1) Springfield Co., based in the U.S., has a cost from orders of foreign material that
exceeds its foreign revenue. All foreign transactions are denominated in the foreign
currency of concern. This firm would ____ a stronger dollar and would ____ a weaker
dollar.
a. benefit from; be unaffected by
b. benefit from; be adversely affected by
c. be unaffected by; be adversely affected by
d. be unaffected by; benefit from
e. benefit from; benefit from
2) Which of the following is the most unlikely strategy for a U.S. firm that will be
purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume
the firm has no offsetting position in francs)?
a. purchase a call option on francs
b. obtain a forward contract to purchase francs forward
c. sell a futures contract on francs
d. all of the above are appropriate strategies for the scenario described
3) To the extent that individual economies are ____ each other, net cash flows from a
portfolio of subsidiaries should exhibit ____ variability, which may reduce the
probability of bankruptcy.
a. dependent on; less
b. dependent on; more
c. independent of; less
d. independent of; more
4) If the observed put option premium is less than what is suggested by the put-call
parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the
call option, and ____ the underlying currency.
a. selling; buying; buying
b. buying; selling; buying
c. selling; buying; selling
d. buying; buying; buying
5) While a strong currency is a possible cure for high inflation, it may cause higher
unemployment due to the attractive foreign prices that result from a strong home
currency.
a. True
b. False
6) According to the “J curve effect,” a weakening of the U.S. dollar relative to its
trading partners’ currencies would result in an initial ____ in the current account
balance, followed by a subsequent ____ in the current account balance.
a. decrease; increase
b. increase; decrease
c. decrease; decrease
d. increase; increase
7) Perhaps the most appropriate method for incorporating forms of country risk in a
capital budgeting analysis is to estimate how the ____ would be affected by each form
of risk.
a. discount rate
b. cash flows
c. opportunity cost
d. none of the above
8) If an MNC sells a product in a foreign country and imports partially manufactured
components needed for production to that country from the U.S., then the local
economy’s inflation will have:
a. a more pronounced impact on revenues than on costs
b. a less pronounced impact on revenues than on costs
c. the same impact on revenues as on costs
d. none of the above
9) The primary component of the current account is the:
a. balance of trade
b. balance of money market flows
c. balance of capital market flows
d. unilateral transfers
10) If there is a strong demand to borrow a currency, and a low supply of savings in that
currency, the interest rate will be relatively low.
a. True
b. False
11) The bill of exchange serves as a receipt for shipment and a summary of freight
charges; most importantly, it conveys title to the merchandise.
a. True
b. False
12) The goal of a multinational corporation (MNC) is
a. The minimization of taxes remitted from foreign subsidiaries
b. The establishment of subsidiaries in any country where operations would provide a
return over and above the cost of capital, even if better projects are available
domestically
c. The maximization of shareholder wealth
d. The maximization of social benefits resulting from actions such as the employment
of foreign managers
13) A forward contract hedge is very similar to a futures contract hedge, except that
____ contracts are commonly used for ____ transactions.
a. forward; small
b. futures; large
c. forward; large
d. none of the above
14) With regard to hedging translation exposure, translation losses ____, and gains on
forward contracts used to hedge translation exposure ____.
a. are not tax deductible; are taxed
b. are tax deductible; are taxed
c. are not tax deductible; are not taxed
d. are tax deductible; are not taxed
15) To strengthen the dollar using sterilized intervention, the Fed would ____ dollars
and simultaneously ____ Treasury securities.
a. buy; sell
b. sell; buy
c. buy; buy
d. sell; sell
16) ____ is (are) not a determinant of translation exposure.
a. The MNC’s degree of foreign involvement
b. The locations of foreign subsidiaries
c. The local (domestic) earnings of the MNC
d. The accounting methods used
17) The imperfect markets theory states that factors of production are somewhat
immobile, allowing firms to capitalize on a foreign country’s resources.
a. True
b. False
18) Under a fixed exchange rate system, U.S. inflation would have a greater impact on
inflation in other countries than it would under a freely floating exchange rate system.
a. True
b. False
19) 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.
a. True
b. False
20) Which of the following is the most likely reason for revaluation of a currency?
a. To reduce inflation
b. To stimulate the local economy
c. To increase the amount of exports
d. To increase balance-of-trade surplus
21) Exporting of products by one country to other countries at prices below cost is
called elasticity.
a. True
b. False
22) If interest rate parity exists, financing with a foreign currency may still be feasible,
but it would have to be conducted on an uncovered basis (i.e., without use of a forward
hedge).
a. True
b. False
23) Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main
competitor is located in Japan. Vada is subject to:
a. economic exposure
b. transaction exposure
c. translation exposure
d. economic and transaction exposure
24) If a U.S. firm’s sales in Australia are much greater than its cost of goods sold in
Australia, the appreciation of the Australian dollar has a ____ impact on the firm’s
____.
a. positive; interest expenses
b. positive; gross profit
c. negative; interest expenses
d. negative; gross profit
25) A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to
the parent on an annual basis. It also imports supplies from China, invoiced in Chinese
yuan. The firm has no other foreign business, and needs a small loan. The firm could
best reduce its exposure to exchange rate risk by borrowing:
a. U.S. dollars
b. Canadian dollars
c. Chinese yuan
d. a combination of Canadian dollars and Chinese yuan
26) Which of the following would likely have the least direct influence on a country’s
current account?
a. inflation
b. national income
c. exchange rates
d. tariffs
e. a tax on income earned from foreign stocks
27) Assume that there are several foreign currencies that exhibit a higher interest rate
than the U.S. interest rate. The U.S. firm has a higher probability of generating a higher
effective yield on a portfolio of currencies (relative to the domestic yield) if:
a. the foreign currency movements against the U.S. dollar are highly correlated
b. the foreign currency movements against the U.S. dollar are perfectly positively
correlated
c. the foreign currency movements against the U.S. dollar exhibit low correlations
d. none of the answers above would have any impact on the probability of a foreign
cash investment generating a higher effective yield than a U.S. investment
28) Leila Corporation used the following regression model to determine if the forecasts
over the last ten years were biased:
St = a0 + a1Ft – 1 + mt,
where St is the spot rate of the yen in year t and Ft – 1 is the forward rate of the yen in
year t – 1. Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila
Corporation has reason to believe that its past forecasts have ____ the realized spot rate.
a. overestimated
b. underestimated
c. correctly estimated
d. none of the above
29) Inflation and interest rate differentials between the U.S. and foreign countries are
examples of variables that could be used in fundamental forecasting.
a. True
b. False
30) Direct foreign investment is commonly considered by MNCs because it allows the
MNC to:
a. attract new sources of demand
b. enter profitable markets
c. react to exchange rate movements
d. react to trade restrictions
e. all of the above
31) The variance in financing costs over time is ____ for foreign financing than
domestic financing. The variance when financing with foreign currencies is lower when
those currencies exhibit ____ correlations, assuming the firm has no other business in
those currencies.
a. lower; low
b. lower; high
c. higher; high
d. higher; low
32) Although forward contracts may reduce translation exposure at the expense of
increasing transaction exposure, they are sometimes used to hedge translation exposure.
a. True
b. False