1) There is an advantage to using equity rather than debt financing because dividend
payments are tax deductible.
2) A reduction in hedging will probably reduce transaction exposure.
3) They key to international diversification is selecting foreign projects whose
performance levels are highly correlated over time.
4) The monetary policy implemented by the European Central Bank always results in
favorable effects on all countries in the eurozone.
5) A European option can be exercised at any time prior to maturity, while an American
option can only be exercised at maturity.
6) Market-based forecasting is based on fundamental relationships between economic
variables and exchange rates.
7) The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S.
balance of payments account.
8) When comparing the forward hedge to the money market hedge, the MNC can easily
determine which hedge is more desirable, because the cost of each hedge can be
determined with certainty.
9) The equilibrium state in which covered interest arbitrage is no longer possible is
called interest rate parity (IRP).
10) Using the inflation differential between two countries to forecast their exchange
rates is not always accurate because of such factors as the uncertain timing of the
impact of inflation and barriers to trade.
11) When the war in Iraq began in 2003, some MNCs feared that oil prices would ____
and that U.S. inflation and interest rates would ____.
a.rise; rise
b.fall; fall
c.rise; fall
d.fall; rise
12) Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate
of the Swiss franc has a 4% premium. Given this information:
a.Swiss investors who attempt covered interest arbitrage earn the same rate of return as
if they invested in Switzerland
b.U.S. investors who attempt covered interest arbitrage earn a higher rate of return than
if they invested in the U.S
c.A and B
d.none of the above
13) Constraints pertaining to taxes, currency convertibility, earnings remittance, and
employee rights are best described as:
a.ethical differences
b.regulatory barriers
c.quota barriers
d.”Red Tape” barriers
14) ____ purchases more U.S. exports than the other countries listed here.
a.Italy
b.Spain
c.Mexico
d.Canada
15) Thornton Corporation has extensive liabilities denominated in Cyprus pounds
resulting from imports from Cyprus. However, Thornton’s revenues are denominated
solely in U.S. dollars. Which of the following is probably not true?
a.Thornton would benefit from a depreciation of the Cyprus pound
b.Thornton has at least some transaction exposure
c.Thornton has at least some economic exposure
d.Thornton has at least some translation exposure
e.All of the above are true
16) Due to ____, market forces should realign the cross exchange rate between two
foreign currencies based on the spot exchange rates of the two currencies against the
U.S. dollar.
a.forward realignment arbitrage
b.triangular arbitrage
c.covered interest arbitrage
d.locational arbitrage
17) The bid/ask spread for small retail transactions is commonly in the range of ____
percent.
a.3 to 7
b..01 to .03
c.10 to 15
d..5 to 1
18) 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
19) Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has
determined the following equation for the euro:
eurot= b0 + b1INFt – 1 + b2INCt – 1
= .005 + .9INFt – 1 + 1.1INCt – 1
The most recent quarterly percentage change in the inflation differential between the
U.S. and Europe was 2 percent, while the most recent quarterly percentage change in
the income growth differential between the U.S. and Europe was -1 percent. Based on
this information, the forecast for the euro is a(n) ____ of ____%.
a.appreciation; 3.4
b.depreciation; 3.4
c.appreciation; 0.7
d.appreciation; 1.2
20) When a foreign currency is perceived by a firm to be ____, the firm will probably
____ direct foreign investment in that country.
a.undervalued; consider
b.undervalued; not consider
c.overvalued; not consider
d.A and C
e.B and C
21) When a country’s risk-free rate rises, the cost of equity to an MNC in that country
_____, and the cost of debt to an MNC in that country ____, other things held constant.
a.increases; increases
b.increases; is not affected
c.is not affected; increases
d.is not affected; is not affected
22) Japan’s annual interest rate has been relatively ____ compared to other countries for
several years, because the supply of funds in its credit market has been very ____.
