1) An MNC must assess country risk not only in countries where it currently does
business but also in those where it expects to export or establish subsidiaries.
a. True
b. False
2) According to your text, U.S. firms pursue more international acquisitions in ____
than in other countries.
a. the U.K
b. Mexico
c. Japan
d. Germany
e. France
3) An advantage of a fixed exchange rate system is that governments are not required to
constantly intervene in the foreign exchange market to maintain exchange rates within
specified boundaries.
a. True
b. False
4) J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L
typically invoices these goods in euros and is concerned that the euro will depreciate in
the near future. Which of the following is not an appropriate technique under these
circumstances?
a. purchase euro put options
b. sell euros forward
c. sell euro futures contracts
d. sell euro put options
5) The capital account reflects changes in country ownership of long-term (but not
short-term) assets.
a. True
b. False
6) Assume that U.S. interest rate for the next three years is 5%, 6%, and 7%
respectively. Also assume that Canadian interest rates for the next three years are 3%,
6%, 9%. The current Canadian spot rate is $.840. What is the approximate three-year
forecast of Canadian dollar spot rate if the three-year forward rate is used as a forecast?
a. $.840
b. $.890
c. $.856
d. $.854
7) Capital asset pricing theory would most likely suggest that the MNC’s cost of capital
is lower than that of domestic firms.
a. True
b. False
8) Under a fixed exchange rate system:
a. a foreign exchange market does not exist
b. central bank intervention in the foreign exchange market is not necessary
c. central bank intervention in the foreign exchange market is often necessary
d. central bank intervention in the foreign exchange market is not allowed
9) The best means to accomplish the revenue-related motive of attracting new sources
of demand is to:
a. acquire a competitor that has controlled its local market
b. establish a subsidiary or acquire a competitor in a new market
c. establish a subsidiary in a market where tougher trade restrictions will adversely
affect the firm’s export volume
d. establish subsidiaries in markets whose business cycles differ from those where
existing subsidiaries are based
10) Small Corporation would like to forecast the value of the Cyprus pound (CYP) five
years from now using forward rates. Unfortunately, Small is unable to obtain quotes for
five-year forward contracts. However, Small observes that the five-year interest rate in
the U.S. is 11%, while the Cyprus five-year interest rate is 15%. Based on this
information, the Cyprus pound should ____ by ____% over the next five years.
a. appreciate; 16.22
b. depreciate; 16.22
c. appreciate; 6.66
d. depreciate; 6.66
e. none of the above
11) Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro
is going to depreciate substantially over time. Assuming the firm is correct, the ideal
strategy is to:
a. sell euros forward
b. purchase euro currency put options
c. purchase euro currency call options
d. purchase euros forward
e. remain unhedged
12) If the Japanese yen is expected to appreciate against the U.S. dollar and interest
rates in the U.S. and Japan are similar, banks may try speculating on this anticipated
exchange rate movement by borrowing ____ and investing in ____.
a. yen; dollars
b. yen; yen
c. dollars; yen
d. dollars; dollars
13) A ____ gives its owner the right to enter into a swap.
a. basis swap
b. swaption
c. callable swap
d. putable swap
14) In a forward hedge, if the forward rate is an accurate predictor of the future spot
rate, the real cost of hedging payables will be:
a. highly positive
b. highly negative
c. zero
d. none of the above
15) The forward rate is the exchange rate used for immediate exchange of currencies.
a. True
b. False
16) An increase in the use of quotas is expected to:
a. reduce the country’s current account balance, if other governments do not retaliate
b. increase the country’s current account balance, if other governments do not retaliate
c. have no impact on the country’s current account balance unless other governments
retaliate
d. increase the volume of a country’s trade with other countries
17) A negative effective financing rate implies that the U.S. firm actually paid fewer
dollars in total loan repayment than the number of dollars borrowed.
a. True
b. False
18) The disadvantage of a long strangle relative to a long straddle is that the underlying
currency has to fluctuate more prior to expiration.
a. True
b. False
19) Countries usually do not have difficulty maintaining a pegged exchange rate, even
when they are experiencing major political or economic problems.
a. True
b. False
20) A major advantage of the euro is the complete elimination of exchange rate risk on
transactions between participating European countries, which encourages more trade
and capital flows within Europe.
a. True
b. False
21) If foreign exchange markets are strong-form efficient, then all relevant public and
private information is already reflected in today’s exchange rates.
a. True
b. False
22) An MNC will always use the same required rate of return in the valuation of foreign
projects, as it would for its domestic projects.
a. True
b. False
23) Licensing obligates a firm to provide ____, while franchising obligates a firm to
provide ____.
a. a specialized sales or service strategy; its technology
b. its technology; a specialized sales or service strategy
c. its technology; its technology
d. a specialized sales or service strategy; a specialized sales or service strategy
e. its technology; an initial investment
24) If the U.S. and Japan engage in substantial financial flows but little trade, ____
directly influences their exchange rate the most. If the U.S. and Switzerland engage in
much trade but little financial flows, ____ directly influences their exchange rate the
most.
a. interest rate differentials; interest rate differentials
b. inflation and interest rate differentials; interest rate differentials
c. income and interest rate differentials; inflation differentials
d. interest rate differentials; inflation and income differentials
e. inflation and income differentials; interest rate differentials
25) Intracompany trade represents the exporting of products by one country to other
countries below cost.
a. True
b. False
26) 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. inflation would affect
the exchange rate of Country Y’s currency more than the exchange rate of Country X’s
currency.
a. True
b. False
27) The Working Capital Guarantee Program and the Medium-term Guarantee Program
are offered by the:
a. Export-Import Bank of the United States
b. Private Export Funding Corporation
c. Overseas Private Investment Corporation
d. none of the above
28) Direct foreign investment is perceived by foreign governments to:
a. be a cause of national problems
b. be a remedy for national problems
c. either A or B is possible
d. have no impact on national problems
29) In general, it is more difficult to effectively hedge economic or translation exposure
than to hedge transaction exposure.
a. True
b. False