1) Cross-hedging may involve taking a forward position in a currency that is highly
correlated with the currency an MNC needs to hedge.
2) If the cross exchange rate of two nondollar currencies implied by their individual
spot rates with respect to the dollar is less than the cross exchange rate quoted by a
bank, locational arbitrage is possible.
3) Currency devaluation can boost a country’s exports, but currency revaluation can
increase foreign competition.
4) The potential forecast error is larger for currencies that are more volatile.
5) A micro-assessment of country risk involves consideration of all variables that affect
country risk except for those unique to a particular firm or industry.
6) Currency options are only traded on exchanges. That is, there is no over-the-counter
market for options.
7) If an MNC is hedging various currencies, it should measure the real cost of hedging
in each currency as a dollar amount for comparison purposes.
8) If interest rate parity exists, then the rate of return achieved from covered interest
arbitrage should be equal to the interest rate available in the foreign country.
9) Unlike project risk, country risk cannot be incorporated into the capital budgeting
analysis of a proposed project by adjustment of the discount rate or by adjustment of the
estimated cash flows.
10) Most MNCs do not perceive their foreign exchange management as a profit center.
Rather, their main responsibility is to assess potential exposure and determine how and
if the exposure should be hedged.
11) Normally, each subsidiary of an MNC will issue its own stock where it does
business.
12) Euronotes are unsecured debt securities whose interest rate is based on the London
Interbank Offer Rate (LIBOR) with typical maturities of one, three, and six months.
13) Assume that interest rate parity holds. The U.S. one-year interest rate is 10% and
the Australian one-year interest rate is 8%. What will the approximate effective yield be
for an Australian citizen of a one-year deposit denominated in U.S. dollars? Assume the
deposit is covered by a forward sale of dollars.
a.10%
b.8%
c.2%
d.cannot answer without more information
14) From the perspective of Detroit Co., which has payables in Mexican pesos and
receivables in Canadian dollars, hedging the payables would be most desirable if the
expected real cost of hedging payables is ____, and hedging the receivables would be
most desirable if the expected real cost of hedging receivables is ____.
a.negative; positive
b.zero; positive
c.zero; zero
d.positive; negative
e.negative; negative
15) 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
16) When obtaining a loan, the risk premium paid above LIBOR depends on the:
a.risk-free interest rate of the borrower
b.credit risk of the borrower
c.borrower’s stock price
d.lender’s stock price
17) If U.S. inflation suddenly increased while European inflation stayed the same, there
would be:
a.an increased U.S. demand for euros and an increased supply of euros for sale
b.a decreased U.S. demand for euros and an increased supply of euros for sale
c.a decreased U.S. demand for euros and a decreased supply of euros for sale
d.an increased U.S. demand for euros and a decreased supply of euros for sale
18) Which of the following countries have not adopted the euro?
a.Germany
b.Italy
c.Switzerland
d.France
19) Which of the following does not represent the risk from using forward contracts?
a.if a forward contract is used to hedge receivables, and the spot exchange rate at the
expiration of contract exceeds the contract price
b.if a forward contract is used to hedge receivables, and the spot exchange rate at the
time of expiration of contract is lower than the contract price
c.if a forward contract is used to hedge payables, and the spot exchange rate at the time
of expiration of contract is lower than the contract price
d.if a forward contract is used to hedge payables or receivables and the amount to be
received or paid is cancelled
20) If the foreign exchange market is ____ efficient, then technical analysis is not
useful in forecasting exchange rate movements.
a.weak-form
b.semistrong-form
c.strong form
d.all of the above
21) A call option premium has a lower bound that is equal to the greater of zero and the
difference between the underlying ____ prices. The upper bound of a call option
premium is the ____ price.
a.spot and exercise; exercise
b.spot and exercise; spot
c.exercise and spot; exercise
d.exercise and spot; spot
22) 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%.
a.1.4
b.1,673.9
c.111.5
d.88.6
e.none of the above
23) From the concept of an “efficient frontier,” the point on a frontier that is optimal for
all firms:
a.is the top point
b.is the point closest to the vertical axis
c.is the point half way between the two end points
d.cannot be determined since firms vary in their willingness to accept risk
24) Which of the following statements is not true?
a.Exporters commonly complain that they are being mistreated because the currency of
their country is too weak
b.Outsourcing affects the balance of trade because it means that a service is purchased
in another country
c.Sometimes, trade policies are used to punish countries for various actions
d.Tariffs imposed by the EU have caused some friction between EU countries that
commonly import products and other EU countries
e.All of the above are true
25) Assume that a bank’s bid rate on Japanese yen is $.0041 and its ask rate is $.0043.
