1) A centralized management style for an MNC results in relatively high agency costs.
2) Margin requirements are deposits placed by investors in futures contracts with their
respective brokerage firms when they take their position. They are intended to minimize
credit risk associated with futures contracts.
3) Delphi analysis examines the financial and political factors of various countries and
attempts to identify which factors help to distinguish between tolerable-risk and
intolerable-risk countries.
4) A balance of trade surplus indicates an excess of merchandise imports over
merchandise exports.
5) An international acquisition is different from the establishment of a new subsidiary in
that the MNC can immediately expand its international business since the target is
already in place.
6) The Smithsonian Agreement was an agreement to allow currencies of major
countries to float without any barriers.
7) To reduce economic exposure when a foreign currency has a greater impact on cash
inflows, an MNC could reduce its level of foreign sales, increase its foreign supply
orders, or restructure debt to increase debt payments in the foreign currency.
8) To reduce the exposure to a host government takeover, an MNC may attempt to
recover cash flows from the foreign project more quickly or hire local labor.
9) 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.
10) The Bretton Woods Agreement created a system under which exchange rates are
determined by market forces without intervention by various governments.
11) Assume a subsidiary is forced to borrow in excess of the MNC’s optimal capital
structure. Also assume that the parent company reduces its debt financing by an
offsetting amount. Under this scenario, the cost of capital for the MNC overall could
not have changed.
12) The objectives of the Export-Import Bank of the United States include the
assumption of underlying credit risk and country risk to encourage private lenders to
finance export trade and the provision of direct loans to foreign buyers when private
lenders are unwilling to do so.
13) U.S. exporters may not necessarily benefit from weak-dollar periods if foreign
competitors are willing to reduce their profit margin.
14) Assume that an MNC’s cash flows are positively related to the movements in a
foreign currency. If the MNC expects the foreign currency to weaken, it could purchase
the currency forward to reduce its degree of economic exposure.
15) The writer of a call option is obligated to sell the underlying currency to the buyer
of the option if the option is exercised.
16) At present, U.S. firms acquire more targets in the former Soviet Union than in any
other country.
17) Under the system known as the “dirty” float, official boundaries for the exchange
rate exist, but they are wider than they are under a fixed exchange rate system.
18) An MNC’s cost of capital may differ from that of domestic firms because of their
access to international capital markets, their exposure to exchange rate risk, and other
characteristics.
19) In a countertrade transaction, banks on both ends act as intermediaries in the
processing of shipping documents and the collection of payment.
20) With ____, the exporter ships the goods to the importer while still retaining actual
title to the merchandise.
a.a letter of credit arrangement
b.an open account arrangement
c.a draft arrangement
d.a consignment arrangement
21) Use the following information to calculate the dollar cost of using a money market
hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no
excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate is
$2.00. The British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day
period.
a.$391,210
b.$396,190
c.$388,210
d.$384,761
e.none of the above
22) 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
23) A put option on Swiss franc has a strike (exercise) price of $.92. The present
exchange rate is $.89. This put option can be referred to as:
a.in the money
b.out of the money
c.at the money
d.at a discount
24) If interest rate parity exists, and the forward rate is an accurate estimator of the
future spot rate, the foreign financing rate will be ____ the home financing rate.
a.lower than
b.greater than
c.similar to
d.none of the above
25) Exhibit 10-1
Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the
Netherlands. Cerra estimates the standard deviation of daily percentage changes of the
euro to be 1 percent over the last 100 days. Assume that these percentage changes are
normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence
level for the following question(s).
Refer to Exhibit 10-1. What is the maximum one-day loss in dollars if the expected
percentage change of the euro tomorrow is 0.5%? The current spot rate of the euro
(before considering the maximum one-day loss) is $1.01.
a.-$75,750
b.-$60,600
c.-$111,100
d.-$25,250
26) The interest rate of a country with a currency board:
a.is less stable than it would be without a currency board
b.is typically below the interest rate of the currency to which it is tied
c.will move in tandem with the interest rate of the currency to which it is tied
d.is completely independent of the interest rate of the currency to which it is tied
27) When a U.S.-based MNC has a subsidiary in Mexico that needs financing, the
MNC’s exposure to exchange rate risk can be minimized if:
a.the parent issues dollar-denominated equity and provides the proceeds to the
subsidiary
b.the parent provides its retained earnings to the Mexican subsidiary
c.the subsidiary obtains a dollar-denominated loan from a financial institution
d.the subsidiary obtains a peso-denominated loan from a financial institution
28) A U.S. firm has received a large amount of cash inflows periodically in Swiss francs
as a result of exporting goods to Switzerland. It has no other business outside the U.S. It
could best reduce its exposure to exchange rate risk by:
a.issuing Swiss franc-denominated bonds
b.purchasing Swiss franc-denominated bonds
c.purchasing U.S. dollar-denominated bonds
d.issuing U.S. dollar-denominated bonds
29) Which of the following is not true regarding the efficient frontier considered by
MNCs?
a.There is exactly one point on the efficient frontier that is optimal for every MNC,
regardless of its degree of risk aversion
b.The efficient frontier for international projects will probably lie to the left of the
efficient frontier for domestic projects
c.Each point on the efficient frontier represents a portfolio of projects as opposed to an
individual project
d.All of the above are true
e.A and C are false
30) The required rate of return of a project is ____ the MNC’s cost of capital.
a.greater than
b.less than
c.the same as
d.any of the above, depending on the specific project
31) Which of the following reflects a hedge of net receivables in British pounds by a
U.S. firm?
a.purchase a currency put option in British pounds
b.sell pounds forward
c.borrow U.S. dollars, convert them to pounds, and invest them in a British pound
deposit
d.A and B
32) Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5.
