1) There are no transactions costs associated with trading futures or options.
a. True
b. False
2) According to the international Fisher effect, if Venezuela has a much higher nominal
rate than other countries, its inflation rate will likely be ____ than other countries, and
its currency will ____.
a. lower; strengthen
b. lower; weaken
c. higher; weaken
d. higher; strengthen
3) Hedging translation exposure with forward contracts can backfire if the currency
being hedged depreciates.
a. True
b. False
4) The discrepancy between the feasibility of a project in a host country from the
perspective of the U.S. parent versus the subsidiary administering the project is likely to
be greater for projects in countries where:
a. the taxes are the same as in the U.S
b. there are no blocked fund restrictions
c. the currency of the host country is expected to depreciate consistently
d. none of the above; a discrepancy is not possible
5) A forward contract can be used to lock in the ____ of a specified currency for a
future point in time.
a. purchase price
b. sale price
c. A or B
d. none of the above
6) Translation 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
7) A strong home currency can harm exports; exporters typically benefit from a weaker
home country currency.
a. True
b. False
8) If the British government desires an appreciation in its currency with respect to the
U.S. dollar, it would consider intervening in the foreign exchange market by buying
dollars with pounds.
a. True
b. False
9) Under a managed float exchange rate system, the Fed may attempt to stimulate the
U.S. economy by ____ the dollar. Such an adjustment in the dollar’s value should ____
the U.S. demand for products produced by major foreign countries.
a. weakening; increase
b. weakening; decrease
c. strengthening; increase
d. strengthening; decrease
10) Consider an exporter that sells its accounts receivables off to another firm that
becomes responsible for obtaining cash from the various importers. This reflects:
a. accounts receivable financing
b. consignment
c. factoring
d. a letter of credit
11) If a parent company backs the debt of a foreign subsidiary, the borrowing capacity
of the parent might be reduced as creditors are not willing to provide as many funds to
the parent if those funds may possibly be needed to rescue a parent’s subsidiary.
a. True
b. False
12) Assume that the Swiss franc has an annual interest rate of 8% and is expected to
depreciate by 6% against the dollar. From a U.S. perspective, the effective financing
rate from borrowing francs is:
a. 8%
b. 14.48%
c. 2%
d. 1.52%
13) In a freely floating exchange rate system, high U.S. inflation rate may be magnified.
This is because the depreciation of the dollar would result in more expensive foreign
imports, thus reducing foreign competition.
a. True
b. False
14) If you expect the British pound to appreciate, you could speculate by ____ pound
call options or ____ pound put options.
a. purchasing; selling
b. purchasing; purchasing
c. selling; selling
d. selling; purchasing
15) Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180
days. Today’s spot rate of the NZ$ is $.50, and the 180-day forward rate is $.51. A call
option on NZ$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day
expiration date. A put option on NZ$ exists with an exercise price of $.51, a premium of
$.02, and a 180-day expiration date. Patton Co. has developed the following probability
distribution for the spot rate in 180 days:
The probability that the forward hedge will result in more U.S. dollars received than the
options hedge is ____ (deduct the amount paid for the premium when estimating the
U.S. dollars received on the options hedge).
a. 10%
b. 30%
c. 40%
d. 70%
e. none of the above
16) If a country experiences high inflation relative to the U.S., its exports to the U.S.
should ____, its imports should ____, and there is ____ pressure on its currency’s
equilibrium value.
a. decrease; increase; upward
b. decrease; decrease; upward
c. increase; decrease; downward
d. decrease; increase; downward
e. increase; decrease; upward
17) If interest rate parity (IRP) exists, then the money market hedge will yield the same
result as the options hedge.
a. True
b. False
18) A firm’s cost of ____ reflects an opportunity cost: what the existing shareholders
could have earned if they had received the earnings as dividends and invested the funds
themselves.
a. debt
b. retained earnings
c. short-term loans
d. none of the above
19) Assume that the income levels in U.K. start to rise, while U.S. income levels remain
unchanged. This will place ____ pressure on the value of British pound. Also, assume
that U.S. interest rates rise, while the British pound remains unchanged. This will place
____ pressure on the value of British pound.
a. downward; downward
b. upward; downward
c. upward; upward
d. downward; upward
20) If the pattern of currency values over time appears random, then technical
forecasting is appropriate.
a. True
b. False
21) ____ represents any impact of exchange rate fluctuations on a firm’s future cash
flows.
a. Translation exposure
b. Economic exposure
c. Transaction exposure
d. None of the above
22) An MNC’s short-term financing decisions are satisfied in the ____ market, while its
medium debt financing decisions are satisfied in the ____ market.
a. international money; international credit
b. international money; international bond
c. international credit; international money
d. international bond; international credit
e. international money; international stock
23) In general, companies are attracted to the stock market in which there are very
limited voting rights for shareholders.
a. True
b. False
24) A limitation of interest rate swaps is that there is a risk to each swap participant that
the counterparticipant could default on his payments.
a. True
b. False
25) Assume that a bank’s bid rate on Japanese yen is $.0041 and its ask rate is $.0043.
Its bid-ask percentage spread is:
a. about 4.99%
b. about 4.88%
c. about 4.65%
d. about 4.43%
26) If a U.S.-based MNC focused completely on exporting, then its valuation would
likely be adversely affected if most currencies were expected to appreciate against the
dollar over time.
a. True
b. False
27) A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:
a. increased trade restrictions outside of North America
b. lower trade restrictions around the world
c. uniform environmental standards around the world
d. uniform worker health laws
28) Corporations tend to make only limited use of technical forecasting because it
typically focuses on the near future, which is not very helpful for developing corporate
policies.
a. True
b. False
29) Which of the following operations benefits from appreciation of the firm’s local
currency?
a. borrowing in a foreign currency and converting the funds to the local currency prior
to the appreciation
b. receiving earnings dividends from foreign subsidiaries
c. purchasing supplies locally rather than overseas
d. exporting to foreign countries
30) If a foreign currency consistently depreciated against the dollar over several periods
and had lower interest rates at the beginning of those periods than the U.S. interest
rates, then:
a. U.S. firms could have achieved a higher effective yield on foreign deposits than on
U.S. deposits during those periods
b. the international Fisher effect is supported by the results
c. A and B
d. none of the above
31) If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than
the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward
and put ____ pressure on the Canadian dollar forward rate.
a. lower; sell; upward
b. lower; sell; downward
c. higher; sell; upward
d. higher; sell; downward