1) Countries usually do not have difficulty maintaining a pegged exchange rate, even
when they are experiencing major political or economic problems.
2) If an MNC uses a long-term forward contract to hedge the exchange rate risk
associated with a bond denominated in euros, it would sell euros forward.
3) In general, increased investment by the parent in the foreign subsidiary causes more
exchange rate exposure to the parent over time because the cash flows remitted to the
parent will be larger.
4) All types of foreign trade transactions in which the sale of goods to one country is
linked to the purchase or exchange of goods from that same country are called
countertrade.
5) An MNC issuing pound-denominated bonds may be completely insulated from
exchange rate risk associated with the bond if its foreign subsidiary makes the coupon
and principal payments of the bond with its pound receivables.
6) In a sterilized exchange rate arrangement, a country’s home currency value is pegged
to a foreign currency or to some unit of account.
7) 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.
8) The writer of a put option has a right, but not obligation, to buy the underlying
currency from the option buyer.
9) The all-in-rate a bank charges its customer(s) for accepting drafts includes both the
discount rate and the acceptance commission.
10) All MNCs are subject to translation exposure.
11) An MNC may deviate from its target capital structure in each country where
financing is obtained, yet still achieve its target capital structure on a consolidated basis.
12) The U.S. is one of the few countries with agencies that monitor mergers and
acquisitions.
13) Hedgers should buy puts if they are hedging an expected inflow of foreign currency.
14) Macro-assessment of country risk refers to an overall risk assessment of a country
without consideration of the MNC’s business.
15) While a weak currency can reduce unemployment at home, it can also lead to
higher inflation, as local companies are better able to raise prices.
16) The VAR method presumes that the distribution of exchange rate movements is
normal.
17) The Sarbanes-Oxley Act (SOX) was enacted in 2002 required MNCs and other
firms to implement an internal reporting process that could be easily monitored by
executives and the board of directors.
18) 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.-$0.03
19) Which is not a concern about the North American Free Trade Agreement (NAFTA)?
a.its impact on U.S. inflation
b.its impact on U.S. unemployment
c.lower environmental standards in Mexico
d.different health laws for workers in Mexico
20) Assume the following information:
Current spot rate of Australian dollar=$.64
Forecasted spot rate of Australian dollar 1 year from now=$.59
1-year forward rate of Australian dollar=$.62
Annual interest rate for Australian dollar deposit=9%
Annual interest rate in the U.S.=6%
Given the information in this question, the return from covered interest arbitrage by
U.S. investors with $500,000 to invest is ____%.
a.about 6.00
b.about 9.00
c.about 7.33
d.about 8.14
e.about 5.59
21) Lorre Company needs 200,000 Canadian dollars (C$) in 90 days and is trying to
determine whether or not to hedge this position. Lorre has developed the following
probability distribution for the Canadian dollar:
Possible Value of
Canadian Dollar in 90 DaysProbability
$0.5415%
0.5725%
0.5835%
0.5925%
The 90-day forward rate of the Canadian dollar is $.575, and the expected spot rate of
the Canadian dollar in 90 days is $.55. If Lorre implements a forward hedge, what is the
probability that hedging will be more costly to the firm than not hedging?
a.40%
b.60%
c.15%
d.85%
22) The Multilateral Investment Guarantee Agency can provide MNCs implementing
direct foreign investment in less developed countries with:
a.insurance that covers losses on multilateral netting procedures
b.exchange rate risk insurance
c.political risk insurance
d.guarantees that MNCs will receive the same taxation treatment by the host
government as local firms
e.guarantees of lines of credit provided by the World Bank if the MNC experiences
liquidity problems
23) If a currency’s spot market is ____, its exchange rate is likely to be ____ to a single
large purchase or sale transaction.
a.liquid; highly sensitive
b.illiquid; insensitive
c.liquid; insensitive
d.none of the above
24) The effective financing rate:
a.adjusts the nominal interest rate for inflation over the period of concern
b.adjusts the nominal interest rate for the change in the spot exchange rate over the
period of concern
c.adjusts the nominal rate for a change in foreign interest rates over the period of
concern
d.adjusts the nominal rate for the forward discount (or premium) over the period of
concern
25) Exhibit 21-2
Moore Corporation would like to simultaneously invest in Malaysian ringgit (MYR)
and Romanian leu (ROL) for a three-month period. Moore would like to determine the
expected yield and the variance of a portfolio consisting of 40% ringgit and 60% leu.
Moore has identified the following information:
Mean effective financing rate of Malaysian ringgit for three months3%
Mean effective financing rate of Romanian leu for three months2%
Standard deviation of Malaysian ringgit’s effective financing rate.15
Standard deviation of Romanian leu’s effective financing rate.07
Correlation coefficient of effective financing rates of these two currencies.19
Refer to Exhibit 21-2. What is the standard deviation of the portfolio contemplated by
Moore Corporation?
a..624%
b.7.950%
c.1.040%
d.10.200%
e.none of the above
26) ____ is not a disadvantage of direct foreign investment.
a.The expense of establishing a foreign subsidiary
b.The uncertainty of inflation and exchange rate movements
c.Political risk
d.All of the above are disadvantages of direct foreign investment
27) A ____ involves an exchange of currencies between two parties, with a promise to
re-exchange currencies at a specified exchange rate and future date.
a.long-term forward contract
b.currency option contract
c.parallel loan
d.money market hedge
28) In comparing exporting to direct foreign investment (DFI), an exporting operation
will likely incur ____ fixed production costs and ____ transportation costs than DFI.
a.higher; higher
b.higher; lower
c.lower; lower
d.lower; higher
29) Which of the following is not a cost-related motive of direct foreign investment?
