1) 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
2) The valuation of an MNC should rise when an event causes the expected cash flows
from foreign to ____ and when foreign currencies denominating these cash flows are
expected to ____.
a. decrease; appreciate
b. increase; appreciate
c. decrease; depreciate
d. increase; depreciate
3) MNCs can use short-term foreign financing to reduce their exposure to exchange rate
fluctuations. For example, if an American-based MNC has ____ in euros, it could
borrow ____, resulting in an offsetting effect.
a. payables; euros
b. receivables; euros
c. payables; dollars
d. receivables; dollars
4) Fundamental models examine moving averages over time and thus allow the
development of a forecasting rule.
a. True
b. False
5) If points are scattered evenly on both sides of the perfect forecast line, then the
forecast appears to be very accurate.
a. True
b. False
6) A negative effective financing rate indicates that an MNC:
a. paid only a small amount in interested over and above the amount borrowed
b. has been negatively affected by a large appreciation of the foreign currency
c. actually paid fewer dollars to repay the loan than it borrowed
d. would have been better off borrowing in the U.S.
7) In recent years, the U.S. has had a relatively (compared to other countries) ____
balance of trade ____ with China.
a. small; surplus
b. large; surplus
c. small; deficit
d. large; deficit
8) An increase in U.S. inflation relative to Singapore inflation places upward pressure
on the Singapore dollar.
a. True
b. False
9) In conducting a multinational capital budgeting analysis, the subsidiary’s perspective
should always be used.
a. True
b. False
10) A futures hedge involves taking a money market position to cover a future payables
or receivables position.
a. True
b. False
11) An obligation to purchase a specific amount of currency at a future point in time is
called a:
a. call option
b. spot contract
c. put option
d. forward contract
e. both B and D
12) Assume the U.S. interest rate is 7.5%, the New Zealand interest rate is 6.5%, the
spot rate of the NZ$ is $.52, and the one-year forward rate of the NZ$ is $.50. At the
end of the year, the spot rate is $.48. Based on this information, what is the effective
financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan?
a. about -1.7%
b. about 0.0%
c. about 14.7%
d. about 15.4%
e. about 8.3%
13) The risk to the exporter is highest with the ____ method.
a. prepayment
b. letter of credit
c. consignment
d. open account
14) 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.
a. True
b. False
15) Assume that interest rate parity exists, and there are zero transactions costs. If the
forward rate consistently underestimates the future spot rate, then:
a. on average, the foreign effective financing rate is greater than the domestic interest
rate
b. on average, the foreign effective financing rate is less than the domestic rate
c. the foreign effective financing rate exceeds the U.S. interest rate when its forward
rate exhibits a discount and is less than the U.S. interest rate when its forward rate
exhibits a premium
d. the foreign effective financing rate is less than the U.S. interest rate when its forward
rate exhibits a discount and exceeds the U.S. interest rate when its forward rate exhibits
a discount
16) A currency put option is a contract specifying a standard volume of a particular
currency to be exchanged on a specific settlement date.
a. True
b. False
17) A futures contract is a contract specifying a standard volume of a particular
currency to be exchanged on a specific settlement date.
a. True
b. False
18) The risk-free interest rates among countries that have adopted the euro should:
a. not necessarily be similar to risk-free rates in other countries
b. equal the U.S. risk-free rate
c. equal the risk-free rates in other European countries
d. equal the risk-free rates in Asian countries
19) Due to market imperfections, the cost of factors of production (such as labor) may
differ substantially across countries.
a. True
b. False
20) The strike price on a currency option is also known as an exercise price.
a. True
b. False
21) If Lazer Co. desired to lock in the maximum it would have to pay for its net
payables in euros but wanted to be able to capitalize if the euro depreciates substantially
against the dollar by the time payment is to be made, the most appropriate hedge would
be:
a. a money market hedge.
b. purchasing euro put options
c. a forward purchase of euros
d. purchasing euro call options
e. selling euro call options
22) Factors such as economic growth, inflation, and interest rates are an integral part of
____ forecasting.
a. technical
b. fundamental
c. market-based
d. none of the above
23) In general, increased investment by the parent in the foreign subsidiary causes more
exchange rate exposure to the parent over time because the cash flows remitted to the
parent will be larger.
a. True
b. False
24) The phrase “the dollar was mixed in trading” means that:
a. the dollar was strong in some periods and weak in other periods over the last month
b. the volume of trading was very high in some periods and low in other periods
c. the dollar was involved in some currency transactions, but not others
d. the dollar strengthened against some currencies and weakened against others
25) Currency futures contracts sold on an exchange:
a. contain a commitment to the owner, and are standardized
b. contain a commitment to the owner, and can be tailored to the desire of the owner
c. contain a right but not a commitment to the owner, and can be tailored to the desire of
the owner
d. contain a right but not a commitment to the owner, and are standardized