1) Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and
Brazil.
a. True
b. False
2) 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
3) Other things being equal, firms from a particular home country will engage in more
international acquisitions if they expect foreign currencies to ____ against their home
currency, and if their cost of capital is relatively ____.
a. appreciate; low
b. appreciate; high
c. depreciate; high
d. depreciate; low
4) Exhibit 20-1
Assume a U.S.-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8%
for one year. Also assume that the spot rate of the leu is $.00012 and the one-year
forward rate of the leu is $.00010. The expected spot rate of the leu one-year from now
is $.00011.
Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it
borrows leu on an uncovered basis?
a. about 10%
b. about -10%
c. about -1%
d. about -2%
e. none of the above
5) The euro is pegged to other currencies of European countries that have not adopted
the euro.
a. True
b. False
6) A purely domestic firm is never exposed to exchange rate fluctuations.
a. True
b. False
7) A blockage of fund transfers imposed by a host government usually forces a
subsidiary to donate the funds to the host government.
a. True
b. False
8) Because their economies have lower growth, the cost of debt in industrialized
countries is much higher than the cost of debt in many less developed countries.
a. True
b. False
9) If hedging projections cause a firm to believe that it will definitely be adversely
affected by its transaction exposure, a currency option hedge is more appropriate than
other methods.
a. True
b. False
10) An MNC has a foreign manufacturing plant to capitalize on cheap production costs;
the MNC exports all the goods produced. It should be most concerned about the
country’s:
a. growth in gross domestic product
b. government policies designed to increase tariffs on imported goods
c. local consumer purchasing habits
d. government environmental regulations and taxes on the lease or purchase of a
production site
11) The international money market is primarily served by:
a. the governments of European countries, which directly intervene in foreign currency
markets.
b. government agencies such as the International Monetary Fund that enhance
development of countries.
c. several large banks that accept deposits and provide loans in various currencies.
d. small banks that convert foreign currency for tourists and business visitors.
12) Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid
currencies.
a. True
b. False
13) Which is not a concern about the North American Free Trade Agreement (NAFTA)?
a. its impact on U.S. inflation
b. its impact on U.S. unemployment
c. lower environmental standards in Mexico
d. different health laws for workers in Mexico
14) As the financing of a foreign project by the parent ____ relative to the financing
provided by the subsidiary, the parent’s exchange rate exposure ____.
a. increases; decreases
b. decreases; increases
c. increases; increases
d. none of the above
15) A foreign target’s expected future cash flows generally vary among different MNCs
valuing the target.
a. True
b. False
16) The more intense the competition for the traded currency, the larger the bid/ask
spread.
a. True
b. False
17) A bill of exchange requesting the bank to pay the face amount at a future date is a:
a. banker’s acceptance
b. time draft
c. letter of credit
d. sight draft
18) 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
19) The primary component of the capital account is the balance of trade.
a. True
b. False
20) 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.
a. True
b. False
21) If an MNC invests excess cash in a foreign county, it would like the foreign
currency to ____; if an MNC issues bonds denominated in a foreign currency, it would
like the foreign currency to ____.
a. appreciate; depreciate
b. appreciate; appreciate
c. depreciate; depreciate
d. depreciate; appreciate
22) 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
23) The international money market is frequently accessed by MNCs for short-term
investment and financing decisions, while longer term financing decisions are made in
the international credit market or the international bond market and in international
stock markets.
a. True
b. False
24) The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro
is $1.05. What is the annualized forward premium or discount of the euro?
a. 1.9 percent discount
b. 1.9 percent premium
c. 7.6 percent premium
d. 7.6 percent discount
25) The ____ the correlation in project returns is over time, the ____ will be the project
portfolio risk as measured by the portfolio variance.
a. lower; lower
b. higher; lower
c. lower; higher
d. none of the above
26) Which of the following is not a factor that should be considered in multinational
capital budgeting?
a. Blocked funds
b. Exchange rate fluctuations
c. Inflation
d. Financing arrangements
e. All of the above should be considered
27) The cost of capital incurred by U.S.-based MNCs is primarily driven by the global
stock market volatility.
a. True
b. False
28) Which of the following reflects a hedge of net payables on British pounds by a U.S.
firm?
a. purchase a currency put option in British pounds
b. sell pounds forward
c. sell a currency call option in British pounds
d. borrow U.S. dollars, convert them to pounds, and invest them in a British pound
deposit
e. A and B
29) Which of the following is true of options?
a. The writer decides whether the option will be exercised
b. The writer pays the buyer the option premium
c. The buyer decides if the option will be exercised
d. More than one of these
30) If the Bank of England announces that it will start to frequently intervene in order
to reduce the fluctuations of British pound, the premiums on call and put options will
increase.
a. True
b. False
31) The ____ does not represent an obligation.
a. long-term forward contract
b. currency swap
c. parallel loan
d. currency option
32) If the parent’s government imposes a ____ tax rate on funds remitted from a foreign
subsidiary, a project is less likely to be feasible from the ____ point of view.
a. high; subsidiary’s
b. high; parent’s
c. low; parent’s
d. A and C
e. none of the above
33) Usually, fundamental forecasting is used for short-term forecasts, while technical
forecasting is used for longer-term forecasts.
a. True
b. False
34) 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.
a. True
b. False
35) According to information in the text, a host government would be least likely to
provide incentives for direct foreign investment (DFI) into its country if the firm
planning DFI:
a. would compete with local firms of the host country
b. would produce a good not currently available in the host country
c. would produce a good and export it to other countries
d. B and C
36) The premium on a pound put option is $.04. The spot rate and the exercise price is
$1.52. The spot rate at the time of this option expiration is expected to be $1.51. The
speculators could profit by:
a. writing a put option
b. buying a put option
c. buying a call option
d. writing a call option and buying a call option simultaneously
37) The most sophisticated forecasting techniques provide consistently accurate
forecasts.
a. True
b. False
38) A syndicated loan:
a. represents a loan by a single bank to a syndicate of corporations
b. represents a loan by a single bank to a syndicate of country governments
c. represents a direct loan by a syndicate of oil-producing exporters to a less developed
country
d. represents a loan by a group of banks to a borrower
e. A and B
39) Carl is an option writer. In anticipation of a depreciation of the British pound from
its current level of $1.50 to $1.45, he has written a call option with an exercise price of
$1.51 and a premium of $.02. If the spot rate at the option’s maturity turns out to be
$1.54, what is Carl’s profit or loss per unit (assuming the buyer of the option acts
rationally)?
a. -$0.01
b. $0.01
c. -$0.04
d. $0.04
e. -$0.03