Given this information, as you and others perform triangular arbitrage, the exchange
rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the
exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.
a.appreciate; depreciate
b.depreciate; appreciate
c.depreciate; depreciate
d.appreciate; appreciate
e.remain stable; appreciate
33) Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars
should result in a(n) ____ in the value of the Swiss franc with respect to ____, other
things being equal.
a.increase; U.S. dollar
b.increase; nondollar currencies
c.decrease; nondollar currencies
d.decrease; U.S. dollar
34) Samson Inc. needs 1,000,000 in 30 days. Samson can earn 5 percent annualized on
a German security. The current spot rate for the euro is $1.00. Samson can borrow funds
in the U.S. at an annualized interest rate of 6 percent. If Samson uses a money market
hedge, how much should it borrow in the U.S.?
a.$952,381
b.$995,851
c.$943,396
d.$995,025
35) Which of the following countries purchases the largest amount of exports by U.S.
firms?
a.Mexico
b.Japan
c.Canada
d.France
36) Which one of the following is a disadvantage of a fixed exchange rate system:
a.Importers are insulated from the risk that the currency will appreciate over time
b.Management of an MNC is less difficult
c.The government might change the value of the currency
d.Exporters are insulated from the risk that the currency will depreciate over time
37) An example of cross-hedging is:
a.find two currencies that are highly positively correlated; match the payables of the
one currency to the receivables of the other currency
b.use the forward market to sell forward whatever currencies you will receive
c.use the forward market to buy forward whatever currencies you will receive
d.B and C
38) Assume that Swiss investors are benefiting from covered interest arbitrage due to a
high U.S. interest rate. Which of the following forces results from the act of this
covered interest arbitrage?
a.upward pressure on the Swiss franc’s spot rate
b.upward pressure on the U.S. interest rate
c.downward pressure on the Swiss interest rate
d.upward pressure on the Swiss franc’s forward rate
39) Orlando Co. produces home appliances and sells them in the U.S. It outsources the
production of the appliances to a Chinese manufacturer, and the imported appliances are
priced in dollars. Its major competitor for appliances is located in Mexico. Based on
this information, Orlando Co. is subject to ____ exposure.
a.economic
b.transaction
c.translation
d.economic and transaction
40) Which of the following is not an example of political risk?
a.Government may impose taxes on subsidiary
b.Government may impose barriers on subsidiary
c.Consumers may boycott the MNC
d.Consumers’ income levels will decrease, thus decreasing consumption
41) Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic
and political considerations, only one eligible target remains in Malaysia. Klimewsky
would like you to value this target and has provided you with the following
information:
Klimewsky expects to keep the target for three years, at which time it expects to sell the
firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes
paid.
Klimewsky expects a strong Malaysian economy. Consequently, the estimates for
revenues for the next year are MYR300 million. Revenues are expected to increase by
9% over the following two years.
Cost of goods sold are expected to be 60% of revenues.
Selling and administrative expenses are expected to be MYR40 million in each of the
next three years.
The Malaysian tax rate on the target’s earnings is expected to be 30%.
Depreciation expenses are expected to be MYR15 million per year for each of the next
three years.
The target will need MYR9 million in cash each year to support existing operations.
The target’s current stock price is MYR35 per share. The target has 11 million shares
outstanding.
Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc.
Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected
exchange rate for the next three years. This exchange rate is currently $.23.
Klimewsky’s required rate of return on similar projects is 13%.
Refer to Exhibit 15-1. The target’s board has indicated that it finds a premium of 30
percent appropriate. You have been asked to negotiate for Klimewsky with the
Malaysian target. What is the maximum percentage premium you should be willing to
offer?
a.30.0%
b.25.9%
c.you should not offer any premium because the market’s valuation is below
Klimewsky’s valuation
d.none of the above
42) Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese
subsidiary to support local operations. Thornton would like its subsidiary to repay the
rupees in one year. Thornton would like to engage in a swap transaction. Thus,
Thornton would:
a.convert the rupees to dollars in the spot market today and convert rupees to dollars in
one year at today’s forward rate
b.convert the dollars to rupees in the spot market today and convert dollars to rupees in
one year at the prevailing spot rate
c.convert the dollars to rupees in the spot market today and convert rupees to dollars in
one year at today’s forward rate
d.convert the dollars to rupees in the spot market today and convert rupees to dollars in
one year at the prevailing spot rate
43) Assume the following bid and ask rates of the pound for two banks as shown below:
BidAsk
Bank A$1.41$1.42
Bank B$1.39$1.40
As locational arbitrage occurs:
a.the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will
increase
b.the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will
decrease
c.the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will
decrease
d.the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will
increase
44) The real cost of hedging payables with a forward contract equals:
a.the nominal cost of hedging minus the nominal cost of not hedging
b.the nominal cost of not hedging minus the nominal cost of hedging
c.the nominal cost of hedging divided by the nominal cost of not hedging
d.the nominal cost of not hedging divided by the nominal cost of hedging
45) Any event that increases the supply of British pounds to be exchanged for U.S.
dollars should result in a(n) ____ in the value of the British pound with respect to ____,
other things being equal.
a.increase; U.S. dollar
b.increase; nondollar currencies
c.decrease; nondollar currencies
d.decrease; U.S. dollar
46) The capital asset pricing model suggests that the required return on a firm’s stock is
a positive function of:
a.the risk-free rate of interest
b.the market rate of return
c.the stock’s beta
d.all of the above