1) Downsizing reduces expenses but may also reduce productivity and revenue.
2) In a freely floating exchange rate system, high U.S. inflation rate may be magnified.
This is because the depreciation of the dollar would result in more expensive foreign
imports, thus reducing foreign competition.
3) Dollarization refers to the replacement of local currency with U.S. dollars.
4) Once a decision to establish a foreign subsidiary has been made, it is irreversible.
Therefore, no periodic monitoring of the project is necessary.
5) If potential acquirers are based in different countries, their required rates of return
when considering a specific target will only vary if the desired use of the target is
different.
6) Forward contracts are the best technique for managing exposure arising from project
bidding.
7) The bill of exchange serves as a receipt for shipment and a summary of freight
charges; most importantly, it conveys title to the merchandise.
8) A simple method of valuing a private company is to apply the price-earnings ratios of
publicly traded firms in the same industry to the private company’s earnings.
9) A foreign target’s expected future cash flows generally vary among different MNCs
valuing the target.
10) The Overseas Private Investment Corporation (OPIC) is owned by a consortium of
commercial banks and industrial companies; it cooperates closely with the
Export-Import Bank.
11) Firms that believe the forward rate is an unbiased predictor of the future spot rate
will prefer borrowing the foreign currency.
12) Nonsterilized intervention is intervention by a central bank in the foreign exchange
market without adjusting for the change in money supply.
13) An advantage of freely floating exchange rates is that a country with floating
exchange rates is more insulated from unemployment problems in other countries.
14) According to the text, the cost of debt:
a.for each country is somewhat stable over time
b.among countries changes over time, and these changes are negatively correlated
c.among countries changes over time, and these changes are positively correlated
d.among countries changes over time, and are not correlated
15) If the home currency begins to appreciate against other currencies, this should ____
the current account balance, other things equal (assume that substitutes are readily
available in the countries, and that the prices charged by firms remain the same).
a.increase
b.have no impact on
c.reduce
d.all of the above are equally possible
16) Which of the following did not occur as a result of Bretton Woods Agreement?
a.Each currency was valued in terms of gold
b.Values of all currencies were fixed with respect to each other
c.Currencies were allowed to fluctuate no more than 1% above or below the initially set
rates
d.The United States experienced no balance-of-trade deficits
17) Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a
180-day call option with an exercise price of $.68 and a premium of $.02 is available.
Also, a 180-day put option with an exercise price of $.66 and a premium of $.02 is
available. Mender plans to purchase options to hedge its receivables position. Assuming
that the spot rate in 180 days is $.67, what is the amount received from the currency
option hedge (after considering the premium paid)?
a.$330,000
b.$325,000
c.$320,000
d.$340,000
18) Under purchasing power parity, the future spot exchange rate is a function of the
initial spot rate in equilibrium and:
a.the income differential
b.the forward discount or premium
c.the inflation differential
d.none of the above
19) A primary result of the Smithsonian Agreement was:
a.the establishment of the European Monetary System (EMS)
b.establishing that exchange rates of most major countries were to be allowed to
fluctuate 2.25% above or below their initially set values
c.establishing specific rules for when tariffs and quotas could be imposed by
governments
d.establishing that exchange rates of most major currencies were to be allowed to
fluctuate freely without boundaries (although the central banks did have the right to
intervene when necessary)
20) If the foreign currency ____ by the time the acquirer makes payment, the
acquisition will be more costly, and the cost of the acquisition changes ____ the change
in the exchange rate.
a.appreciates; by a lesser percentage then
b.depreciates; in the same proportion as
c.appreciates; in the same proportion as
d.appreciates; by a greater percentage than
21) Maston Corporation has forecasted the value of the Russian ruble as follows for the
next year:
Percentage ChangeProbability of Occurrence
-5%20%
-3%50%
1%30%
If the Russian interest rate is 30%, the expected cost of financing a one-year loan in
rubles is:
a.27.14%
b.32.86%
c.26.10%
d.none of the above
22) Which of the following is not mentioned in the text as a factor affecting exchange
rates?
a.Relative interest rates
b.Relative inflation rates
c.Government controls
d.Expectations
e.All of the above are mentioned in the text as factors affecting exchange rates
23) If you have a position where you might be obligated to sell pounds, you are:
a.a call writer
b.a call buyer
c.a put writer
d.a put buyer
24) Which of the following is true regarding the euro?
a.Exchange rate risk between participating European currencies is completely
eliminated, encouraging more trade and capital flows across European borders
b.It allows for more consistent economic conditions across countries
c.It prevents each country from conducting its own monetary policy
d.All of the above are true
25) If a country experiences high inflation relative to the U.S., its exports to the U.S.
