1) An MNC has determined that the degree of appreciation for the Singapore dollar that
equates the foreign and domestic yield is 2%. If the Singapore dollar appreciates by less
than 2%, the investment in Singapore will be more attractive.
a. True
b. False
2) In general, stock markets allow for more price efficiency and attract more investors
when they have all of the following except:
a. more voting rights for shareholders
b. more legal protection
c. more enforcement of the laws
d. less stringent accounting requirements
3) Which of the following is not true regarding the eurozone?
a. Members cannot set unique monetary policy individually
b. Members cannot apply their own fiscal policies
c. Members have to agree on the ideal monetary policy
d. Its creation allowed for greater political union among its members
4) Research has found that the options market is:
a. efficient before controlling for transaction costs
b. efficient after controlling for transaction costs
c. highly inefficient
d. none of the above
5) Among the reasons that purchasing power parity (PPP) does not consistently occur
are:
a. exchange rates are affected by interest rate differentials
b. exchange rates are affected by national income differentials and government controls
c. supply and demand may not adjust if no substitutable goods are available
d. all of the above are reasons that PPP does not consistently occur
6) When investing in a portfolio of foreign currencies, the currencies represented within
the portfolio are ideally highly positively correlated.
a. True
b. False
7) 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
8) According to the text, MNCs can:
a. use only debt financing in foreign countries to support foreign subsidiaries
b. use only equity financing in foreign countries to support foreign subsidiaries
c. use only parent financing in foreign countries to support foreign subsidiaries
d. none of the above
9) Assume that the Japanese yen is expected to depreciate substantially over the next
year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues.
The overall value of MNC will ____ because of the yen’s depreciation.
a. decrease
b. increase
c. remain unchanged
d. A and C are possible
10) A perfect hedge (full coverage) on translation exposure can usually be achieved
when:
a. using the money market hedge
b. using the forward hedge
c. using the futures hedge
d. none of the above, since a perfect hedge is nearly impossible
11) Leading refers to the payment of supplies earlier than necessary; lagging refers to
the payment of supplies later than allowed.
a. True
b. False
12) International trade generally results in ____ exposure to international political risk
and ____ exposure to international economic conditions, when compared to other
methods of international business.
a. higher; lower
b. higher; higher
c. lower; higher
d. lower; lower
13) A high correlation between two currencies would be desirable for achieving low
exchange rate risk if one is an inflow currency and the other is an outflow currency.
a. True
b. False
14) It is generally least difficult to effectively hedge various types of:
a. translation exposure
b. transaction exposure
c. economic exposure
d. A and C
15) Assume that the interest rate offered on pounds is 5% and the pound is expected to
depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K.
and the U.S., the U.S. interest rate should be ____.
a. 3.43%
b. 5.68%
c. 6.5%
d. 7.3%
16) Which of the following would probably not cause the stock price of a foreign target
to decrease?
a. Its expected cash flows decline
b. General stock market conditions in the foreign country are deteriorating
c. Investors anticipate that the target will be acquired
d. All of the above will cause the target’s stock price to decrease
17) Which of the following interactions will likely have the least effect on the dollar’s
value? Assume everything else is held constant.
a. A reduction in U.S. inflation accompanied by an increase in real U.S. interest rates
b. A reduction in U.S. inflation accompanied by an increase in nominal U.S. interest
rates
c. An increase in U.S. inflation accompanied by an increase in nominal, but not real,
U.S. interest rates
d. An increase in Singapore’s inflation accompanied by an increase in real U.S. interest
rates
e. An increase in Singapore’s interest rates accompanied by an increase in U.S. inflation
18) Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the
international Fisher effect holds and is used to determine the future spot rate, the
forecast would reflect an expectation of:
a. appreciation of pound’s value over the next year
b. depreciation of pound’s value over the next year
c. no change in pound’s value over the next year
d. not enough information to answer this question
19) The writer of a call option is obligated to sell the underlying currency to the buyer
of the option if the option is exercised.
a. True
b. False
20) According to your text, ____ is a country that has been perceived as one of the most
attractive sources of new demand.
a. Paraguay
b. Morocco
c. Sweden
d. China
21) Consider an exporter that is willing to send goods to the importer without a
guaranteed payment by the bank. The bank provides a loan to the exporter that is
backed by the value of the exported goods. This reflects:
a. accounts receivable financing
b. forfaiting
c. factoring
d. a letter of credit
22) The ____ the MNC’s cost of capital, the ____ will be a project’s net present value
for its proposed project with a given set of expected cash flows.
a. lower; higher
b. higher; higher
c. lower; lower
d. none of the above
23) Since exchange rate forecasts are not always accurate, a probability distribution of
possible exchange rates may be preferable to a single point estimate.
a. True
b. False
24) Which of the following theories can be assessed using data that exists at one
specific point in time?
a. purchasing power parity (PPP)
b. international Fisher effect (IFE)
c. A and B
d. interest rate parity (IRP)
25) Which of the following is not true regarding the efficient frontier considered by
MNCs?
a. There is exactly one point on the efficient frontier that is optimal for every MNC,
regardless of its degree of risk aversion
b. The efficient frontier for international projects will probably lie to the left of the
efficient frontier for domestic projects
c. Each point on the efficient frontier represents a portfolio of projects as opposed to an
individual project
d. All of the above are true
e. A and C are false
26) The annualized forward premium on the euro is 7%. What is the 90-day forward
rate on the euro if the spot rate today is $1.25?
a. $1.27
b. $1.34
c. $1.16
d. $1.23
27) Which of the following is true?
a. Forecast errors cannot be negative
b. Forecast errors are negative when the forecasted rate exceeds the realized rate
c. Absolute forecast errors are negative when the forecasted rate exceeds the realized
rate
d. None of the above
28) Assume a U.S. firm uses a forward contract to hedge all of its translation exposure.
Also assume that the firm underestimated what its foreign earnings would be. Assume
that the foreign currency depreciated over the year. The firm would generate a
translation ____, which would be ____ than the gain generated by the forward contract.
a. loss; smaller
b. loss; larger
c. gain; larger
d. gain; smaller
29) When managers use NPV analysis, agency costs are eliminated, and governance is
not needed to monitor MNC decisions regarding projects.
a. True
b. False
30) Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is
$.66. The forward rate exhibits a ____ of ____.
a. premium; about 6%
b. discount; about 6%
c. discount; about 6.45%
d. premium; about 6.45%
31) The direct foreign investment positions by U.S. firms have generally ____ over
time. Restrictions by governments on direct foreign investment have generally ___ over
time.
a. increased; increased
b. increased; decreased
c. decreased; decreased
d. decreased; increased
32) Petrus Company has a unique opportunity to invest in a two-year project in
Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the
first year and 2,000,000 Australian dollars in the second. Petrus would have to invest
$1,500,000 in the project. Petrus has determined that the cost of capital for similar
projects is 14%. What is the net present value of this project if the spot rate of the
Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?
a. $2,905,817
b. -$94,183
c. $916,128
d. none of the above
33) The ____ hedge is not a technique to eliminate transaction exposure discussed in
your text.
a. index
b. futures
c. forward
d. money market
e. currency option
34) The closer graphical points are to the perfect forecast line, the better is the forecast.
a. True
b. False
35) When comparing the forward hedge to the options hedge, the MNC can easily
determine which hedge is more desirable, because the cost of each hedge can be
determined with certainty.
a. True
b. False
36) The government enforcement of securities laws varies among countries.
a. True
b. False