Its bid-ask percentage spread is:
a.about 4.99%
b.about 4.88%
c.about 4.65%
d.about 4.43%
26) Which of the following is not true regarding host government attitudes towards
direct foreign investment (DFI)?
a.Host governments may offer incentives to MNCs in the form of subsidies in certain
circumstances
b.Host governments generally perceive DFI as a remedy for their national problems
c.The ability of a host government to attract DFI is dependent on the country’s markets
and resources
d.Some types of DFI will be more attractive to some governments than to others
e.All of the above are true
27) Which of the following would likely have the least direct influence on a country’s
current account?
a.inflation
b.national income
c.exchange rates
d.tariffs
e.a tax on income earned from foreign stocks
28) An MNC valuing a foreign target for acquisition purposes must account for all of
the following, except:
a.the foreign exchange rate
b.withholding taxes imposed by the host government
c.blocked-funds restrictions
d.income taxes imposed by the U.S. government
e.An MNC must account for all of the above
29) Which of the following statements is false?
a.If interest rate parity exists, covered interest arbitrage is not worthwhile
b.If interest rate parity holds and the forward rate is an accurate forecast of the future
spot rate, an uncovered investment in a foreign security is not worthwhile
c.If interest rate parity exists and the forward rate is an unbiased forecast of the future
spot rate, an uncovered investment in a foreign security will on average earn an
effective yield similar to an investment in a domestic security
d.If interest rate parity exists and the forward rate is expected to underestimate the
future spot rate, an uncovered investment in a foreign security is expected to earn a
lower effective yield than an investment in a domestic security
30) Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest
funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward
rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what
forces should occur?
a.spot rate of peso increases; forward rate of peso decreases
b.spot rate of peso decreases; forward rate of peso increases
c.spot rate of peso decreases; forward rate of peso decreases
d.spot rate of peso increases; forward rate of peso increases
31) Exhibit 14-1
Assume that Baps Corporation is considering the establishment of a subsidiary in
Norway. The initial investment required by the parent is $5,000,000. If the project is
undertaken, Baps would terminate the project after four years. Baps’ cost of capital is
13%, and the project is of the same risk as Baps’ existing projects. All cash flows
generated from the project will be remitted to the parent at the end of each year. Listed
below are the estimated cash flows the Norwegian subsidiary will generate over the
project’s lifetime in Norwegian kroner (NOK):
Year 1Year 2Year 3Year 4
NOK10,000,000NOK15,000,000NOK17,000,000NOK20,000,000
The current exchange rate of the Norwegian kroner is $.135. Baps’ exchange rate
forecast for the Norwegian kroner over the project’s lifetime is listed below:
Year 1Year 2Year 3Year 4
$.13$.14$.12$.15
Refer to Exhibit 14-1. What is the net present value of the Norwegian project?
a.-$803,848
b.$5,803,848
c.$1,048,829
d.none of the above
32) One argument for why subsidiaries should be wholly-owned by the parent is that
the potential conflict of interests between the MNC’s ____ is avoided.
a.managers and shareholders
b.majority shareholders and minority shareholders
c.existing creditors
d.managers and creditors
33) 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
34) Which of the following is not true regarding currency correlations?
a.Two highly positively correlated currencies act almost as if they are the same currency
b.If two inflow currencies are highly positively correlated transaction exposure is
somewhat offset
c.If two inflow currencies are negatively correlated transaction exposure is somewhat
offset
d.If two currencies, one an inflow currency and the other an outflow currency, are
highly positively correlated, transaction exposure is somewhat offset
35) Which of the following is not true regarding government intervention?
a.Under the direct method of intervention, an appreciation of the dollar would be
accomplished by exchanging dollars for foreign currencies
b.Under nonsterilized intervention, the Fed would intervene in the foreign exchange
market without adjusting the money supply
c.Under sterilized intervention, the Fed would intervene simultaneously in the foreign
exchange and Treasury markets
d.Under indirect intervention, the Fed would attempt to affect the dollar’s value by
indirectly influencing the factors that determine it, such as interest rates
e.All of the above are true
36) When the futures price on euros is below the forward rate on euros for the same
settlement date, astute investors may attempt to simultaneously ____ euros forward and
____ euro futures.
a.sell; sell
b.buy; sell
c.sell; buy
d.buy; buy
37) Which of the following theories identifies specialization as a reason for
international business?
a.theory of comparative advantage
b.imperfect markets theory
c.product cycle theory
d.none of the above
38) Exhibit 7-1
Assume the following information:
You have $300,000 to invest:
The spot bid rate for the euro () is $1.08
The spot ask quote for the euro is $1.10
The 180-day forward rate (bid) of the euro is $1.08
The 180-day forward rate (ask) of the euro is $1.10
The 180-day interest rate in the U.S. is 6%
The 180-day interest rate in Europe is 8%
Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what amount will you
have after 180 days?
a.$318,109.10
b.$330,000.00
c.$312,218.20
d.$323,888.90
e.none of the above
39) Blake Inc. needs 1,000,000 in 30 days. It can earn 5 percent annualized on a
German security. The current spot rate for the euro is $1.00. Blake can borrow funds in
the U.S. at an annualized interest rate of 6 percent. If Blake uses a money market hedge
to hedge the payable, what is the cost of implementing the hedge?
a.$1,000,000
b.$1,055,602
c.$1,000,830
d.$1,045,644