1) The interest rate of euronotes is based on the T-bill rate.
2) Usually, fundamental forecasting is used for short-term forecasts, while technical
forecasting is used for longer-term forecasts.
3) A floating coupon rate is an advantage to the bond issuer during periods of increasing
interest rates.
4) The lower bound of a put option premium is the greater of zero and the difference
between the exercise price and the spot rate; the upper bound of a currency put option is
the exercise price.
5) If the foreign currency that was borrowed appreciates over time, an MNC will need
fewer funds to cover the coupon or principal payments. [Assume the MNC has no other
cash flows in that currency.]
6) To hedge payables with futures, an MNC would sell futures; to hedge receivables
with futures, an MNC would buy futures.
7) A limitation of hedging translation exposure is that translation losses are not tax
deductible, whereas gains on forward contracts used to hedge translation exposure are
taxed.
8) A set of currency cash inflows is more volatile if the correlations are low.
9) If interest rate parity (IRP) exists, then the money market hedge will yield the same
result as the options hedge.
10) In conducting a multinational capital budgeting analysis, the subsidiary’s
perspective should always be used.
11) If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign
currencies with relatively high interest rates should have forward discounts and those
currencies would be expected to depreciate.
12) The international Fisher effect (IFE) suggests that the currencies with relatively
high interest rates will appreciate because those high rates will attract investment and
increase the demand for that currency.
13) The establishment of a new subsidiary is commonly considered by MNCs because
the cost is less expensive than acquiring a foreign subsidiary of the same size.
14) The price at which a currency put option allows the holder to sell a currency is
called the settlement price.
15) When using a checklist approach to assess country risk, factors should be converted
to some numerical forms and assigned equal weights.
16) Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries.
17) The most important cost-related motive for direct foreign investment is
diversification across product markets.
18) Assume that the euro’s interest rates are higher than U.S. interest rates, and that
interest rate parity exists. Which of the following is true?
a.Americans using covered interest arbitrage earn the same rate of return as Germans
who attempt covered interest arbitrage
b.Americans who invest in the U.S. earn the same rate of return as Germans who
attempt covered interest arbitrage
c.Americans who invest in the U.S. earn the same rate of return as Germans who invest
in Germany
d.A and B
e.None of the above
19) Which of the following theories identifies the non-transferability of resources as a
reason for international business?
a.theory of comparative advantage
b.imperfect markets theory
c.product cycle theory
d.none of the above
20) The MNC’s value depends on all of the following, except:
a.MNC’s required rate of return
b.Amount of MNC’s cash flows in particular currency
c.The exchange rate at which cash flows are converted to dollars
d.The value of MNC depends on all of the above factors
21) 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
22) Kushter Inc. would like to finance in euros. European interest rates are currently
4%, and the euro is expected to depreciate by 2% over the next year. What is Kushter’s
effective financing rate next year?
a.1.92%
b.2.00%
c.6.08%
d.none of the above
23) Which of the following is not a trade financing method used in international trade
from an exporter’s perspective?
a.Accounts receivable financing
b.Letter of credit
c.Barter
d.Open account
24) Assume that a speculator purchases a put option on British pounds (with a strike
price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at
the time of the purchase, the spot rate of the pound is $1.51 and continually rises to
$1.62 by the expiration date. The highest net profit possible for the speculator based on
the information above is:
a.$1,562.50
b.-$1,562.50
c.-$1,250.00
d.-$625.00
25) According to your text, all of the following are factors to 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
26) A “dirty” float represents a system of:
a.freely floating exchange rates
b.fixed exchange rates
c.floating exchange rates, but the central bank can manipulate the currency
d.fixed exchange rates, but the central bank can manipulate the currency
27) 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
28) If the U.S. dollar appreciates,
a.an MNC’s U.S. sales will probably decrease
b.an MNC’s exports denominated in U.S. dollars will probably increase
c.an MNC’s interest owed on foreign funds borrowed will probably increase
d.an MNC’s exports denominated in foreign currencies will probably increase
e.all of the above
29) 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
30) The ____ a project’s variability in cash flows, and the ____ the positive correlation
between the project’s cash flow and the MNC’s cash flow, the lower the risk of the
project.
a.higher; higher
b.higher; lower
c.lower; lower
d.lower; higher
31) An MNC’s parent would consider investing in a target only if the estimated present
value of the cash flows it would ultimately receive from the target over time ____ the
initial outlay necessary to purchase the target.
a.is less than
b.is the same as
c.is greater than
d.none of the above
32) Spears Co. will receive SF1,000,000 in 30 days. Use the following information to
determine the total dollar amount received (after accounting for the option premium) if
the firm purchases and exercises a put option:
Exercise price=$.61
Premium=$.02
Spot rate=$.60
Expected spot rate in 30 days=$.56
30-day forward rate=$.62
a.$630,000
b.$610,000
c.$600,000
d.$590,000
e.$580,000
33) Procedural and documentation requirements imposed by the foreign government are
referred to as:
a.regulatory barriers
b.industry barriers
c.protective barriers
d.”Red Tape” barriers
34) Direct foreign investment is commonly considered by MNCs because it allows the
MNC to:
a.attract new sources of demand
b.enter profitable markets
c.react to exchange rate movements
d.react to trade restrictions
e.all of the above
35) Assume that the U.S. places a strict quota on goods imported from Chile and that
Chile does not retaliate. Holding other factors constant, this event should immediately
cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____.
a.increase; increase
b.increase; decline
c.decline; decline
d.decline; increase
36) One of the best-known pegged exchange rate arrangements that was established by
several European countries in April 1972 and was difficult to maintain is called the:
a.European Monetary System (EMS)
b.snake agreement
c.Maastricht Treaty
d.European Union
37) 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
38) Zanada Corporation invests 1,500,000 South African rand (ZAR) at a nominal
interest rate of 10%. At the time the investment is made, the spot rate of the rand is
$0.205. If the spot rate of the rand at maturity of the investment is $0.203, what is the
effective yield of investing in rand?
a.11.08%
b.8.93%
c.10.00%
d.None of the above
39) Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore
firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share
price of the firm in Singapore dollars?
a.10
b.13.28
c.30.12
d.39.84
40) Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main
competitor is located in Japan. Vada is subject to:
a.economic exposure
b.transaction exposure
c.translation exposure
d.economic and transaction exposure
41) 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
42) If interest rate parity does not hold, and the forward ____ is ____ the interest rate
differential, then foreign financing with a simultaneous hedge of that position in the
forward market results in higher financing costs than those of domestic financing
a.premium; higher than
b.discount; higher than
c.premium; less than
d.A and B
43) Assume that the dollar has been consistently depreciating over a long period. The
Fed decides to counteract this movement by intervening in the foreign exchange market
using sterilized intervention. The Fed would
a.buy dollars with foreign currency and simultaneously sell Treasury securities for
dollars
b.buy dollars with foreign currency and simultaneously buy Treasury securities with
dollars
c.sell dollars for foreign currency and simultaneously sell Treasury securities for dollars
d.sell dollars for foreign currency and simultaneously buy Treasury securities with
dollars
e.none of the above