1) If foreign exchange markets are strong-form efficient, then all relevant public and
private information is already reflected in today’s exchange rates.
2) If partial financing is provided by the foreign subsidiary, including foreign interest
payments in the cash flow analysis may avoid overstatement of the estimated foreign
cash flows.
3) 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.
4) If a currency call option is in the money, then the present exchange rate exceeds the
strike price.
5) The lower bound of the call option premium is the greater of zero and the difference
between the spot rate and the exercise price; the upper bound of a currency call option
is the spot rate.
6) Two methods to assess exchange rate volatility are the volatility of historical
exchange rate movements and the exchange rate’s implied standard deviation from the
currency option pricing model.
7) Triangular arbitrage tends to force a relationship between the interest rates of two
countries and their forward exchange rate premium or discount.
8) The Bank of England is responsible for setting the monetary policy for the European
countries participating in the euro.
9) In general, it is more difficult to effectively hedge economic or translation exposure
than to hedge transaction exposure.
10) A limitation of interest rate swaps is that there is a risk to each swap participant that
the counterparticipant could default on his payments.
11) The writer of an uncovered call can experience a loss limited to the option
premium.
12) Country X frequently engages in trade flows with the U.S. (such as imports and
exports). Country Y frequently engages in financial flows with the U.S. (such as
financial investments). Everything else held constant, an increase in U.S. interest rates
would affect the exchange rate of Country X’s currency more than the exchange rate of
Country Y’s currency.
13) Regarding the valuation of privatized businesses in less developed countries, ____
can normally be estimated with a high degree of accuracy.
a.future cash flows
b.future exchange rate movements
c.the proper discount rate
d.none of the above
14) Assume that the income levels in U.K. start to rise, while U.S. income levels remain
unchanged. This will place ____ pressure on the value of British pound. Also, assume
that U.S. interest rates rise, while the British pound remains unchanged. This will place
____ pressure on the value of British pound.
a.downward; downward
b.upward; downward
c.upward; upward
d.downward; upward
15) Which of the following is not an example of political risk?
a.The Japanese government requires an MNC’s subsidiary to install exercise rooms for
its employees
b.The Swiss government requires an MNC’s subsidiary to install filters in its
manufacturing plants to reduce pollution
c.Country X, considered for expansion, frequently goes to war with its neighbors
d.Country Y’s government has recently taken over the subsidiary of one of your
competitors, another U.S.-based MNC
e.All of the above are examples of political risk
16) ____ is not a type of program offered by Ex-Imbank.
a.Guarantees
b.Loans
c.Currency swap insurance
d.Bank insurance
17) The Basel II accord is focused on eliminating inconsistencies in ____ across
countries.
a.capital requirements
b.deposit rates
c.deposit insurance
d.bank failure policies
18) 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
19) The premium on a pound put option is $.04. The spot rate and the exercise price is
$1.52. The spot rate at the time of this option expiration is expected to be $1.51. The
speculators could profit by:
a.writing a put option
b.buying a put option
c.buying a call option
d.writing a call option and buying a call option simultaneously
20) 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
21) ____ is not a factor that causes currency supply and demand schedules to change.
a.Relative inflation rates
b.Relative interest rates
c.Relative income levels
d.Expectations
e.All of the above are factors that cause currency supply and demand schedules to
change
22) Which of the following is not a forecasting technique mentioned in your text?
a.accounting-based forecasting
b.technical forecasting
c.fundamental forecasting
d.market-based forecasting
23) Without the international capital flows, there would be ____ funding available in
the U.S. across all risk levels, and the cost of funding would be ____ regardless of the
firm’s risk level.
a.more; lower
b.more; higher
c.less; lower
d.less; higher
24) Which of the following might discourage covered interest arbitrage even if interest
rate parity does not exist?
a.transaction costs
b.political risk
c.differential tax laws
d.all of the above
25) In general, stock markets allow for more price efficiency and attract more investors
when they have all of the following except:
a.more voting rights for shareholders
b.more legal protection
c.more enforcement of the laws
d.less stringent accounting requirements
26) Assume that Japan places a strict quota on goods imported from the U.S. and the
U.S. places a strict quota on goods imported from Japan. This event should immediately
cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be
exchanged for U.S. dollars to ____.
a.increase; increase
b.increase; decline
c.decline; decline
d.decline; increase
27) According to the text, the average foreign exchange trading around the world ____
per day.
a.equals about $200 billion
b.equals about $400 billion
c.equals about $700 billion
d.exceeds $1 trillion
28) A quotation representing the value of a foreign currency in dollars is referred to as
a(n) ____ quotation; a quotation representing the number of units of a foreign currency
per dollar is referred to as a(n) ____ quotation.
a.direct; indirect
b.indirect; direct
c.direct; direct
d.indirect; indirect
e.cannot be answered without more information
29) If interest rate parity exists, the attempt to finance with a foreign currency while
covering the position to avoid exchange rate risk will result in an effective financing
rate that is ____ the domestic interest rate.
a.lower than
b.greater than
c.similar to
d.none of the above
30) Translation 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
31) 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
32) The World Bank was established to:
a.enhance development solely in Asia through grants.
b.enhance economic development through non-subsidized loans (at market interest
rates)
c.enhance economic development through low-interest rate loans (below-market rates)
d.enhance economic development of the private sector through investment in stock of
corporations
33) In which case will locational arbitrage most likely be feasible?
