1) Privatization involves the sale of previously government-owned businesses by the
government.
2) 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.
3) Under a letter of credit, the exporter will not ship the goods until the buyer has
remitted payment to the exporter.
4) After a project is accepted and implemented, country risk does not need to be
monitored; since the project is already established, no further changes can be made.
5) When the real cost of hedging is positive, this implies that hedging was more
favorable than not hedging.
6) If an MNC’s cash flows are more stable, it can probably handle more debt than an
MNC with erratic cash flows.
7) Currency futures are very similar to forward contracts, except that they are
standardized and are more appropriate for firms that prefer to hedge in smaller amounts.
8) 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.
9) If the futures rate is above the forward rate, actions by rational investors would put
upward pressure on the forward rate and downward pressure on the futures rate.
10) When a parent company tries to convince a subsidiary to hedge its transaction
exposure, this is called leading.
11) No matter what the probability distribution of future exchange rates is, as long as
one out of several scenarios results in a negative net present value (NPV), a project
should not be accepted.
12) The exchange of goods between two parties without the use of any currency as a
medium of exchange is called factoring.
13) The currency futures markets are regulated by the International Monetary Fund.
14) Portfolio investments represent transactions involving long-term financial assets
(such as stocks and bonds) between countries that do not affect the transfer of control.
15) If graphical points lie above the perfect forecast line, than the forecast
overestimated the future value.
16) If a U.S. firm has much more revenue than expenses denominated in euros, the firm
will likely ____ if the euro ____.
a.benefit; weakens
b.be unaffected; weakens
c.be unaffected; strengthens
d.benefit; strengthens
17) In ____, the exporter sells accounts receivable without recourse.
a.accounts receivable financing
b.factoring
c.working capital financing
d.countertrade
18) 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
19) Your company expects to receive 5,000,000 Japanese yen 60 days from now. You
decide to hedge your position by selling Japanese yen forward. The current spot rate of
the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days
to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from
now?
a.$44,500
b.$45,000
c.$526 million
d.$47,500
20) To fully benefit from use of foreign raw materials:
a.establish a subsidiary in a market where raw materials are cheap and accessible
b.sell the finished product to countries where the raw materials are more expensive
c.establish a subsidiary in a new market that can sell products produces elsewhere
d.A and B
21) An upward-sloping yield curve for a foreign country means that annualized yields
there are ____ for short-term debt than for long-term debt. The yield curve in this
country reflects ____.
a.higher; several periods
b.lower; several periods
c.higher; a specific point in time
d.lower; a specific point in time
22) Assume that the international Fisher effect (IFE) holds between the U.S. and the
U.K. The U.S. inflation is expected to be 5%, while British inflation is expected to be
3%. The interest rates offered on pounds are 7% and U.S. interest rates are 7%. What
does this say about real interest rates expected by British investors?
a.real interest rates expected by British investors are equal to the interest rates expected
by U.S. investors
b.real interest rates expected by British investors are 2 percentage points lower than the
real interest rates expected by U.S. investors
c.real interest rates expected by British investors are 2 percentage points above the real
interest rates expected by U.S. investors
d.IFE doesn’t hold in this case because the U.S. inflation is higher than the British
inflation, but the interest rates offered in both countries are equal
23) Assume that the inflation rate becomes much higher in the U.K. relative to the U.S.
This will place ____ pressure on the value of the British pound. Also, assume that
interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in
interest rates will place ____ pressure on the value of the British pound.
a.upward; downward
b.upward; upward
c.downward; upward
d.downward; downward
24) If the U.S. dollar appreciates, an MNC’s:
a.U.S. sales will probably decrease
b.exports denominated in U.S. dollars will probably increase
c.interest owed on foreign funds borrowed will probably increase
d.exports denominated in foreign currencies will probably increase
e.all of the above
25) The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The
current exchange rate for the Japanese yen () is $0.0080. After supply and demand for
the Japanese yen has adjusted according to purchasing power parity, the new exchange
rate for the yen will be
a.$0.0078
b.$0.0082
c.$0.0111
d.$0.00492
e.None of the above
26) 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
27) Which of the following is true?
a.Forecast errors cannot be negative
b.Forecast errors are negative when the forecasted rate exceeds the realized rate
c.Absolute forecast errors are negative when the forecasted rate exceeds the realized
rate
d.None of the above
28) Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X.
Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y.
Given this information, what would be your gain if you use $1,000,000 and execute
locational arbitrage? That is, how much will you end up with over and above the
$1,000,000 you started with?
a.$7,067
b.$8,556
c.$10,114
d.$12,238
29) The risk-free interest rates among countries that have adopted the euro should:
a.not necessarily be similar to risk-free rates in other countries
b.equal the U.S. risk-free rate
c.equal the risk-free rates in other European countries
d.equal the risk-free rates in Asian countries
30) Insurance purchased to cover the risk of expropriation ____, and will typically
cover ____.
a.will be the same for all firms; only a portion of the firm’s total exposure
b.will be the same for all firms; all of the firm’s total exposure
c.will be dependent on the firm’s risk; all of the firm’s total exposure
d.will be dependent on the firm’s risk; only a portion of the firm’s total exposure
31) Which of the following is not a reason provided in the text regarding why the cost
of debt can vary across countries?
a.differences in the risk-free rate
b.a high price-earnings multiple
c.differences in the credit risk premium
d.differences in demographics
32) Which of the following is not a possible bid/ask quotation for the Barbados dollar?
a.$.50/$.51
b.$.49/$.50
c.$.52/$.51
d.$.51/$.52
e.All of the above are possible bid/ask quotations
33) 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
34) The primary purpose of country risk analysis when applied to capital budgeting is
usually to:
a.measure the effect of country risk on sales
b.measure the effect of country risk on cash flows
c.measure the effect of country risk on the consolidated balance sheet
d.measure the effect of country risk on the consolidated income statement
35) Consider Firm A and Firm B that both produce the same product. Firm A would
more likely have more stable cash flows if its percentage of foreign sales were ____ and
the number of foreign countries it sold products to was ____.
a.higher; large
b.higher; small
c.lower; small
d.higher; large
36) The following regression model was estimated to forecast the value of the Indian
rupee (INR):
INRt = a0 + a1INTt + a2INFt – 1 + mt,
where INR is the quarterly change in the rupee, INT is the real interest rate differential
in period t between the U.S. and India, and INF is the inflation rate differential between
the U.S. and India in the previous period. Regression results indicate coefficients of a0
= .003; a1 = -.5; and a2 = .8. Assume that INFt – 1 = 2%. However, the interest rate
differential is not known at the beginning of period t and must be estimated. You have
developed the following probability distribution:
ProbabilityPossible Outcome
30%-2%
40%-3%
30%-4%
The expected change in the Indian rupee in period t is:
a.3.40%
b.0.40%
c.3.10%
d.1.70%
e.none of the above
37) The bid-ask spread on an exchange rate can be used to directly determine:
a.how an exchange rate will change
b.the transaction cost of foreign exchange
c.the forward premium
d.the currency option premium
38) Your company will receive C$600,000 in 90 days. The 90-day forward rate in the
Canadian dollar is $.80. If you use a forward hedge, you will:
a.receive $750,000 today
b.receive $750,000 in 90 days
c.pay $750,000 in 90 days
d.receive $480,000 today
e.receive $480,000 in 90 days
39) Under a ____, the exporter is paid once shipment has been made and the draft is
presented to the buyer for payment; under a ____, the exporter provides instructions to
the buyer’s bank to release shipping documents against acceptance, by the buyer, of the
draft.
a.sight draft; time draft
b.sight draft; banker’s acceptance
c.bill of lading; banker’s acceptance
d.time draft; sight draft
40) When using ____, funds are not tied up for any length of time.
