1) Transaction exposure reflects:
a. the exposure of a firm’s international contractual transactions to exchange rate
fluctuations
b. the exposure of a firm’s local currency value to transactions between foreign
exchange traders
c. the exposure of a firm’s financial statements to exchange rate fluctuations
d. the exposure of a firm’s cash flows to exchange rate fluctuations
2) Which of the following is true according to the text?
a. Forecasts in recent years have been very accurate
b. Use of the absolute forecast error as a percent of the realized value is a good measure
to use in detecting a forecast bias
c. Forecasting errors are smaller when focused on longer term periods
d. None of the above
3) The greater the variability of a currency, the ____ will be the premium of a call
option on this currency, and the ____ will be the premium of a put option on this
currency, other things equal.
a. greater; lower
b. greater; greater
c. lower; greater
d. lower; lower
4) 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:
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%
5) ____ is (are) not a form of political risk.
a. Exchange rate movements
b. Attitude of consumers in the host country
c. Actions of the host government
d. Blockage of fund transfers
e. All of the above are forms of political risk
6) In general, translation exposure is larger with MNCs that have a larger proportion of
earnings generated by foreign subsidiaries.
a. True
b. False
7) 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.
a. True
b. False
8) A country with fixed exchange rates often faces constraints on growth.
a. True
b. False
9) The degree to which a firm’s present value of future cash flows can be influenced by
exchange rate fluctuations is referred to as transaction exposure.
a. True
b. False
10) The 180-day forward rate for the euro is $1.34, while the current spot rate of the
euro is $1.29. What is the annualized forward premium or discount of the euro?
a. 7.46% premium
b. 7.46% discount
c. 7.75% premium
d. 7.75% discount
11) When you own ____, there is no obligation on your part; however, when you own
____, there is an obligation on your part.
a. call options; put options
b. futures contracts; call options
c. forward contracts; futures contracts
d. o; forward contracts
12) Assume that the U.S. experiences a significant decline in income, while Japan’s
income remains steady. This event should place ____ pressure on the value of the
Japanese yen, other things being equal. (Assume that interest rates and other factors are
not affected.)
a. upward
b. downward
c. no
d. upward and downward (offsetting)
13) Under a letter of credit arrangement, the bank issuing the letter of credit is known as
the ____ bank, the correspondent bank in the beneficiary’s country to which the issuing
bank sends the letter of credit is known as the ____ bank, and the bank that agrees to
examine documents under the letter of credit and pay the beneficiary is called the ____
bank.
a. issuing; negotiating; advising
b. issuing; advising; negotiating
c. advising; issuing; negotiating
d. negotiating; issuing; advising
e. advising; negotiating; issuing
14) ____ exposure occurs when an MNC translates each subsidiary’s financial data to
its home currency for consolidated financial statements.
a. Translation
b. Transaction
c. Economic
d. None of the above
15) A strong dollar is normally expected to cause:
a. high unemployment and high inflation in the U.S
b. high unemployment and low inflation in the U.S
c. low unemployment and low inflation in the U.S
d. low unemployment and high inflation in the U.S
16) A ____ currency may ____ the volume of products imported by the country and
therefore reduce the country’s production and national income.
a. weak; increase
b. weak; reduce
c. strong; increase
d. strong; reduce
17) Under a ____, the exporter is paid once shipment has been made and the draft is
presented to the buyer for payment; under a ____, the exporter provides instructions to
the buyer’s bank to release shipping documents against acceptance, by the buyer, of the
draft.
a. sight draft; time draft
b. sight draft; banker’s acceptance
c. bill of lading; banker’s acceptance
d. time draft; sight draft
18) Which of the following is not a program of the Export-Import Bank of the U.S.?
a. working capital guarantee program
b. project finance loan program
c. direct loan program
d. the foreign sales corporation program
19) To enter markets where superior profits are possible, an MNC should:
a. acquire a competitor that has controlled its local market
b. establish a subsidiary or acquire a competitor in a new market
c. establish a subsidiary in a market where tougher trade restrictions will adversely
affect the firm’s export volume
d. establish subsidiaries in markets whose business cycles differ from those where
existing subsidiaries are based
20) When a foreign currency is perceived by a firm to be ____, the firm will probably
____ direct foreign investment in that country.
a. undervalued; consider
b. undervalued; not consider
c. overvalued; not consider
d. A and C
e. B and C
21) Based on the text, it should be obvious that markets are ____ in reality, and
consequently, monopolistic advantages ____ be exploited.
a. perfect; may possibly
b. perfect; cannot
c. imperfect; may possibly
d. imperfect; cannot
22) If the Fed announces that it will decrease the U.S. interest rates, and European
Central Bank takes no action, then the value of euro will ____ against the value of U.S.
dollar. The Fed’s action is called ____ intervention.
a. appreciate; direct
b. depreciate; direct
c. appreciate; indirect
d. depreciate; indirect
23) Over the last several years, international trade has generally:
a. increased for most major countries
b. decreased for most major countries
c. stayed about constant for most major countries
d. increased for about half the major countries and decreased for the others
24) Implementing a forward or money market hedge to hedge translation exposure may
increase transaction exposure.
a. True
b. False
25) Which of the following is not true regarding IRP, PPP, and the IFE?
a. IRP suggests that a currency’s spot rate will change according to interest rate
differentials
b. PPP suggests that a currency’s spot rate will change according to inflation
differentials
c. The IFE suggests that a currency’s spot rate will change according to interest rate
differentials
d. All of the above are true
26) MNCs often use ____ to invest excess cash while retaining liquidity.
a. international bond markets
b. international equity markets
c. international money markets
d. the market for acquisitions
27) If an investor who has previously purchased a futures contract wishes to liquidate
her position, she would sell an identical futures contract with the same settlement date.
a. True
b. False
28) The exact cost of hedging with call options (as measured in the text) is not known
with certainty at the time that the options are purchased.
a. True
b. False
29) The term counterpurchase denotes the exchange of goods between two parties under
two distinct contracts expressed in monetary terms.
a. True
b. False
30) If U.S. inflation suddenly increased while European inflation stayed the same, there
would be:
a. an increased U.S. demand for euros and an increased supply of euros for sale
b. a decreased U.S. demand for euros and an increased supply of euros for sale
c. a decreased U.S. demand for euros and a decreased supply of euros for sale
d. an increased U.S. demand for euros and a decreased supply of euros for sale
31) A mild form of political risk is a tendency of residents to purchase only:
a. imported products
b. locally produced products
c. products produced by MNCs
d. none of the above
32) ____ is not a cost-related motive for direct foreign investment (DFI).
a. Using foreign factors of production
b. Using foreign raw materials
c. Using foreign technology
d. Reacting to trade restrictions
e. Fully benefiting from economies of scale
33) If it was determined that the movement of exchange rates was not related to
previous exchange rate values, this implies that a ____ is not valuable for speculating
on expected exchange rate movements.
a. technical forecast technique
b. fundamental forecast technique
c. all of the above
d. none of the above
34) A firm sells a currency futures contract, and then decides before the settlement date
that it no longer wants to maintain such a position. It can close out its position by:
a. buying an identical futures contract
b. selling an identical futures contract
c. buying a futures contract with a different settlement date
d. selling a futures contract for a different amount of currency
e. purchasing a put option contract in the same currency