1) The currency futures markets are regulated by the International Monetary Fund.
a. True
b. False
2) An MNC may be more exposed to agency problems if most of its shares are held by:
a. a few mutual funds
b. a widely dispersed set of individual investors
c. a few pension funds
d. all of the above would prevent agency problems
3) Which of the following is not likely to represent a strategy by the government of
Country X to reduce its balance of trade deficit with Country Y?
a. The government of Country X eliminates environmental restrictions
b. The government of Country X subsidizes firms in its country to facilitate dumping
c. The government of Country X provides tax breaks to firms in specific industries
d. The government of Country X removes a tariff on goods imported from Country Y
4) Thornton Corporation has extensive liabilities denominated in Cyprus pounds
resulting from imports from Cyprus. However, Thornton’s revenues are denominated
solely in U.S. dollars. Which of the following is probably not true?
a. Thornton would benefit from a depreciation of the Cyprus pound
b. Thornton has at least some transaction exposure
c. Thornton has at least some economic exposure
d. Thornton has at least some translation exposure
e. All of the above are true
5) A currency call option grants the right to sell a specific currency at a designated price
within a specific time period.
a. True
b. False
6) An investor engaging in a transaction whereby he or she contracts to purchase British
pounds one year from now is an example of a spot market transaction.
a. True
b. False
7) 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
8) If companies can rely on stock markets to obtain funds, they will have to rely more
heavily on the ____ market to raise long-term funds.
a. derivative
b. long-term credit
c. money
d. foreign exchange
9) According to the international Fisher effect:
a. exchange rates adjust to compensate for income differentials between countries
b. interest rates adjust to compensate for income differentials between countries
c. exchange rates adjust to compensate for interest rate differentials between countries
d. exchange rates adjust to compensate for risk differentials between countries
10) The U.S. is one of the few countries with agencies that monitor mergers and
acquisitions.
a. True
b. False
11) The goal of a multinational corporation (MNC) is the maximization of shareholder
wealth.
a. True
b. False
12) If the pattern of currency values over time appears random, then technical
forecasting is appropriate.
a. True
b. False
13) Foreign subsidiaries of U.S. MNCs can finance projects with dollars in order to
avoid exchange rate risk.
a. True
b. False
14) Which of the following is a reason why commercial banks can facilitate
international trade?
a. The exporter may not wish to accept credit risk of the importer
b. The government may impose exchange contracts that prevent payment by the
importer to the exporter
c. The exporter may need financing until payment for the goods is received
d. All of the above
15) 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
16) The exchange rate mechanism (ERM) refers to the method of linking ____
currencies to each other within boundaries.
a. Latin American
b. European
c. Asian
d. North American
17) 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
18) All types of foreign trade transactions in which the sale of goods to one country is
linked to the purchase or exchange of goods from that same country are called
countertrade.
a. True
b. False
19) Risk assessors almost always arrive at the same opinion after completing a
macro-assessment of country risk.
a. True
b. False
20) British investors frequently invest in the U.S. or Italy, depending on the prevailing
interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors
will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure
on the value of the pound against the U.S. dollar.
a. increase; downward
b. decrease; upward
c. increase; upward
d. decrease; downward
21) When quantifying country risk:
a. weights should be equally allocated among factors
b. weights should be assigned to the political and financial factors according to their
perceived importance
c. it is not generally necessary to construct separate ratings for political and financial
risk since these will be equally weighed in the final analysis
d. the derived factors will be identical for all MNCs conducting business in that country
22) Which of the following is not a limitation of fundamental forecasting?
a. uncertain timing of impact
b. forecasts are needed for factors that have a lagged impact
c. omission of other relevant factors from the model
d. possible change in sensitivity of the forecasted variable to each factor over time
e. none of the above
23) When the parent’s home currency is weak, remitted funds from foreign subsidiaries
will convert to a smaller amount of the home currency.
a. True
b. False
24) Which of the following is probably the best method of incorporating country risk
into a capital budgeting analysis?
