exposed to exchange rate movements
2) Which of the following is true?
a. Some countries may prohibit netting
b. Some countries may prohibit forms of leading and lagging
c. A and B
d. None of the above
3) To hedge a payable position with a currency option hedge, an MNC would write a
call option.
a. True
b. False
4) Since each subsidiary may be more concerned with its own operations than with the
overall operations of the MNC, a centralized management group may need to monitor
the parent-subsidiary and intersubsidiary cash flows.
a. True
b. False
5) Which currency is used the most to denominate Eurobonds?
a. the British pound
b. the Japanese yen
c. the U.S. dollar
d. the Swiss franc
6) Which of the following is not a method of forecasting exchange rate volatility?
a. Using the absolute forecast error as a percentage of the realized value to improve
your forecast
b. Using the volatility of historical exchange rate movements as a forecast for the future
c. Using a time series of volatility patterns in previous periods
d. Deriving the exchange rate's implied standard deviation from the currency option
pricing model
7) The interest rate the bank charges the customer in a banker's acceptance is referred to
as the all-in rate; it entirely consists of the acceptance commission.
a. True
b. False
8) China's yuan is presently:
a. allowed to fluctuate freely without any central bank intervention
b. allowed to fluctuate but with central bank intervention
c. pegged to the dollar
d. pegged to the euro
9) Severus Co. has to pay 5 million Canadian dollars for supplies it recently received
from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S.
dollar. Severus has determined that whenever the Canadian dollar appreciates against
the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent on the
following day. Based on this information, the Canadian dollar is expected to ____
tomorrow, and Severus would prefer to make payment ____.
a. depreciate by .8%; today
b. depreciate by .8%; tomorrow
c. appreciate by .8%; today
d. appreciate by .8%; tomorrow
10) Assume that an American firm wants to engage in international business without
major investment in the foreign country. Which method is least appropriate in this
situation?
a. International Trade
b. Licensing
c. Franchising
d. Direct foreign investment
11) If the Singapore dollar appreciates against the U.S. dollar over this year, the
consolidated earnings of a U.S. company with a subsidiary in Singapore will be ____ as
a result of the exchange rate movement.
a. negative
b. adversely affected
c. favorably affected
d. unaffected
12) Normally, when a pegged exchange rate is broken because of a crisis in that
country, there is downward pressure on the local currency of that country.
a. True
b. False
13) Exhibit 11-1
Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360
days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is
$1.46. What is Pablo's cost from implementing a money market hedge (assume Pablo
does not have any excess cash)?
a. $224,135
b. $226,269
c. $224,114
d. $223,212
14) Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the
return on the stock market overall is expected to be 13%. What is the required rate of
return on Zoro stock?
a. 21%.
b. 41%.
c. 16%.
d. 13%.
e. none of the above
15) The one-year forward rate of the British pound is $1.55, while the current spot rate
is $1.60. Based on the forward rate, what is the expected percentage change in the
British pound over the next year?
a. +5.0%
b. -3.1%
c. +3.1%
d. +3.2%
e. None of the above
16) Exhibit 20-2
To benefit from the low correlation between the Canadian dollar (C$) and the Japanese
yen (), Luzar Corporation decides to borrow 50% of funds needed in Canadian dollars
and the remainder in yen. The domestic financing rate for a one-year loan is 7%. The
Canadian one-year interest rate is 6% and the Japanese one-year interest rate is 10%.
Luzar has determined the following possible percentage changes in the two individual
currencies as follows:
Refer to Exhibit 20-2. What is the expected effective financing rate of the portfolio
Luzar is contemplating (assume the two currencies move independently from one
another)?
a. 9.03%
b. 7.00%
c. 10.00%
d. 7.59%
e. none of the above
17) The term "eurobor" is widely used to reflect the interbank offer rate on euros.
a. True
b. False
18) Which of the following is least likely to influence an MNC's capital structure?
a. The stability of MNC's cash flows
b. The MNC's credit risk
c. The MNC's access to earnings
d. The MNC's decision to invest excess cash in a Treasury bill rather than in a bank
19) Assume that a speculator received news that makes her believe that the yen will
appreciate or depreciate substantially in the near future, but she is not certain of the
direction. Also assume that exercise price of call and put options are the same. The most
appropriate method for speculation is ____and it may be achieved by ____.
a. straddle; purchase put option and purchase call option
b. strangle; purchase put option and sell call option
c. strangle; sell put option and sell put option
d. straddle; sell put option and buy call option
20) The ____ is a self-sustaining federal agency responsible for insuring direct U.S.
investments in foreign countries against the risk of currency inconvertibility,
expropriation, and other political risks.
a. Export-Import Bank of the United States
b. Private Export Funding Corporation
c. Overseas Private Investment Corporation
d. none of the above
21) The Multilateral Investment Guarantee Agency can provide MNCs implementing
direct foreign investment in less developed countries with:
a. insurance that covers losses on multilateral netting procedures
b. exchange rate risk insurance
c. political risk insurance
d. guarantees that MNCs will receive the same taxation treatment by the host
government as local firms
e. guarantees of lines of credit provided by the World Bank if the MNC experiences
liquidity problems
22) An international project's NPV is ____ related to the size of the initial investment
and ____ related to the project's required rate of return.
a. positively; positively
b. positively; negatively
c. negatively; positively
d. negatively; negatively
23) The markets that have a smaller amount of foreign exchange trading for speculatory
purposes than for trade purposes will likely experience more volatility than those where
trade flows play a larger role.
a. True
b. False
24) Financial flow foreign exchange transactions are more responsive to news than
trade-related transactions.
a. True
b. False
25) An MNC valuing a foreign target for acquisition purposes must account for all of
the following, except:
a. the foreign exchange rate
b. withholding taxes imposed by the host government
c. blocked-funds restrictions
d. income taxes imposed by the U.S. government
e. An MNC must account for all of the above