a.covered interest arbitrage
b.locational arbitrage
c.triangular arbitrage
d.B and C
41) The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per
pound:
a.U.S. demand for pounds would exceed the supply of pounds for sale and there would
be a shortage of pounds in the foreign exchange market
b.U.S. demand for pounds would be less than the supply of pounds for sale and there
would be a shortage of pounds in the foreign exchange market
c.U.S. demand for pounds would exceed the supply of pounds for sale and there would
be a surplus of pounds in the foreign exchange market
d.U.S. demand for pounds would be less than the supply of pounds for sale and there
would be a surplus of pounds in the foreign exchange market
e.U.S. demand for pounds would be equal to the supply of pounds for sale and there
would be a shortage of pounds in the foreign exchange market
42) A bill of exchange requesting the bank to pay the face amount upon presentation of
documents is a:
a.banker’s acceptance
b.time draft
c.letter of credit
d.sight draft
43) The value of euro was $1.30 last week. During last week the euro depreciated by
5%. What is the value of euro today?
a.$1.365
b.$1.235
c.$1.330
d.$1.30
44) Assume that the British pound and Swiss franc are highly correlated. A U.S. firm
anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1
million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its
exposure.
a.strong dollar; favorably
b.weak dollar; not
c.strong dollar; not
d.weak dollar; favorably
45) Assume the following information:
You have $1,000,000 to invest:
Current spot rate of pound=$1.60
90-day forward rate of pound=$1.57
3-month deposit rate in U.S.=3%
3-month deposit rate in U.K.=4%
If you use covered interest arbitrage for a 90-day investment, what will be the amount
of U.S. dollars you will have after 90 days?
a.$1,020,500
b.$1,045,600
c.$1,073,330
d.$1,094,230
e.$1,116,250
46) A firm produces goods for which substitute goods are produced in all countries.
Appreciation of the firm’s local currency should:
a.increase local sales as it reduces foreign competition in local markets
b.increase the firm’s exports denominated in the local currency
c.increase the returns earned on the firm’s foreign bank deposits
d.increase the firm’s cash outflow required to pay for imported supplies denominated in
a foreign currency
e.none of the above
47) Assume that British interest rates are higher than U.S. rates, and that the spot rate
equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound’s
spot rate, and ____ pressure on the pound’s forward rate.
a.downward; downward
b.downward; upward
c.upward; downward
d.upward; upward
48) The European Central Bank is located in:
a.London
b.Denmark
c.Luxembourg
d.Frankfurt
49) Lantana Co. conducts pays for many imports denominated in Canadian dollars. It is
a major exporter to France, and invoices the exports in euros. It also has much business
in U.S. dollars. It has no other international business and does not hedge its
transactions. It is about to obtain a small loan. It could reduce its exchange rate risk if
its loan is denominated in:
a.U.S. dollars
b.euros
c.Canadian dollars
d.none of the above
50) Sometimes, a multinational project may appear feasible from the subsidiary’s
perspective but not from the parent’s perspective and vice versa.
51) Which of the following is not true with respect to spot market liquidity?
a.The more willing buyers and sellers there are, the more liquid a market is
b.The spot markets for heavily traded currencies such as the Japanese yen are very
liquid
c.A currency’s liquidity affects the ease with which an MNC can obtain or sell that
currency
d.If a currency is illiquid, an MNC is typically able to quickly purchase that currency at
a reasonable exchange rate
52) Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu
(ROL). 30% of the MNC’s funds are lev and 70% are leu. The standard deviation of
exchange movements is 10% for lev and 15% for leu. The correlation coefficient
between movements in the value of the lev and the leu is .85. Based on this information,
the standard deviation of this two-currency portfolio is approximately:
a.17.28%
b.13.15%
c.14.50%
d.12.04%
53) Which of the following industries would most likely take advantage of lower costs
in some less developed foreign countries?
a.assembly line production
b.specialized professional services
c.nuclear missile planning
d.planning for more sophisticated computer technology
54) When assuming that investors in the U.S. are most concerned with their exposure to
the U.S. stock market, it is acceptable to use the U.S. market when measuring a
U.S.-based MNC’s project’s beta.