1) Regression analysis cannot be used to assess the sensitivity of a company’s
performance to economic conditions because economic conditions are unpredictable.
2) If a U.S.-based MNC focused completely on importing, then its valuation would
likely be adversely affected if most currencies were expected to appreciate against the
dollar over time.
3) If the forward rate is used as an indicator of the future spot rate, the spot rate is
expected to appreciate or depreciate by the same amount as the forward premium or
discount, respectively.
4) The initial outlay for a project in a foreign country may decline if property values in
that country decline.
5) Sometimes the overall performance of an MNC may already be insulated by
offsetting effects between subsidiaries and it may not be necessary to hedge the position
of each individual subsidiary.
6) An acquirer based in a low-tax country may be able to generate higher cash flows
from acquiring a foreign target than an acquirer based in a high-tax country.
7) Although direct foreign investment is sometimes conducted, benefits are rarely
realized.
8) The Working Capital Guarantee Program of the Private Export Funding Corporation
(PEFCO) encourages commercial banks to extend short-term export financing to
eligible exporters by providing a comprehensive guarantee that covers 100 percent of
the loan’s principal and interest.
9) If movements of two currencies with low interest rates are highly negatively
correlated, then financing in a portfolio of currencies would not be very beneficial. That
is, financing with such a portfolio would not be very different from financing with a
single foreign currency.
10) If a publicly-traded MNC’s managers make poor decisions that reduce its value, it
may encourage other firms to acquire it.
11) Signals regarding future actions of market participants in the foreign exchange
market sometimes result in overreactions.
12) Increases in relative income in one country vs. another result in an increase in the
first country’s currency value.
13) The valuation of MNC accounts for all the cash flows received by the foreign
subsidiaries plus all the cash flows remitted by the subsidiaries.
14) If an MNC diversifies its operations internationally to reduce its exposure to any
individual country’s problems, country risk analysis becomes irrelevant.
15) A foreign subsidiary with more revenue than expenses denominated in a foreign
currency will be favorably affected by appreciation of the foreign currency.
16) The required rate of return used to discount the relevant cash flows from a foreign
project may differ from the MNC’s cost of capital because of that particular project’s
risk.
17) Risk assessors almost always arrive at the same opinion after completing a
macro-assessment of country risk.
18) In market-based forecasting, a forward rate quoted for a specific date in the future
can be used as the forecasted spot rate on that future date.
19) If the forward rate was expected to be an unbiased estimate of the future spot rate,
and interest rate parity holds, then:
a.covered interest arbitrage is feasible
b.the international Fisher effect (IFE) is supported
c.the international Fisher effect (IFE) is refuted
d.the average absolute error from forecasting would equal zero
20) Assume the U.S. one-year interest rate is 11% and the French one-year interest rate
is 18%. The break-even level of depreciation in the euro at which the U.S. and French
investments would exhibit the same return to a U.S. investor is:
a.about 5.1%
b.about 6.8%
c.about 6.3%
d.about 5.9%
21) A ____ is not normally used for hedging long-term transaction exposure.
a.long-term forward contact
b.futures contract
c.currency swap
d.parallel loan
22) Under a letter of credit arrangement, the bank issuing the letter of credit is known as
the ____ bank, the correspondent bank in the beneficiary’s country to which the issuing
bank sends the letter of credit is known as the ____ bank, and the bank that agrees to
examine documents under the letter of credit and pay the beneficiary is called the ____
bank.
a.issuing; negotiating; advising
b.issuing; advising; negotiating
c.advising; issuing; negotiating
d.negotiating; issuing; advising
e.advising; negotiating; issuing
23) ____ are beneficial because they may reduce transaction costs. However, MNCs
may not be able to obtain all the funds that they need.
a.Private placements
b.Domestic equity offerings
c.Global equity offerings
d.Global debt offerings
24) When using indirect intervention, a central bank is likely to focus on:
a.inflation
b.interest rates
c.income levels
d.expectations of future exchange rates
25) From 1944 to 1971, the exchange rate between any two currencies was typically:
a.fixed within narrow boundaries
b.floating, but subject to central bank intervention
c.floating, and not subject to central bank intervention
d.nonexistent; that is currencies were not exchanged, but gold was used to pay for all
foreign transactions
26) Eurenasia is a country that has frequently been assigned low macro-assessment
ratings of country risk in the recent past due to its tendency to war with neighboring
nations. MNC A is considering the establishment of a subsidiary to manufacture
personal computers, while MNC B is considering the establishment of a subsidiary to
manufacture tanks. Which of the two MNCs is likely to be less affected by the low
macro-assessment?
a.MNC A
b.MNC B
c.both will be equally affected, since the macro-assessment does not vary
d.none of the above
27) Celine Co. will need 500,000 in 90 days to pay for German imports. Today’s 90-day
forward rate of the euro is $1.07. There is a 40 percent chance that the spot rate of the
euro in 90 days will be $1.02, and a 60 percent chance that the spot rate of the euro in
90 days will be $1.09. Based on this information, the expected value of the real cost of
hedging payables is $____.
a.-35,000
b.25,000
c.-1,000
d.1,000
28) Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows
of Sunland francs. These two currencies are highly negatively correlated in their
movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same
exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash
outflows. Which firm has a high exposure to exchange rate risk?
a.Jacko Co
b.Kriner Co
c.the firms have about the same level of exposure
d.neither firm has any exposure
29) When a U.S. firm borrows a foreign currency and has no offsetting position in this
currency, it will incur an effective financing rate that is always above the ____ if the
currency ____.
a.foreign currency’s interest rate; appreciates
b.foreign currency’s interest rate; depreciates
c.domestic interest rate; depreciates
d.domestic interest rate; appreciates
30) Assume that the bank’s bid quote of Mexican peso is $.126 and ask price is $.129. If
you have Mexican pesos, what is the amount of pesos that you need to purchase
$100,000?
a.12,600
b.775,194
c.793,651
d.12,900
31) Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure.
