1) Acquirers may have different required rates of return because of differences in the
ability to use financial leverage.
2) Assume locational arbitrage is possible and involves two different banks. The
realignment that would occur due to market forces would increase one bank’s ask rate
and would decrease the other bank’s bid rate.
3) If an actual put option premium is less than what is suggested by the put-call parity
relationship, arbitrage can be conducted.
4) Lockboxes are post office box numbers assigned to employees for picking up their
paychecks.
5) A currency put option is a contract specifying a standard volume of a particular
currency to be exchanged on a specific settlement date.
6) The degree of volatility of financing with a currency portfolio depends on only the
standard deviations of effective financing rates of the individual currencies within the
portfolio.
7) Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid
currencies.
8) U.S.-based MNCs invoicing in Asian currencies and incurring expenses in Asian
currencies were probably less affected by the weakness of Asian currencies than
U.S.-based MNCs that invoice in Asian currencies but do not incur expenses in those
currencies.
9) A tariff is a maximum limit on imports.
10) A futures hedge involves taking a money market position to cover a future payables
or receivables position.
11) Due to put-call parity, we can use the same formula to price calls and puts.
12) The acquisition of a foreign subsidiary is commonly considered by MNCs because
the cost is less expensive than establishing a new subsidiary of the same size.
13) Direct foreign investment is normally completed first, and then capital budgeting
can be applied later.
14) A firm’s transaction exposure in any foreign currency is based solely on the size of
its open position in that currency.
15) A balance of trade deficit indicates an excess of imports over exports.
16) Since exchange rate forecasts are not always accurate, a probability distribution of
possible exchange rates may be preferable to a single point estimate.
17) Forward rates are driven by the government rather than market forces.
18) Movements of foreign currencies tend to be more volatile for shorter time horizons.
19) LIBOR is:
a.the interest rate commonly charged for loans between banks.
b.the average inflation rate in European countries
c.the maximum loan rate ceiling on loans in the international money market
d.the maximum deposit rate ceiling on deposits in the international money market
e.the maximum interest rate offered on bonds that are issued in London
20) An effective way for an MNC to assess its economic exposure is to review the
firm’s:
a.income statement
b.liquidity
c.retained earnings
d.level of stockholders’ equity
21) Which of the following is not a host country characteristic than can affect an MNC’s
capital structure decision?
a.The strength of host country currencies
b.The country risk in host countries
c.Political decisions to increase penalties for criminals
d.Tax laws in host countries
22) In general, a firm that concentrates on local sales, has very little foreign
competition, and obtains foreign supplies (denominated in foreign currencies) will
likely ____ a(n) ____ local currency.
a.be hurt by; appreciated
b.benefit from; depreciated
c.be hurt by; depreciated
d.none of the above
23) Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35.
The value of the Peruvian Sol in Canadian dollars is:
a.about .3621 Canadian dollars
b.about .3977 Canadian dollars
c.about 2.36 Canadian dollars
d.about 2.51 Canadian dollars
24) An international alliance typically requires a ____ initial outlay than an
international acquisition, and the cash flows to be received will typically be ____ than
the cash flow resulting from an international acquisition.
a.smaller; larger
b.smaller; smaller
c.larger; smaller
d.larger; larger
25) The earnings of a private European firm are 5 million, and the average P/E ratio of
publicly traded European firms in the same industry is 12. This firm is considering the
possibility of going public in which it would issue one million shares. If the private firm
has similar growth potential and other characteristics similar to other publicly traded
firms in the industry, its value can be estimated as ____ million euros.
a.2.4
b.60.0
c.41.7
d.12
26) Assume that Smith Corporation will need to purchase 200,000 British pounds in 90
days. A call option exists on British pounds with an exercise price of $1.68, a 90-day
expiration date, and a premium of $.04. A put option exists on British pounds, with an
exercise price of $1.69, a 90-day expiration date, and a premium of $.03. Smith
Corporation plans to purchase options to cover its future payables. It will exercise the
option in 90 days (if at all). It expects the spot rate of the pound to be $1.76 in 90 days.
Determine the amount of dollars it will pay for the payables, including the amount paid
for the option premium.
a.$360,000
b.$338,000
c.$332,000
d.$336,000
e.$344,000
27) Jenco Co. imports raw materials from Japan, invoiced in U.S. dollars. The price it
pays is not expected to change for the next several years. If the Japanese yen
appreciates, its imports from Japan will probably ____ and if the Japanese yen
depreciates, its imports from Japan will probably ____.
a.increase; decrease
b.decrease; increase
c.increase; stay the same
d.stay the same; stay the same
28) Which of the following are examples of currency controls?
a.import restrictions
b.prohibition of remittance of funds
c.ceilings on granting credit to foreign firms
d.all of the above
29) The Smithsonian Agreement called for a devaluation of the U.S. dollar by about
____ percent.
a.2.25
b.6
c.10
d.8
30) Which of the following is not a factor that favorably affects an MNC’s cost of
capital, according to your text?
a.exchange rate risk
b.size
c.access to international capital markets
d.international diversification
31) Which of the following is least likely to influence an MNC’s capital structure?
