1) The parent of MNC can implement compensation plans that directly reward the
subsidiary managers for enhancing the value of the MNC.
a. True
b. False
2) The Bank of England is responsible for setting the monetary policy for the European
countries participating in the euro.
a. True
b. False
3) Normally, each subsidiary of an MNC will issue its own stock where it does
business.
a. True
b. False
4) The payment method that affords the supplier the greatest degree of protection is the
prepayment method.
a. True
b. False
5) You purchase a put option on Swiss francs for a premium of $.02, with an exercise
price of $.61. The option will not be exercised until the expiration date, if at all. If the
spot rate on the expiration date is $.58, your net profit per unit is:
a. -$.03
b. -$.02
c. -$.01
d. $.02
e. none of the above
6) China is commonly criticized for keeping the yuan’s value at superficially high
levels.
a. True
b. False
7) Maston Corporation has forecasted the value of the Russian ruble as follows for the
next year:
If the Russian interest rate is 30%, the expected cost of financing a one-year loan in
rubles is:
a. 27.14%
b. 32.86%
c. 26.10%
d. none of the above
8) The objectives of the Export-Import Bank of the United States include the
assumption of underlying credit risk and country risk to encourage private lenders to
finance export trade and the provision of direct loans to foreign buyers when private
lenders are unwilling to do so.
a. True
b. False
9) When the Japanese yen appreciates against the U.S. dollar, this means that the U.S.
dollar is strengthening relative to the yen.
a. True
b. False
10) Country X frequently engages in trade flows with the U.S. (such as imports and
exports). Country Y frequently engages in capital flows with the U.S. (such as financial
investments). Everything else held constant, an increase in U.S. interest rates would
affect the exchange rate of Country X’s currency more than the exchange rate of
Country Y’s currency.
a. True
b. False
11) Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that
the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm
expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could
hedge by ____ dollars forward.
a. depreciate; buying
b. depreciate; selling
c. appreciate; selling
d. appreciate; buying
12) The ____ for a given country represents the annualized yield offered on debt for
various maturities.
a. LIBOR
b. yield curve
c. parallel loan
d. interest rate swap
13) An example of cross-hedging is:
a. find two currencies that are highly positively correlated; match the payables of the
one currency to the receivables of the other currency
b. use the forward market to sell forward whatever currencies you will receive
c. use the forward market to buy forward whatever currencies you will receive
d. B and C
14) If a foreign country’s interest rate is similar to the U.S. rate, the forward rate
premium or discount will be close to zero, meaning that the forward rate and spot rate
will provide similar forecasts.
a. True
b. False
15) Non-deliverable forward contracts (NDFs) are frequently used for currencies in
emerging markets.
a. True
b. False
16) Changes in country ownership of long-term and short-term assets are measured in
the balance of payments with the capital account.
a. True
b. False
17) Under the gold standard, each currency was convertible into gold at a specified rate,
and the exchange rate between two currencies was determined by their relative
convertibility rates per ounce of gold.
a. True
b. False
18) A “dirty” float represents a system of:
a. freely floating exchange rates
b. fixed exchange rates
c. floating exchange rates, but the central bank can manipulate the currency
d. fixed exchange rates, but the central bank can manipulate the currency
19) The commonly accepted goal of the MNC is to:
a. maximize short-term earnings
b. maximize shareholder wealth
c. minimize risk
d. A and C
e. maximize international sales
20) A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£)
payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot
rate at the time of maturity is $0.65, what is the total amount paid by the corporation if
it acts rationally?
a. $33,600
b. $46,900
c. $44,100
d. $36,400
21) Currency devaluation can boost a country’s exports, but currency revaluation can
increase foreign competition.
a. True
b. False
22) Countries in eastern Europe are more appealing to MNCs that seek relatively low
costs of land and labor than countries in western Europe.
a. True
b. False
23) Which of the following is true?
a. Most forward contracts between firms and banks are for speculative purposes
b. Most future contracts represent a conservative approach by firms to hedge foreign
trade
c. The forward contracts offered by banks have maturities for only four possible dates
in the future
d. none of the above
24) In assessing the risk of an individual project, the expected correlation of the new
project’s returns with those of the prevailing business should be considered.
a. True
b. False
25) The effective yield of investing in a foreign currency depends on both the ____ and
the ____ of the foreign currency.
a. inflation rate; exchange rate movements
b. income level; interest rates
c. interest rates; exchange rate movements
d. interest rates; amount invested