Mercury forecasts that its earnings next year will be 10 million. Mercury decides to
hedge the expected earnings by selling 10 million forward. During the next year, the
euro appreciated. Mercury’s consolidated earnings were ____ affected by the euro’s
movement, and Mercury’s hedge position was ____ affected by the euro’s movement.
a.favorably; favorably
b.favorably; adversely
c.adversely; favorably
d.adversely; adversely
32) When the “real” interest rate is relatively low in a given country, then the currency
of that country is typically expected to be:
a.weak, since the country’s quoted interest rate would be high relative to the inflation
rate
b.strong, since the country’s quoted interest rate would be low relative to the inflation
rate
c.strong, since the country’s quoted interest rate would be high relative to the inflation
rate
d.weak, since the country’s quoted interest rate would be low relative to the inflation
rate
33) The North American Free Trade Agreement (NAFTA) increased restrictions on:
a.trade between Canada and Mexico
b.trade between Canada and the U.S
c.direct foreign investment in Mexico by U.S. firms
d.none of the above
34) When the futures price is equal to the spot rate of a given currency, and the foreign
country exhibits a higher interest rate than the U.S. interest rate, astute investors may
attempt to simultaneously ____ the foreign currency, invest it in the foreign country,
and ____ futures in the foreign currency.
a.buy; buy
b.sell; buy
c.buy; sell
d.buy; buy
35) Points below the IRP line represent situations where:
a.covered interest arbitrage is feasible from the perspective of domestic investors and
results in the same yield as investing domestically
b.covered interest arbitrage is feasible from the perspective of domestic investors and
results in a yield above what is possible domestically
c.covered interest arbitrage is feasible from the perspective of foreign investors and
results in a yield above what is possible in their local markets
d.covered interest arbitrage is not feasible for neither domestic nor foreign investors
36) Like income tax treaties, ____ help to avoid double taxation and stimulate direct
foreign investment.
a.withholding taxes
b.excise taxes
c.tax credits
d.carryforwards
37) 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
38) 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
39) Based on the text, it should be obvious that markets are ____ in reality, and
consequently, monopolistic advantages ____ be exploited.
a.perfect; may possibly
b.perfect; cannot
c.imperfect; may possibly
d.imperfect; cannot
40) The maximum one-day loss computed for the value-at-risk (VAR) method does not
depend on:
a.the expected percentage change in the currency for the next day
b.the standard deviation of the daily percentage changes in the currency over a previous
period
c.the current level of interest rates
d.the confidence level used
41) As the financing of a foreign project by the parent ____ relative to the financing
provided by the subsidiary, the parent’s exchange rate exposure ____.
a.increases; decreases
b.decreases; increases
c.increases; increases
d.none of the above
42) According to the international Fisher effect (IFE):
a.the nominal rate of return on a foreign investment should be equal to the nominal rate
of return on the domestic investment
b.the exchange rate adjusted rate of return on a foreign investment should be equal to
the interest rate on a local money market investment
c.the percentage change in the foreign spot exchange rate will be positive if the foreign
interest rate is higher than the local interest rate
d.the percentage change in the foreign spot exchange rate will be negative if foreign
interest rate is lower than the local interest rate
43) MNCs may be able to lock in a lower cost from financing in a low interest rate
foreign currency if they:
a.have future cash inflows in that foreign currency
b.have future cash outflows in that foreign currency
c.have offsetting future cash inflows and outflows in that foreign currency
d.have no other cash flows in that foreign currency
44) Assume that the Swiss franc has an annual interest rate of 8% and is expected to
depreciate by 6% against the dollar. From a U.S. perspective, the effective financing
rate from borrowing francs is:
a.8%
b.14.48%
c.2%
d.1.52%
45) As a result of the Smithsonian Agreement, the U.S. dollar was:
a.the currency to be used by all countries as a medium of exchange for international
trade
b.forced to be freely floating relative to all currencies without any boundaries
c.devalued relative to major currencies
d.revalued (upward) relative to major currencies
46) It is generally least difficult to effectively hedge various types of:
a.translation exposure
b.transaction exposure
c.economic exposure
d.A and C
47) Bullock Corporation invests 1,500,000 South African rand at a nominal interest rate
of 10%. At the time the investment is made, the spot rate of the rand is $.205. If the spot
rate of the rand at maturity of the investment is $.203, what is the effective yield of
investing in rand?
a.11.08%
b.8.92%
c.10.00%
d.none of the above
48) In a(n) ____ swap, the notional value is increased over time.
a.amortizing
b.basis
c.zero-coupon
d.accretion
49) 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
50) ____ are free of default risk.
a.Euronotes
b.Eurobonds
c.Euro-commercial paper
d.None of the above