1) Which of the following is not a form of financial risk?
a. Exchange rate movements
b. Inflation rates
c. Blockage of fund transfers
d. All of the above are forms of financial risk.
2) Transaction exposure results when an MNC translates each subsidiary’s financial data
to its home currency for consolidated financial statements.
a. True
b. False
3) When the futures price is above the forward rate, astute investors may attempt to
simultaneously buy a currency forward and sell futures in that currency. These actions
would place ____ pressure on the forward rate and ____ pressure on the futures rate.
a. upward; downward
b. upward; upward
c. downward; upward
d. downward; downward
4) The checklist approach:
a. requires several inspections of the country being evaluated
b. requires the use of discriminant analysis to assess country risk
c. requires ratings and weights to be assigned to all factors relevant in assessing country
risk
d. involves the collection of independent opinions on country risk
5) The exposure of an MNC’s consolidated financial statements to exchange rate
fluctuations is known as transaction exposure.
a. True
b. False
6) If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is
receiving 100,000 in 90 days, it could:
a. obtain a 90-day forward purchase contract on euros
b. obtain a 90-day forward sale contract on euros
c. purchase euros 90 days from now at the spot rate
d. sell euros 90 days from now at the spot rate
7) If a U.S. firm’s expenses are more susceptible to exchange rate movements than
revenue, the firm will ____ if the dollar ____.
a. benefit; weakens
b. be unaffected; weakens
c. be unaffected; strengthens
d. benefit; strengthens
8) Most MNCs can completely hedge all of their transactions.
a. True
b. False
9) Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously
buys Treasury securities, this is an example of sterilized intervention.
a. True
b. False
10) A draft drawn on and accepted by a bank is called a banker’s acceptance.
a. True
b. False
11) When economic conditions of two countries are ____, then a firm would ____ its
risk by operating in both countries instead of concentrating just in one.
a. highly correlated; reduce
b. not highly correlated; not reduce
c. not highly correlated; reduce
d. none of the above
12) The Bretton Woods Agreement called for the establishment of a single European
currency.
a. True
b. False
13) The term “local target capital structure” is used in the text to represent the:
a. average capital structure of local firms where the MNC’s subsidiary is based
b. average capital structure of local firms where the MNC’s parent is based
c. capital structure of a subsidiary of a particular MNC
d. capital structure of a particular MNC overall (including all subsidiaries)
14) Exhibit 10-2
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments
denominated in both euros and Canadian dollars in one month. Based on today’s spot
rates, the dollar value of the funds to be received is estimated at $500,000 for the euros
and $300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia
estimates the standard deviation of monthly percentage changes to be 8 percent for the
euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro
and the Canadian dollar is 0.30.
Refer to Exhibit 10-2. Assuming an expected percentage change of 0 percent for each
currency during the next month, what is the maximum one-month loss of the currency
portfolio? Use a 95 percent confidence level and assume the monthly percentage
changes for each currency are normally distributed.
a. -9.00%
b. -30.00%
c. -5.00%
d. none of the above
15) Of all the payment methods available in international trade, ____ probably affords
the most protection to the exporter, while ____ probably affords the least protection.
a. prepayment; consignment
b. prepayment; open account
c. open account; prepayment
d. consignment; prepayment
16) Currency futures can be used by MNCs to hedge payables. That is, an MNC would
____ futures to hedge a foreign payable position. Also, currency futures can be used for
speculation. For example, a speculator expecting a currency to appreciate would ____
futures.
a. buy; buy
b. sell; sell
c. buy; sell
d. sell; buy
17) The writer of an uncovered call can experience a loss limited to the option
premium.
a. True
b. False
18) If potential acquirers are based in different countries, their required rates of return
when considering a specific target will only vary if the desired use of the target is
different.
a. True
b. False
19) Exchange rates one year in advance are typically forecasted with almost perfect
accuracy for the major currencies, but not for currencies of smaller countries.
a. True
b. False
20) You observe a quotation of the Japanese yen () of $0.007. You are, however,
interested in the number of yen per dollar. Thus, you calculate the ____ quotation of
____ /$.
a. direct; 142.86
b. indirect; 142.86
c. indirect; 150
d. direct; 150
e. indirect; 0
21) MNCs can forecast exchange rate volatility to determine the potential range
surrounding their exchange rate forecast.
a. True
b. False
22) If an MNC diversifies its operations internationally to reduce its exposure to any
individual country’s problems, country risk analysis becomes irrelevant.
a. True
b. False
23) The weights assigned to factors when assessing country risk should always be
higher for the political risk factors than the financial factors.
a. True
b. False
24) Currency options sold through an options exchange:
a. contain a commitment to the owner, and are standardized
b. contain a commitment to the owner, and can be tailored to the desire of the owner
c. contain a right but not a commitment to the owner, and can be tailored to the desire of
the owner
d. contain a right but not a commitment to the owner, and are standardized
25) The tradeoff when considering alternative call options to hedge a currency position
is that an MNC can obtain a call option with a higher exercise price, but would have to
pay a higher premium.
a. True
b. False
26) Which of the following is true?
a. Non-U.S. firms may desire to issue bonds in the U.S. due to less regulations in the
U.S
b. U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S
c. U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations
in non-U.S. countries
d. A and B
27) The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590.
The forward rate contains an annualized ____ of ____%.
a. discount; -4.07
b. premium; 4.07
c. discount; -4.08
d. premium; 4.08
e. premium; 3.40
28) If the parent charges the subsidiary administrative fees, the earnings from the
project will appear low to the parent and high to the subsidiary.
a. True
b. False
29) In general, a firm ____ exposed to exchange rate fluctuations will usually have a
____ distribution of possible cash flows in future periods.
a. more; narrower
b. less; wider
c. more; wider
d. none of the above
30) Wisconsin Inc. conducts business in Zambia. Years ago, Wisconsin established a
subsidiary in Zambia that has consistently generated very large profits denominated in
Zambian kwacha. Wisconsin wishes to restructure its operations to reduce economic
exposure. Which of the following is not a feasible way of accomplishing this?
a. increase Zambian supply orders
b. increase Zambian sales
c. restructure debt to increase debt payments in Zambia
d. reduce Zambian sales