a.One bank’s ask price for a currency is greater than another bank’s bid price for the
currency
b.One bank’s bid price for a currency is greater than another bank’s ask price for the
currency
c.One bank’s ask price for a currency is less than another bank’s ask price for the
currency
d.One bank’s bid price for a currency is less than another bank’s bid price for the
currency
34) If you expect the British pound to appreciate, you could speculate by ____ pound
call options or ____ pound put options.
a.purchasing; selling
b.purchasing; purchasing
c.selling; selling
d.selling; purchasing
35) To make an MNC’s operations coincide with its own goal, a host government could
do all of the following, except:
a.require the use of local employees for managerial positions
b.require social facilities
c.subsidize the MNC
d.require environmental controls
36) If interest rate parity holds, then the one-year forward rate of a currency will be
____ the predicted spot rate of the currency in one year according to the international
Fisher effect.
a.greater than
b.less than
c.equal to
d.answer is dependent on whether the forward rate has a discount or premium
37) U.S. firms acquire more target firms in ____ than in any other country.
a.Spain
b.Italy
c.Belgium
d.United Kingdom
38) Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that
the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm
expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could
hedge by ____ dollars forward.
a.depreciate; buying
b.depreciate; selling
c.appreciate; selling
d.appreciate; buying
39) One foreign project in Hungary and another in Japan had the same perceived value
from the U.S. parent’s perspective. Then, the exchange rate expectations were revised,
upward for the value of the Hungarian forint and downward for the Japanese yen. The
break-even salvage value for the project in Japan would now be ____ from the parent’s
perspective.
a.negative
b.higher than that for the Hungarian project
c.lower than that for the Hungarian project
d.the same as that for the Hungarian project
e.A and C
40) International governance is achieved by all of the following except:
a.poison pills
b.board of directors
c.institutional investors
d.blockholders
e.All of the above achieve governance
41) The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate
of Japanese yen is quoted at $.011. The forward ____ is ____ percent.
a.discount; 18.18
b.premium; 18.18
c.discount; 15.38
d.premium; 15.38
42) 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. Based on the information provided above, the net present value
of the Malaysian target is $____ million.
a.155.9
b.111.5
c.138.0
d.143.0
e.none of the above
43) Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank
X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank
Z. Given this information, what would be your gain if you use $1,000,000 and execute
locational arbitrage? That is, how much will you end up with over and above the
$1,000,000 you started with?
a.$11,764
b.-$11,964
c.$36,585
d.$24,390
e.$18,219
44) Which of the following is not true regarding Thailand?
a.Thailand was one of the slowest growing countries before the Asian crisis
b.High levels of spending and low levels of saving placed upward pressure on prices of
real estate, products, and on Thailand’s local interest rate
c.Thailand’s baht was linked to the dollar prior to July 1997, which made Thailand an
attractive site for foreign investors
d.Thai banks provided many loans that were very risky in their attempt to make use of
all of their funds
e.All of the above are true
45) The capital asset pricing model suggests that the required return on a firm’s stock is
a negative function of:
a.the risk-free rate of interest
b.the market rate of return
c.the stock’s beta
d.none of the above
46) Any restructuring of operations that ____ the difference between a foreign
currency’s inflows and outflows may ____ economic exposure.
a.reduces; increase
b.increases; reduce
c.reduces; reduce
d.A and B
e.none of the above
47) The valuation of an MNC should rise when an event causes the expected cash flows
from foreign to ____ and when foreign currencies denominating these cash flows are
expected to ____.
a.decrease; appreciate
b.increase; appreciate
c.decrease; depreciate
d.increase; depreciate
48) ____ promises to pay the beneficiary if they buyer fails to pay as agreed.
a.A standby L/C
b.A transferable L/C
c.Assignment of proceeds
d.None of the above
49) Exhibit 20-1
Assume a U.S.-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8%
for one year. Also assume that the spot rate of the leu is $.00012 and the one-year
forward rate of the leu is $.00010. The expected spot rate of the leu one-year from now
is $.00011.
Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it
borrows leu on an uncovered basis?
a.about 10%
b.about -10%
c.about -1%
d.about -2%
e.none of the above
50) 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. What is the portfolio standard deviation?
a.3.00%.
b.5.44%.
c.17.98%.
d.none of the above
51) Which of the following firms is not exposed to translation exposure?
a.Firm X, with a fully owned subsidiary that periodically remits earnings generated in
Great Britain to the U.S.-based parent
b.Firm Y, with a fully owned subsidiary that periodically generates foreign losses in
Sweden. The parent covers at least some of these losses
c.Firm Z, with a fully owned subsidiary that generates substantial earnings in Germany.
The subsidiary never remits earnings but reinvests them in Germany
d.All of the above firms are exposed to translation exposure
52) Which of the following would not enhance the value of a target from the acquirer’s
perspective?
a.Expected sales of the target have increased
b.The subsidiary’s currency is expected to strengthen after the acquisition
c.The required rate of return from investing in the target has increased
d.All of the above would enhance the value of the target
53) The ask quote is the price for which a bank offers to sell a currency.
54) At any given point in time, a bank’s bid quote will be greater than its ask quote.
55) Shareholders in some countries may have more power to effectively sue
publicly-traded firms if their executives or directors commit financial fraud.
56) The government enforcement of securities laws varies among countries.
57) In general, common law countries such as the U.S., Canada, and the United
Kingdom allow for more legal protection than French civil law countries such as France
or Italy.
58) An MNC with receivables in Japanese Yen purchases yen forward to hedge its
exposure to exchange rate fluctuations.
59) The LIBOR varies among currencies because the market supply of and demand for
funds vary among currencies.