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1) Latin American countries have historically experienced relatively high inflation, and
their currencies have weakened. This information is somewhat consistent with the
concept of:
a. interest rate parity
b. locational arbitrage
c. purchasing power parity
d. the exchange rate mechanism
2) The translation gain (or loss) is simply a paper gain (or loss). Conversely, the gain (or
loss) resulting from a hedge strategy is a real gain (or loss).
a. True
b. False
3) Assume that a currency's spot and future prices are the same, and the currency's
interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this
higher foreign return would ____ the currency's spot rate and ____ the currency's
futures price.
a. put upward pressure on; put upward pressure on
b. put downward pressure on; put upward pressure on
c. put upward pressure on; put downward pressure on
d. put downward pressure on; put downward pressure on
4) Which of the following will probably not result in an increase in a country's current
account balance (assuming everything else constant)?
a. A decrease in the country's rate of inflation
b. A decrease in the country's national income level
c. An increase in government restrictions in the form of tariffs or quotas
d. An appreciation of the country's currency
e. All of the above will result in an increased current account balance
5) An example of indirect intervention by the Bank of Japan would be for the Bank of
Japan to use interest rates to increase the value of the yen vs. the dollar.
a. True
b. False
6) The following regression model was estimated to forecast the value of the Indian
rupee (INR):
INRt = a0 + a1INTt + a2INFt - 1 + mt,
where INR is the quarterly change in the rupee, INT is the real interest rate differential
in period t between the U.S. and India, and INF is the inflation rate differential between
the U.S. and India in the previous period. Regression results indicate coefficients of a0
= .003; a1 = -.5; and a2 = .8. Assume that INFt - 1 = 2%. However, the interest rate
differential is not known at the beginning of period t and must be estimated. You have
developed the following probability distribution:
The expected change in the Indian rupee in period t is:
a. 3.40%
b. 0.40%
c. 3.10%
d. 1.70%
e. none of the above
7) From 1944 to 1971, the exchange rate between any two currencies was typically:
a. fixed within narrow boundaries
b. floating, but subject to central bank intervention
c. floating, and not subject to central bank intervention
d. nonexistent; that is currencies were not exchanged, but gold was used to pay for all
foreign transactions
8) A foreign subsidiary with more revenue than expenses denominated in a foreign
currency will be favorably affected by appreciation of the foreign currency.
a. True
b. False
9) MNCs can improve their internal control process by all of the following, except:
a. establishing a centralized data base of information
b. ensuring that all data are reported consistently among subsidiaries
c. ensuring that the MNC always borrows from countries where interest rates are lowest
d. using a system that checks internal data for unusual discrepancies
10) Foreign financing costs in a single foreign currency ____ financing costs in dollars,
and the variance of foreign financing costs over time is ____ than the variance of
financing in dollars.
a. are higher than; higher than
b. can be lower or higher than; higher than
c. can be lower or higher than; lower than
d. are lower than; higher than
11) Like income tax treaties, ____ help to avoid double taxation and stimulate direct
foreign investment.
a. withholding taxes
b. excise taxes
c. tax credits
d. carryforwards
12) Adjustments to incorporate country risk into the capital budgeting analysis would
involve either the addition of a risk premium to the discount rate or a reduction of the
cash flows.
a. True
b. False
13) The IFE theory suggests that foreign currencies with relatively high interest rates
will appreciate because the high nominal interest rates reflect expected inflation.
a. True
b. False
14) A primary result of the Bretton Woods Agreement was:
a. the establishment of the European Monetary System (EMS)
b. establishing specific rules for when tariffs and quotas could be imposed by
governments
c. establishing that exchange rates of most major currencies were to be allowed to
fluctuate 1% above or below their initially set values
d. establishing that exchange rates of most major currencies were to be allowed to
fluctuate freely without boundaries (although the central banks did have the right to
intervene when necessary)
15) Due to put-call parity, we can use the same formula to price calls and puts.
a. True
b. False
16) Which of the following is an example of economic exposure but not an example of
transaction exposure?
a. An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign
competitors are able to increase their sales to U.S. customers
b. An increase in the pound's value increases the U.S. firm's cost of British pound
payables
c. A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables
d. A decrease in the Swiss franc's value decreases the dollar value of interest payments
on a Swiss deposit sent to a U.S. firm by a Swiss bank
17) With a bull spread, the spreader believes that the underlying currency will
appreciate substantially, even more so than with a strangle.
a. True
b. False
18) Because there are a variety of factors in addition to inflation that affect exchange
rates, this will:
a. reduce the probability that PPP shall hold
b. increase the probability that PPP shall hold
c. increase the probability the IFE will hold
d. B and C
19) Higher interest rates tend to increase the growth of an economy and increase the
demand for an MNC's products.
a. True
b. False
20) According to the text, international trade (exports plus imports combined) as a
percentage of GDP is:
a. higher in the U.S. than in European countries
b. lower in the U.S. than in European countries
c. higher in the U.S. than in about half the European countries, and lower in the U.S.
than the others
d. about the same in the U.S. as in European countries
21) Under the Product Cycle Theory, foreign demand can be initially satisfied by
exporting.
a. True
b. False
22) Which of the following are examples of currency controls?
a. import restrictions
b. prohibition of remittance of funds
c. ceilings on granting credit to foreign firms
d. all of the above
23) Which of the following is not true regarding letters of credit?
a. They are issued by banks on behalf of the importer promising to pay the exporter
b. A revocable letter of credit can be cancelled or revoked at any time without prior
notification to the beneficiary
c. They guarantee that the goods shipped are the goods purchased
d. All of the above are true
24) Downsizing reduces expenses but may also reduce productivity and revenue.
a. True
b. False
25) The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian
dollar call option is $.04. The exercise price is $.81. The option will be exercised on the
expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a
percent of the initial investment (the premium paid) is:
a. 0 percent
b. 25 percent
c. 50 percent
d. 150 percent
e. none of the above
26) A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to
increase its investment there. Its value should increase if the value of the euro weakens
over time.
a. True
b. False
