1) In general, when speculating on exchange rate movements, the speculator will
borrow the currency that is expected to appreciate and invest in the country whose
currency is expected to depreciate.
2) Hedging translation exposure with forward contracts can backfire if the currency
being hedged depreciates.
3) All European countries now use the euro as their currency.
4) The balance of payments is a measurement of all transactions between domestic and
foreign residents over a specified period of time.
5) Since the cash flows generated by a foreign target will eventually be converted to the
parent’s currency, there is no need to consider the foreign exchange rate in the capital
budgeting process.
6) The degree to which a firm’s present value of future cash flows can be influenced by
exchange rate fluctuations is referred to as transaction exposure.
7) If shipment is made under a time draft, the exporter is paid once shipment has been
made and the draft is presented to the buyer for payment.
8) An MNC will always use the same required rate of return in the valuation of foreign
projects, as it would for its domestic projects.
9) Direct foreign investment (DFI) represents investment in real assets (such as land,
buildings, or even existing plants) in foreign countries.
10) A company may become more exposed or sensitive to an individual currency’s
movements over time for several reasons, including a reduction in hedging, a greater
involvement in the foreign country, or an increased use of the foreign currency.
11) In order to stimulate a stagnant economy, a government operating under a managed
float may attempt to weaken its currency.
12) If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.
13) Baylor Bank believes the New Zealand dollar will appreciate over the next five
days from $.48 to $.50. The following annual interest rates apply:
CurrencyLending RateBorrowing Rate
Dollars7.10%7.50%
New Zealand dollar (NZ$)6.80%7.25%
Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor
Bank’s forecast is correct, what will its dollar profit be from speculation over the
five-day period (assuming it does not use any of its existing consumer deposits to
capitalize on its expectations)?
a.$521,325
b.$500,520
c.$104,262
d.$413,419
e.$208,044
14) 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%
15) Which of the following payment terms provides the supplier with the greatest
degree of protection?
a.letters of credit
b.consignment
c.prepayment
d.drafts (sight/time)
16) Which of the following is not a way in which country risk analysis can be used?
a.to monitor countries where an MNC is currently doing business
b.as a screening device to avoid conducting business in countries with excessive risk
c.to revise an MNC’s financing decisions
d.to determine the degree to which the MNC is exposed to exchange rate movements
17) If U.S. experiences a sudden surge in inflation and surge in interest rates while
Japanese inflation and interest rates remain unchanged, the value of Japanese yen will
____ against the U.S. dollar.
a.appreciate
b.depreciate
c.remain unchanged
d.cannot be determined from the information provided
18) Which of the following is not a form of exposure to exchange rate fluctuations?
a.Transaction exposure
b.Credit exposure
c.Economic exposure
d.Translation exposure
19) The following regression model was estimated to forecast the value of the
Malaysian ringgit (MYR):
MYRt = a0 + a1INCt – 1 + a2INFt – 1 + mt,
where MYR is the quarterly change in the ringgit, INF is the previous quarterly
percentage change in the inflation differential, and INC is the previous quarterly
percentage change in the income growth differential. Regression results indicate
coefficients of a0 = .005; a1 = .4; and a2 = .7. The most recent quarterly percentage
change in the inflation differential is -5%, while the most recent quarterly percentage
change in the income differential is 3%. Using this information, the forecast for the
percentage change in the ringgit is:
a.4.60%
b.-1.80%
c.5.2%
d.-4.60%
e.none of the above
20) Assume that the interest rate in the home country of Currency X is a much higher
interest rate than the U.S. interest rate. According to interest rate parity, the forward rate
of Currency X:
a.should exhibit a discount
b.should exhibit a premium
c.should be zero (i.e., it should equal its spot rate)
d.B or C
21) For the MNC, agency costs are typically:
a.non-existent
b.larger than agency costs of a small purely domestic firm
c.smaller than agency costs of a small purely domestic firm
d.the same as agency costs of a small purely domestic firm
22) Assume that the forward rate is used to forecast the spot rate. The forward rate of
the Canadian dollar contains a 6% discount. Today’s spot rate of the Canadian dollar is
$.80. The spot rate forecasted for one year ahead is:
a.$.860
b.$.848
c.$.740
d.$.752
e.none of the above
23) Because there are a variety of factors in addition to inflation that affect exchange
rates, this will:
a.reduce the probability that PPP shall hold
b.increase the probability that PPP shall hold
c.increase the probability the IFE will hold
d.B and C
24) If a U.S. firm’s cost of goods sold in Switzerland is much greater than its sales in
Switzerland, the appreciation of the Swiss franc has a ____ impact on the firm’s ____.
a.positive; interest expenses
b.positive; gross profit
c.negative; gross profit
d.negative; interest expenses
25) Which of the following is not true regarding a target’s previous cash flows?
a.They may serve as an initial base from which future cash flows may be estimated
after accounting for other factors
b.It may be easier to estimate the cash flows to be generated by a target than to estimate
the cash flows to be generated from a new foreign subsidiary
c.They are always good indicators of future cash flows
d.All of the above are true
26) ____ swaps are often used by companies to hedge against ____ rate risk.
