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1) In general, the ____ rate payer in a plain vanilla swap believes interest rates are
going to ____.
a. fixed; decline
b. floating; decline
c. floating; increase
d. none of the above
2) The VAR method presumes that the distribution of exchange rate movements is
normal.
a. True
b. False
3) Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on
Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian
inflation is expected to be 7%. You have $100,000 to invest for one year and you
believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What
will be the yield on your investment if you invest in the Australian market?
a. 6%
b. 3%
c. 4%
d. 2%
4) According to the text, research generally supports ____ in foreign exchange markets.
a. weak-form efficiency
b. semistrong-form efficiency
c. strong-form efficiency
d. A and B
e. B and C
5) The current account represents the investment in fixed assets in foreign countries that
can be used to conduct business operations.
a. True
b. False
6) The North American Free Trade Agreement (NAFTA) increased restrictions on:
a. trade between Canada and Mexico
b. trade between Canada and the U.S
c. direct foreign investment in Mexico by U.S. firms
d. none of the above
7) When the foreign exchange market opens in the U.S. each morning, the opening
exchange rate quotations will be based on the:
a. closing prices in the U.S. during the previous day
b. closing prices in Canada during the previous day
c. prevailing prices in locations where the foreign exchange markets have been open
d. officially set by central banks before the U.S. market opens
8) If partial financing is provided by the foreign subsidiary, including foreign interest
payments in the cash flow analysis may avoid overstatement of the estimated foreign
cash flows.
a. True
b. False
9) Assume that the government of Krusho requires bribes to approve certain projects.
MNCs that attempt to do business in Krusho must deal with:
a. protective barriers
b. "red tape" barriers
c. ethical differences
d. regulatory barriers
10) When a country's currency is inconvertible, the earnings generated by a subsidiary
in that country cannot be remitted to the parent through currency conversion.
a. True
b. False
11) MNCs generally do not need to hedge because shareholders can hedge their own
risk.
a. True
b. False
12) ____ is not a political risk factor.
a. High interest rates in a foreign country
b. Currency inconvertibility
c. War
d. Corruption
13) The capital asset pricing model suggests that the required return on a firm's stock is
a negative function of:
a. the risk-free rate of interest
b. the market rate of return
c. the stock's beta
d. none of the above
14) Which of the following statements is not true?
a. Exporters commonly complain that they are being mistreated because the currency of
their country is too weak
b. Outsourcing affects the balance of trade because it means that a service is purchased
in another country
c. Sometimes, trade policies are used to punish countries for various actions
d. Tariffs imposed by the EU have caused some friction between EU countries that
commonly import products and other EU countries
e. All of the above are true
15) Certificates representing bundles of stock of non-U.S. firms are called:
a. Eurobonds
b. ADRs
c. FRNs
d. Eurobor
16) An interest rate swap between two firms of different countries enables the exchange
of ____ for ____.
a. fixed-rate payments; floating-rate payments
b. stock; interest deductions on taxes
c. interest payments on loans; ownership of debt of less developed countries
d. interest payments on loans; stock
17) Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be
received in the future from this subsidiary have not changed since last month, but the
valuation of Saller Co. has declined since last month. What could've caused this decline
in value?
a. A weaker Mexican economy
b. Lower Mexican interest rates
c. Depreciation of the Mexican peso
d. Appreciation of the Mexican peso
18) The demand for U.S. exports tends to increase when:
a. economic growth in foreign countries decreases
b. the currencies of foreign countries strengthen against the dollar
c. U.S. inflation rises
d. none of the above
19) Orlando Co. produces home appliances and sells them in the U.S. It outsources the
production of the appliances to a Chinese manufacturer, and the imported appliances are
priced in dollars. Its major competitor for appliances is located in Mexico. Based on
this information, Orlando Co. is subject to ____ exposure.
a. economic
b. transaction
c. translation
d. economic and transaction
20) Huge Corporation has just initiated a market-based forecast system using the
forward rate as an estimate of the future spot rate of the Japanese yen () and the
Australian dollar (A$). Listed below are the forecasted and realized values for the last
period:
According to this information and using the absolute forecast error as a percentage of
the realized value, the forecast of the yen by Huge Corp. is ____ the forecast of the
Australian dollar.
a. more accurate than
b. less accurate than
c. more biased than
d. the same as
21) 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
22) 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
23) Which of the following is not a trade financing method used in international trade
from an exporter's perspective?
a. Accounts receivable financing
b. Letter of credit
c. Barter
d. Open account
24) Which of the following is true regarding the euro?
a. Exchange rate risk between participating European currencies is completely
eliminated, encouraging more trade and capital flows across European borders
b. It allows for more consistent economic conditions across countries
c. It prevents each country from conducting its own monetary policy
d. All of the above are true
25) A put option on Swiss franc has a strike (exercise) price of $.92. The present
exchange rate is $.89. This put option can be referred to as:
a. in the money
b. out of the money
c. at the money
d. at a discount
26) Assume the following information:
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
27) If interest rate parity exists and transactions costs are zero, the hedging of payables
in euros with a forward hedge will ____.
a. have the same result as a call option hedge on payables
b. have the same result as a put option hedge on payables
c. have the same result as a money market hedge on payables
d. require more dollars than a money market hedge
e. A and D
28) An MNC with receivables in Japanese Yen purchases yen forward to hedge its
exposure to exchange rate fluctuations.
a. True
b. False
29) 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