a. Adjusting the discount rate upward
b. Adjusting the input variables to estimate the sensitivity of the project’s NPV
c. Adjusting the political risk rating to obtain a more favorable NPV
d. Country risk should be ignored in capital budgeting, since it is a subjective analysis
25) Licensing is the process by which a firm provides its technology (copyrights,
patents, trademarks, or trade names) in exchange for fees or some other specified
benefits.
a. True
b. False
26) News of a potential surge in U.S. inflation and zero Chilean inflation places ____
pressure on the value of the Chilean peso. The pressure will occur ____.
a. upward; only after the U.S. inflation surges
b. downward; only after the U.S. inflation surges
c. upward; immediately
d. downward; immediately
27) Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net
cash flows into operations and remits half to the parent. Livingston’s expected cash
flows from domestic business are $100,000 and the Korean subsidiary is expected to
generate 100 million Korean won at the end of the year. The expected value of won is
$.0012. What are the expected dollar cash flows of Livingston Co.?
a. $100,000
b. $200,000
c. $160,000
d. $60,000
28) Which of the following is not a goal of the International Monetary Fund (IMF)?
a. To promote cooperation among countries on international monetary issues
b. To promote stability in exchange rates
c. To enhance a country’s long-term economic growth via the extension of structural
adjustment loans
d. To promote free trade
e. To promote free mobility of capital funds across countries
29) A bank issuing a letter of credit on behalf of an importer is obligated to honor the
letter of credit regardless of the buyer’s willingness or ability to pay.
a. True
b. False
30) The following regression model was estimated to forecast the value of the
Malaysian ringgit (MYR):
MYRt = a0 + a1INCt – 1 + a2INFt – 1 + mt,
where MYR is the quarterly change in the ringgit, INF is the previous quarterly
percentage change in the inflation differential, and INC is the previous quarterly
percentage change in the income growth differential. Regression results indicate
coefficients of a0 = 0.005; a1 = 0.4; and a2 = 0.7. The most recent quarterly percentage
change in the inflation differential is -5%, while the most recent quarterly percentage
change in the income differential is 3%. Using this information, the forecast for the
percentage change in the ringgit is
a. 4.60%
b. -1.80%
c. 5.2%
d. -4.60%
e. None of the above
31) The acquisition of a foreign subsidiary is commonly considered by MNCs because
the cost is less expensive than establishing a new subsidiary of the same size.
a. True
b. False
32) 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.
a. True
b. False
33) Based on information in your text, all of the following factors should be considered
in an international acquisition, except:
a. the target’s willingness to be acquired
b. the target’s previous acquisition history
c. the target’s previous cash flows
d. the target’s local economic conditions
34) An upward-sloping yield curve for a foreign country means that annualized yields
there are ____ for short-term debt than for long-term debt. The yield curve in this
country reflects ____.
a. higher; several periods
b. lower; several periods
c. higher; a specific point in time
d. lower; a specific point in time
35) The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a
2% discount. What is the 90-day forward rate of the pound?
a. $1.52
b. $1.61
c. $1.37
d. $1.46
36) Assume that Cooper Co. will not use its cash balances in a money market hedge.
When deciding between a forward hedge and a money market hedge, it ____ determine
which hedge is preferable before implementing the hedge. It ____ determine whether
either hedge will outperform an unhedged strategy before implementing the hedge.
a. can; can
b. can; cannot
c. cannot; can
d. cannot; cannot
37) An MNC’s size, its access to international capital markets, and international
diversification are unfavorable to an MNC’s cost of capital.
a. True
b. False
38) An interest rate swap is commonly used by an issuer of fixed-rate bonds to:
a. convert to floating-rate debt
b. hedge exchange rate risk
c. lock in the interest payments on debt
d. remove the default risk of its debt
39) 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:
Refer to Exhibit 15-1. The Malaysian target’s value based on its stock price is $____
million.
a. 1.4
b. 1,673.9
c. 111.5
d. 88.6
e. none of the above