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1) 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
2) If you have a position where you might be obligated to buy Euros, you are:
a. a call writer
b. a put writer
c. a put buyer
d. a futures seller
3) If a firm is hedging payables with futures contracts, it may end up paying more for
the payable than it would have had it remained unhedged if the foreign currency
depreciates.
a. True
b. False
4) Under the Imperfect Markets Theory, it is assumed that factors of production are
entirely mobile, so that firms can capitalize on a foreign country's resources.
a. True
b. False
5) MNCs can use ____ to sell their existing accounts receivable as a means of obtaining
cash.
a. factoring
b. a bill of lading
c. a banker's acceptance
d. a letter of credit
6) Assume that the British pound (£) futures price for September is $1.60. Given that
62,500 units are in a British pound futures contract, the seller of British pound futures
will receive $____ on the delivery date.
a. 39,062.50
b. 100,000
c. 48,000
d. 87,062.50
7) Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the
nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the
international Fisher effect, the franc will ____ by about ____.
a. appreciate; 3%
b. appreciate; 1%
c. depreciate; 3%
d. depreciate; 2%
e. appreciate; 2%
8) According to the text, the analysis of currencies forecasted with use of the forward
rate suggests that:
a. currencies exhibited about the same mean forecast errors as a percent of the realized
value
b. the Canadian dollar can be forecasted by U.S. firms with greater accuracy than other
currencies
c. the Swiss franc can be forecasted by U.S. firms with greater accuracy than other
currencies
d. none of the above
9) Liquidity of a currency can affect the extent to which speculation can impact the
currency's value.
a. True
b. False
10) Investors from Germany, the United States, and the U.K. frequently invest in each
other based on prevailing interest rates. If British interest rates increase, German
investors are likely to buy ____ dollar-denominated securities, and the euro is likely to
____ relative to the dollar.
a. fewer; depreciate
b. fewer; appreciate
c. more; depreciate
d. more; appreciate
11) 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
12) The following regression analysis was conducted for the inflation rate information
and exchange rate of the British pound:
Regression results indicate that a0 = 0 and a1 = 2 . Therefore:
a. purchasing power parity holds
b. purchasing power parity overestimated the exchange rate change during the period
under examination
c. purchasing power parity underestimated the exchange rate change during the period
under examination
d. purchasing power parity will overestimate the exchange rate change of the British
pound in the future
13) Some MNCs use a country's yield curve to compare annualized rates among debt
maturities, so that they can choose a maturity that has a relatively low rate.
a. True
b. False
14) If a speculator expects that the Fed will intervene by exchanging euros for U.S.
dollars, she would most likely ____ to capitalize on this intervention.
a. purchase euro put options
b. purchase euro futures contracts
c. purchase yen call options
d. sell U.S. Treasury bonds
15) The sale of accounts receivable to a third party for a discount is called factoring.
a. True
b. False
16) Vermont Co. has one foreign subsidiary. Its translation exposure is directly affected
by each of the following, except:
a. the interest rate in the country of the subsidiary
b. proportion of business conducted by the subsidiary
c. its accounting method
d. the exchange rate movements of the subsidiary's currency
17) Which of the following reflects a hedge of net receivables in British pounds by a
U.S. firm?
a. purchase a currency put option in British pounds
b. sell pounds forward
c. borrow U.S. dollars, convert them to pounds, and invest them in a British pound
deposit
d. A and B
18) If the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity
might be ____.
a. does not back; increased
b. backs; reduced
c. does not back; reduced
d. backs; increased
e. C and D
19) The spot rate of euro is quoted at $1.29. The annualized forward premium on the
euro is 10%. What is the 30-day forward rate of the euro?
a. $1.28
b. $1.30
c. $1.42
d. $1.16
20) Assume the U.S. has a balance of trade surplus with the country of Thor. When
individuals in Thor manufacture CDs and DVDs that look almost exactly like the
original product produced in the U.S. and other countries, they ____ the U.S. balance of
trade surplus with Thor. This activity is called ____.
a. reduce; flipping
b. reduce; pirating
c. increase; pirating
d. increase; flipping
21) U.S.-based MNCs could avoid country risk by simply avoiding international
business.
a. True
b. False
22) The international Fisher effect suggests that:
a. the effective yield on short-term foreign securities should, on average, equal the yield
on short-term domestic securities
b. the effective yield on short-term securities of high inflation countries is greater than
the yield on short-term domestic securities
c. if domestic income grows faster than foreign income, the effective yield on
short-term foreign securities is higher than short-term domestic securities
d. if foreign tax rates equal domestic tax rates, the exchange rates of different currencies
will change by the same degree
23) Which of the following is not true about syndicated loans?
a. A borrower that receives a syndicated loan incurs various fees besides the interest rate
b. The loans are only denominated in U.S. dollars
c. The loans are provided by a group of banks to a borrower
d. The loans are usually formed in 6 weeks or less
24) Currency futures are very similar to forward contracts, except that they are
standardized and are more appropriate for firms that prefer to hedge in smaller amounts.
a. True
b. False
25) When receiving quotations on a currency's exchange rate, the bank's bid quote is the
rate at which the bank is willing to sell currency.
a. True
b. False
26) Shareholders have more voting power in some countries than others.
a. True
b. False
27) Firms with more in foreign costs than in foreign revenues will be favorably affected
by a stronger foreign currency.
a. True
b. False
28) ____ is not a type of program offered by Ex-Imbank.
a. Guarantees
b. Loans
c. Currency swap insurance
d. Bank insurance
29) Assume the following information regarding U.S. and European annualized interest
rates:
Trensor Bank can borrow either $20 million or 20 million. The current spot rate of the
euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10
in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the
euro is indeed $1.10 in 90 days?
a. $579,845
b. $583,800
c. $588,200
d. $584,245
e. $980,245
30) A U.S. firm has received a large amount of cash inflows periodically in Swiss francs
as a result of exporting goods to Switzerland. It has no other business outside the U.S. It
could best reduce its exposure to exchange rate risk by:
a. issuing Swiss franc-denominated bonds
b. purchasing Swiss franc-denominated bonds
c. purchasing U.S. dollar-denominated bonds
d. issuing U.S. dollar-denominated bonds
31) The one-year forward rate of the British pound is quoted at $1.60, and the spot rate
of the British pound is quoted at $1.6 The forward ____ is ____ percent.
a. discount; 1.9
b. discount; 1.8
c. premium; 1.9
d. premium; 1.8
32) Generally, the financing costs associated with a foreign currency-denominated bond
will be ____ volatile than the financing costs of a domestic bond because of ____.
a. more; exchange rate movements
b. less; exchange rate movements
c. less; global economic conditions
d. none of the above
33) Even after an MNC's accept/reject decision of a foreign acquisition has been made,
it should be reassessed at various times. In fact, this analysis may indicate that a
previously accepted project should be divested.
a. True
b. False
34) A target's previous cash flows are typically an accurate indicator of future cash
flows, especially when the target's cash flows would have to be converted into the
acquirer's home currency as they are remitted to the parent.
a. True
b. False
35) If the observed put option premium is less than what is suggested by the put-call
parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the
call option, and ____ the underlying currency.
a. selling; buying; buying
b. buying; selling; buying
c. selling; buying; selling
d. buying; buying; buying
36) Assume that the British pound and Swiss franc are highly correlated. A U.S. firm
anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1
million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its
exposure.
a. strong dollar; favorably
b. weak dollar; not
c. strong dollar; not
d. weak dollar; favorably