a.International diversification
b.Low labor costs
c.Land can be purchased at a low price
d.Manufacturing plants can be built for a low price
30) Given a home country and a foreign country, the international Fisher effect (IFE)
suggests that:
a.the nominal interest rates of both countries are the same
b.the inflation rates of both countries are the same
c.the exchange rates of both countries will move in a similar direction against other
currencies
d.none of the above
31) Even if production costs are higher in a foreign country, a U.S. firm may establish a
manufacturing plant in the foreign country now if:
a.the host government of that country eliminates all quotas
b.the host government of that country reduces all quotas
c.the host government of that country increases all quotas
d.the host government of that country eliminates all tariffs
32) Which of the following is an appropriate form of indirect intervention?
a.To strengthen the dollar, the Fed increases the money supply to lower interest rates
b.To weaken the dollar, the Fed reduces the money supply to increase interest rates
c.To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation
d.To weaken the dollar in the long run, the Fed attempts to reduce U.S. inflation
33) The ____ an MNC, the ____ its cost of capital is likely to be.
a.larger; higher
b.larger; lower
c.smaller; lower
d.A and C
34) The ADR of a British firm is convertible into 3 shares of stock. The share price of
the firm was 30 pounds when the British market closed. When the U.S. market opens,
the pound is worth $1.63. The price of this ADR should be $____.
a.48.90
b.146.70
c.55.21
d.none of the above
35) The risk to the exporter is highest with the ____ method.
a.prepayment
b.letter of credit
c.consignment
d.open account
36) Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million
Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.
a.appreciates; decreases
b.depreciates; is unaffected
c.appreciates; is unaffected
d.depreciates; decreases
e.B and C
37) According to the text, a disadvantage of licensing is that:
a.it prevents a firm from importing
b.it is difficult to ensure quality control of the production process
c.it prevents a firm from exporting
d.none of the above
38) An exchange of goods between two parties under two distinct contracts expressed in
monetary terms is:
a.compensation
b.counterpurchase
c.factoring
d.accounts receivable financing
39) If the international Fisher effect (IFE) did not hold based on historical data, then
this suggests that:
a.some corporations with excess cash can lock in a guaranteed higher return on future
foreign short-term investments
b.some corporations with excess cash could have generated profits on average from
covered interest arbitrage
c.some corporations with excess cash could have generated higher profits on average
from foreign short-term investments than from domestic short-term investments
d.most corporations that consistently invest in foreign short-term investments would
have generated the same profits (on average) as from domestic short-term investments
40) Assume that Live Co. has expected cash flows of $200,000 from domestic
operations, SF200,000 from Swiss operations, and 150,000 euros from Italian
operations at the end of the year. The Swiss franc’s value and euro’s value are expected
to be $.83 and $1.29 respectively, at the end this year. What are the expected dollar cash
flows of Live Co?
a.$200,000
b.$559,500
c.$582,500
d.$393,500
41) Based on the factors that influence a country’s cost of capital, the cost of capital in
less developed countries is likely to be ____ than that of the U.S. and ____ than that of
Japan.
a.higher; higher
b.higher; lower
c.lower; lower
d.lower; higher
42) As part of Ex-Imbank’s export credit insurance programs, a(an) ____ policy is
generally issued to an administrator, such as a bank, trading company, insurance broker,
or government agency, who then administers the policy for multiple exporters.
a.multiple-buyer
b.single-buyer
c.small business
d.umbrella
43) The break-even salvage value of a particular project is the salvage value necessary
to:
a.offset any losses incurred by the subsidiary in a given year
b.offset any losses incurred by the MNC overall in a given year
c.make the project have zero profits
d.make the project’s return equal the required rate of return
44) To ____, MNCs can use preauthorized payments.
a.accelerate cash inflows
b.minimize currency conversion costs
c.manage blocked funds
d.manage intersubsidiary cash transfers
45) An increase in the use of quotas is expected to:
a.reduce the country’s current account balance, if other governments do not retaliate
b.increase the country’s current account balance, if other governments do not retaliate
c.have no impact on the country’s current account balance unless other governments
retaliate
d.increase the volume of a country’s trade with other countries
46) Due to ____, market forces should realign the relationship between the interest rate
differential of two currencies and the forward premium (or discount) on the forward
exchange rate between the two currencies.
a.forward realignment arbitrage
b.triangular arbitrage
c.covered interest arbitrage
d.locational arbitrage
47) Which of the following is the most likely strategy for a U.S. firm that will be
receiving 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.sell a futures contract on francs
c.obtain a forward contract to purchase francs forward
d.all of the above are appropriate strategies for the scenario described
48) Assume that your firm is an importer of Mexican chairs denominated in pesos. Your
competition is mainly U.S. producers of chairs. You wish to assess the relationship
between the percentage change in its stock price (SPt) and the percentage change in the
peso’s value relative to the dollar (PESOt). SPt is the dependent variable. You apply the
regression model to an earlier subperiod and a more recent subperiod. In the recent
subperiod, you increased your importing volume. You should expect that the regression
coefficient in the PESOt variable would be ____ in the first subperiod and ____ in the
second subperiod.
a.negative; positive
b.positive; positive
c.positive; negative
d.negative; negative
49) Which of the following is probably the best method of incorporating country risk
into a capital budgeting analysis?
a.Adjusting the discount rate upward
b.Adjusting the input variables to estimate the sensitivity of the project’s NPV
c.Adjusting the political risk rating to obtain a more favorable NPV
d.Country risk should be ignored in capital budgeting, since it is a subjective analysis
50) ____ is not a revenue-related motive for direct foreign investment.
a.Attracting new sources of demand
b.Fully benefiting from economies of scale
c.Exploiting monopolistic advantages
d.Entering profitable markets
51) 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
52) 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