should ____, its imports should ____, and there is ____ pressure on its currency’s
equilibrium value.
a.decrease; increase; upward
b.decrease; decrease; upward
c.increase; decrease; downward
d.decrease; increase; downward
e.increase; decrease; upward
26) An MNC has a foreign manufacturing plant to capitalize on cheap production costs;
the MNC exports all the goods produced. It should be most concerned about the
country’s:
a.growth in gross domestic product
b.government policies designed to increase tariffs on imported goods
c.local consumer purchasing habits
d.government environmental regulations and taxes on the lease or purchase of a
production site
27) Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian
ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the
ringgit. What will be the profit for an investor that has $500,000 available to conduct
locational arbitrage?
a.$2,041,667
b.$9,804
c.$500
d.$1,639
28) Exhibit 21-2
Moore Corporation would like to simultaneously invest in Malaysian ringgit (MYR)
and Romanian leu (ROL) for a three-month period. Moore would like to determine the
expected yield and the variance of a portfolio consisting of 40% ringgit and 60% leu.
Moore has identified the following information:
Mean effective financing rate of Malaysian ringgit for three months3%
Mean effective financing rate of Romanian leu for three months2%
Standard deviation of Malaysian ringgit’s effective financing rate.15
Standard deviation of Romanian leu’s effective financing rate.07
Correlation coefficient of effective financing rates of these two currencies.19
Refer to Exhibit 21-2. What is the expected effective yield of the portfolio contemplated
by Moore Corporation?
a.2.50%
b.2.60%
c.2.40%
d.none of the above
29) Assume the following information:
U.S. deposit rate for 1 year=11%
U.S. borrowing rate for 1 year=12%
New Zealand deposit rate for 1 year=8%
New Zealand borrowing rate for 1 year=10%
New Zealand dollar forward rate for 1 year=$.40
New Zealand dollar spot rate=$.39
Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and
expects to receive NZ$600,000 in 1 year. You are a consultant for this firm.
Using the information above, what will be the approximate value of these exports in 1
year in U.S. dollars given that the firm executes a money market hedge?
a.$238,584
b.$240,000
c.$234,000
d.$236,127
30) The value of the Canadian dollar, Japanese yen, and Australian dollar with respect
to the U.S. dollar are part of a:
a.pegged system
b.fixed system
c.managed float system
d.crawling peg system
31) Eurobonds:
a.can be issued only by European firms
b.can be sold only to European investors
c.A and B
d.none of the above
32) Assume the following information regarding U.S. and European annualized interest
rates:
CurrencyLending RateBorrowing Rate
U.S. Dollar ($)6.73%7.20%
Euro ()6.80%7.28%
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
33) In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.
a.callable
b.putable
c.amortizing
d.zero-coupon
34) A call option on Australian dollars has a strike (exercise) price of $.56. The present
exchange rate is $.59. This call option can be referred to as:
a.in the money
b.out of the money
c.at the money
d.at a discount
35) Simulation is useful in the bond-denomination decision since it can:
a.precisely compute the cost of financing with bonds denominated in a single foreign
currency
b.precisely compute the cost of financing with bonds denominated in a portfolio of
foreign currencies
c.assess the probability that a bond denominated in a foreign currency will be less
costly than a bond denominated in the home currency
d.A and B
36) Forward contracts:
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
37) According to your text, which of the following is not a factor that increases an
MNC’s cost of capital?
a.higher exposure to exchange rate risk
b.higher exposure to country risk
c.an increase in the risk-free interest rate
d.an increase in the size of the MNC
38) Werner Corporation has a target capital structure that consists of 40% debt and 60%
equity. Werner can borrow at an interest rate of 10%. Also, Werner has determined its
cost of equity to be 14%. Werner’s tax rate is 40%. What is Werner’s weighted average
cost of capital?
a.10.80%
b.12.40%
c.9.20%
d.None of the above
39) In ____, a bank arranges to fund a loan to pay the exporter instead of charging the
importer’s account immediately.
a.refinancing of a sight letter of credit
b.a banker’s acceptance
c.a short-term bank loan
d.accounts receivable financing
40) Which of the following is not one of the more common methods used by MNCs to
improve their internal control process?
a.Establishing a centralized database of information
b.Ensuring that all data are reported consistently among subsidiaries
c.Speeding the process by which all departments and all subsidiaries have access to the
data that they need
d.Making executives more accountable for financial statements by personally verifying
their accuracy
e.All of the above are common methods used by MNCs to improve their internal
control process.
41) Certificates representing bundles of stock of non-U.S. firms are called:
a.Eurobonds
b.ADRs
c.FRNs
d.Eurobor