1) MNCs can use ____ to reduce exchange rate risk. This occurs when two parties
provide simultaneous loans with an agreement to repay at a specified point in the future.
a. forward contracts
b. currency swaps
c. parallel loans
d. none of the above
2) 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
3) Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate
estimate of the spot rate 90 days from now, then the real cost of hedging payables will
be:
a. positive
b. negative
c. positive if the forward rate exhibits a premium, and negative if the forward rate
exhibits a discount
d. zero
4) If a country experiences an increase in interest rates relative to U.S. interest rates, the
inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to
purchase U.S. securities should ____, and there is ____ pressure on its currency’s
equilibrium value.
a. increase; decrease; downward
b. decrease; increase; upward
c. increase; decrease; upward
d. decrease; increase; downward
e. increase; increase; upward
5) Market forces are the determinant of exchange rates in a freely floating exchange
rate system.
a. True
b. False
6) To hedge a contingent exposure, in which an MNC’s exposure is contingent on a
specific event occurring, the appropriate hedge would be a(n) ____ hedge.
a. money market
b. futures
c. forward
d. options
7) Since the cost of funds can vary among markets, the MNC’s access to the
international capital markets may allow it to attract funds at a lower cost than that paid
by domestic firms.
a. True
b. False
8) According to your text, which of the following is not a factor that increases an
MNC’s cost of capital?
a. higher exposure to exchange rate risk
b. higher exposure to country risk
c. an increase in the risk-free interest rate
d. an increase in the size of the MNC
9) According to the text, currency variability levels ____ perfectly stable over time, and
currency correlations ____ perfectly stable over time.
a. are; are not
b. are; are
c. are not; are not
d. are not; are
10) In multinational capital budgeting, depreciation is treated as a cash outflow.
a. True
b. False
11) A weakening of the U.S. dollar with respect to the British pound would likely
reduce the U.S. exports to Britain and increase U.S. imports from Britain over time.
a. True
b. False
12) 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
13) Macro-assessment of country risk refers to an overall risk assessment of a country
without consideration of the MNC’s business.
a. True
b. False
14) The Smithsonian Agreement called for a devaluation of the U.S. dollar by about
____ percent.
a. 2.25
b. 6
c. 10
d. 8
15) Foreign exchange markets appear to be strong-form efficient.
a. True
b. False
16) ____ swaps are often used by companies to hedge against ____ rate risk.
a. Currency; interest
b. Interest; interest
c. Interest; exchange
d. Currency; exchange
e. B and D
17) According to the text, country risk analysis has:
a. almost always detected problems before they occur
b. been effectively used in place of capital budgeting to determine whether a project
should be accepted
c. been perfected as a result of the development of discriminant analysis
d. none of the above
18) If markets were perfect, then labor and other costs of production would be easily
transferable.
a. True
b. False
19) If foreign investors fear that a peg may be broken because of fund outflows from
that country, they may attempt to purchase more of that currency before the peg is
broken.
a. True
b. False
20) Which of the following is not mentioned in the text as a factor affecting exchange
rates?
a. Relative interest rates
b. Relative inflation rates
c. Government controls
d. Expectations
e. All of the above are mentioned in the text as factors affecting exchange rates
21) Netting can achieve all but one of the following:
a. Cross border transactions between subsidiaries are reduced
b. Transactions costs are reduced
c. Currency conversion costs are reduced
d. Transaction exposure is eliminated
22) A foreign target’s expected future cash flows generally vary among different MNCs
valuing the target.
a. True
b. False
23) If an MNC exports to a country, then establishes a subsidiary to produce and sell the
same product in the country, then cash flows from prevailing operations would likely be
____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary
that buys components from the parent, the cash flows from prevailing operations would
likely be ____ affected by the project.
a. adversely; adversely
b. favorably; adversely
c. favorably; favorably
d. adversely; favorably
24) A balance of trade surplus indicates an excess of merchandise imports over
merchandise exports.
a. True
b. False
25) The degree of financial information that must be provided by public companies is
the same among countries.
a. True
b. False