a.Currency; interest
b.Interest; interest
c.Interest; exchange
d.Currency; exchange
e.B and D
27) As a result of the European Union, restrictions on exports between ____ were
reduced or eliminated.
a.member countries and the U.S
b.member countries
c.member countries and European non-members
d.none of the above
28) Assume the following information:
Current spot rate of New Zealand dollar=$.41
Forecasted spot rate of New Zealand dollar 1 year from now=$.43
One-year forward rate of the New Zealand dollar=$.42
Annual interest rate on New Zealand dollars=8%
Annual interest rate on U.S. dollars=9%
Given the information in this question, the return from covered interest arbitrage by
U.S. investors with $500,000 to invest is ____%.
a.about 11.97
b.about 9.63
c.about 11.12
d.about 11.64
e.about 10.63
29) According to ____, the effective yield earned by U.S. investors will be the same as
the effective yield earned by non-U.S. investors in any given period.
a.interest rate parity (IRP)
b.the international Fisher effect (IFE)
c.purchasing power parity (PPP)
d.none of the above
30) According to the international Fisher effect, if U.S. investors expect a 5% rate of
domestic inflation over one year, and a 2% rate of inflation in European countries that
use the euro, and require a 3% real return on investments over one year, the nominal
interest rate on one-year U.S. Treasury securities would be:
a.2%
b.3%
c.-2%
d.5%
e.8%
31) Because there are sometimes no substitutes for traded goods, this will:
a.reduce the probability that PPP shall hold
b.increase the probability that PPP shall hold
c.increase the probability the IFE will hold
d.B and C
32) Assume that the U.S. one-year interest rate is 5% and the one-year interest rate on
euros is 8%. You have $100,000 to invest and you believe that the international Fisher
effect (IFE) holds. The euro’s spot exchange rate is $1.40. What will be the yield on
your investment if you invest in euros?
a.8%
b.5%
c.3%
d.2.78%
33) The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The
current exchange rate for the Japanese yen () is $0.0075. After supply and demand for
the Japanese yen has adjusted in the manner suggested by purchasing power parity, the
new exchange rate for the yen will be:
a.$0.0076
b.$0.0073
c.$0.0070
d.$0.0066
34) Appreciation in a firm’s local currency causes a(n) ____ in cash inflows and a(n)
____ in cash outflows.
a.reduction; reduction
b.increase; increase
c.increase; reduction
d.reduction; increase
35) Which of the following statement is false?
a.If interest rate parity holds, foreign financing a simultaneous hedge of that position in
the forward market will result in financing costs similar to those in domestic financing
b.If interest rate parity holds, and the forward rate is an accurate forecast of the future
spot rate, uncovered foreign financing will result in financing costs similar to those in
domestic financing
c.If interest rate parity holds, and the forward rate is expected to overestimate the future
spot rate, uncovered foreign financing is expected to result in lower financing costs than
those in domestic financing
d.If interest rate parity holds, and the forward rate is expected to underestimate the
future spot rate, uncovered foreign financing is expected to result in lower financing
costs than those in domestic financing
36) Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If
interest rate parity exists, then:
a.British investors who invest in the United Kingdom will achieve the same return as
U.S. investors who invest in the U.S
b.U.S. investors will earn a higher rate of return when using covered interest arbitrage
than what they would earn in the U.S
c.U.S. investors will earn 15% whether they use covered interest arbitrage or invest in
the U.S
d.U.S. investors will earn 10% whether they use covered interest arbitrage or invest in
the U.S
37) The ____ the existing spot price relative to the strike price, the ____ valuable the
call options will be.
a.higher; less
b.higher; more
c.lower; less
d.lower; more
38) If it was determined that the movement of exchange rates was not related to
previous exchange rate values, this implies that a ____ is not valuable for speculating
on expected exchange rate movements.
a.technical forecast technique
b.fundamental forecast technique
c.all of the above
d.none of the above
39) Which of the following would probably not cause the stock price of a foreign target
to decrease?
a.Its expected cash flows decline
b.General stock market conditions in the foreign country are deteriorating
c.Investors anticipate that the target will be acquired
d.All of the above will cause the target’s stock price to decrease
40) A put option on British pounds has a strike (exercise) price of $1.48. The present
exchange rate is $1.55. 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
41) A negative effective financing rate for a U.S. firm implies that the firm:
a.will incur a loss on the project financed with the funds
b.paid more interest on the funds than what it would have paid if it had borrowed
dollars
c.will be unable to repay the loan
d.none of the above
42) The term “eurobor” is widely used to reflect the total amount of euros borrowed by
the firms in Europe per month to finance their growth.
43) The forward rate is the exchange rate used for immediate exchange of currencies.
44) In response to the Sarbanes-Oxley Act, the reporting costs were reduced, and many
non-U.S. firms that issued new shares of stock decided to place their stock in the United
States.
45) In general, companies are attracted to the stock market in which there are very
limited voting rights for shareholders.
46) The degree of financial information that must be provided by public companies is
the same among countries.