a.The stability of MNC’s cash flows
b.The MNC’s credit risk
c.The MNC’s access to earnings
d.The MNC’s decision to invest excess cash in a Treasury bill rather than in a bank
32) Consider a bank that acknowledges that it will make payments on behalf of a
computer importer after the computers are delivered to the importer. This reflects:
a.accounts receivable financing
b.forfaiting
c.factoring
d.a letter of credit
33) If both interest rate parity and the international Fisher effect hold, then between the
forward rate and the spot rate, the ____ rate should provide more accurate forecasts for
currencies in ____-inflation countries.
a.spot; high
b.spot; low
c.forward; high
d.forward; low
34) Which of the following is not true regarding the Bretton Woods Agreement?
a.It called for fixed exchange rates between currencies
b.Governments intervened to prevent exchange rates from moving more than 1 percent
above or below their initially established levels
c.The agreement lasted from 1944 until 1971
d.Each country used gold to back its currency
e.All of the above are true regarding the Bretton Woods Agreement
35) Managing economic exposure is generally perceived to be ____ managing
transaction exposure.
a.more difficult than
b.less difficult than
c.just as difficult as
d.none of the above
36) Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the
international Fisher effect holds and is used to determine the future spot rate, the
forecast would reflect an expectation of:
a.appreciation of pound’s value over the next year
b.depreciation of pound’s value over the next year
c.no change in pound’s value over the next year
d.not enough information to answer this question
37) Country risk analysis is important because it:
a.focuses on whether to hedge contractual transactions
b.focuses on the competitor firms in its industry
c.can be used to improve the analysis used to make long-term investing decisions
d.all of the above
38) To use foreign factors of production, an MNC should:
a.establish a subsidiary in a new market that can sell products produced elsewhere
b.establish a subsidiary in a market that has relatively low costs of labor or land
c.establish a subsidiary in a market where raw materials are cheap and accessible
d.participate in a joint venture in order to learn about a production process or other
operations
39) Assume that the U.S. investors are benefiting from covered interest arbitrage due to
high interest rates on euros. Which of the following forces should result from the act of
this covered interest arbitrage?
a.downward pressure on the euro’s spot rate
b.downward pressure on the euro’s forward rate
c.downward pressure on the U.S. interest rate
d.upward pressure on the euro’s interest rate
40) Assume that interest rate parity holds. The U.S. five-year interest rate is 5%
annualized, and the Mexican five-year interest rate is 8% annualized. Today’s spot rate
of the Mexican peso is $.20. What is the approximate five-year forecast of the peso’s
spot rate if the five-year forward rate is used as a forecast?
a.$.131
b.$.226
c.$.262
d.$.140
e.$.174
41) If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will
need C$200,000 in 90 days to make payment on imports from Canada, it could:
a.obtain a 90-day forward purchase contract on Canadian dollars
b.obtain a 90-day forward sale contract on Canadian dollars
c.purchase Canadian dollars 90 days from now at the spot rate
d.sell Canadian dollars 90 days from now at the spot rate
42) ____ may complicate cash flow optimization.
a.The use of a zero-balance account
b.Government restrictions
c.Leading and lagging
d.None of the above
43) If the international Fisher effect (IFE) exists, then a U.S. firm that has access to
banks offering high interest rates in deposits denominated in foreign currencies should:
a.invest in the foreign deposits since they will, on average, generate higher effective
yields than a U.S. deposit
b.invest in the U.S. deposits since they will, on average, generate higher effective yields
than a foreign deposit
c.invest in the U.S. deposits since they will, on average, generate similar effective
yields as a foreign deposit
d.invest in the foreign deposits since they will, on average, generate similar effective
yields as a U.S. deposit
44) Assume that the U.S. interest rate is 11% while the interest rate on the euro is 7%. If
euros are borrowed by a U.S. firm, they would have to ____ against the dollar by ____
in order to have the same effective financing rate from borrowing dollars.
a.depreciate; about 3.74%
b.appreciate; about 3.74%
c.appreciate; about 4.53%
d.depreciate; about 4.53%
45) If quoted exchange rates are the same across different locations, then ____ is not
feasible.
a.triangular arbitrage
b.covered interest arbitrage
c.locational arbitrage
d.A and C
46) The strike price on a currency option is also known as an exercise price.
47) The strike price is also known as the premium price.
48) If there is a large supply of savings relative to the demand for short-term funds, the
interest rate for that country will be relatively low.
49) Assume that inflation in the U.S. is expected to be 9%, while inflation in Australia
is expected to be 5% over the next year. Today you receive an offer to purchase a
one-year put option for $.03 per unit on Australian dollars at a strike price of $0.72.
Today the Australian dollar is quoted at $0.70. You believe that purchasing power parity
holds. You should accept the offer.
50) The interest rate commonly charged for loans between banks is called the cross rate.
51) NZ$30,000,000 $.60 = $18,000,000$18,000,000/(1.18)2=$12,927,320
$19,029,015
52) The Single European Act prevented a trend toward increased globalization in the
banking industry.
53) A cross exchange rate expresses the amount of one foreign currency per unit of
another foreign currency.