a.low; small
b.high; small
c.low; large
d.high; large
23) A U.S. corporation has purchased currency call options to hedge a 70,000 pound
payable. The premium is $.02 and the exercise price of the option is $.50. If the spot
rate at the time of maturity is $.65, what is the total amount paid by the corporation if it
acts rationally?
a.$33,600
b.$46,900
c.$44,100
d.$36,400
24) The International Financial Corporation was established to:
a.enhance development solely in Asia through grants
b.enhance economic development through non-subsidized loans (at market interest
rates)
c.enhance economic development through low-interest rate loans (below-market rates)
d.enhance economic development of the private sector through investment in stock of
corporations
25) 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
26) A primary result of the Bretton Woods Agreement was:
a.the establishment of the European Monetary System (EMS)
b.establishing specific rules for when tariffs and quotas could be imposed by
governments
c.establishing that exchange rates of most major currencies were to be allowed to
fluctuate 1% above or below their initially set values
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)
27) 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
28) The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590.
The forward rate contains an annualized ____ of ____%.
a.discount; -4.07
b.premium; 4.07
c.discount; -4.08
d.premium; 4.08
e.premium; 3.40
29) If the Fed announces that it will decrease the U.S. interest rates, and European
Central Bank takes no action, then the value of euro will ____ against the value of U.S.
dollar. The Fed’s action is called ____ intervention.
a.appreciate; direct
b.depreciate; direct
c.appreciate; indirect
d.depreciate; indirect
30) The euro is the currency:
a.adopted in all western European countries as of 1999
b.adopted in all eastern European countries as of 1999
c.adopted in all European countries as of 1999
d.none of the above
31) If interest rate parity exists, and transaction costs do not exist, the money market
hedge will yield the same result as the ____ hedge.
a.put option
b.forward
c.call option
d.none of the above
32) The variance in financing costs over time is ____ for foreign financing than
domestic financing. The variance when financing with foreign currencies is lower when
those currencies exhibit ____ correlations, assuming the firm has no other business in
those currencies.
a.lower; low
b.lower; high
c.higher; high
d.higher; low
33) Which of the following is not a way in which agency problems can be reduced
through corporate control?
a.executive compensation
b.threat of hostile takeover
c.acquisition of a foreign subsidiary
d.monitoring by large shareholders
34) A firm considers an exporting project and will invoice the exports in dollars. The
expected cash flows in dollars would be more difficult if the currency of the foreign
country is ____.
a.fixed
b.volatile
c.stable
d.none of the above, as the firm is not exposed
35) Refer to Exhibit 20-2. What is the probability that the financing rate of the
two-currency portfolio is less than the domestic financing rate?
a.12%
b.30%
c.100%
d.0%
e.none of the above
36) To hedge translation exposure, MNCs could ____ that their foreign subsidiaries
receive as earnings to create a cash outflow in the currency to offset the earnings
received in that currency.
a.purchase the currency forward
b.sell the currency forward
c.purchase futures contracts of the currency
d.A or C
e.none of the above
37) ____ is (are) income received by investors on foreign investments in financial
assets (securities).
a.Portfolio income
b.Direct foreign income
c.Unilateral transfers
d.Factor income
38) The International Development Association was established to:
a.enhance development solely in Asia through grants
b.enhance economic development through non-subsidized loans (at market interest
rates)
c.enhance economic development through low-interest rate loans (below-market rates)
d.enhance economic development of the private sector through investment in stock of
corporations
39) Treck Co. expects to pay 200,000 in one month for its imports from Greece. It also
expects to receive 250,000 for its exports to Italy in one month. Treck Co. estimates the
standard deviation of monthly percentage changes of the euro to be 3 percent over the
last 40 months. Assume that these percentage changes are normally distributed. Using
the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum
one-month loss in dollars if the expected percentage change of the euro during next
month is -2%? Assume that the current spot rate of the euro (before considering the
maximum one-month loss) is $1.23.
a.-$38,468
b.-$21,371
c.-$17,097
d.-$4,274
40) Assume that Cooper Co. will not use its cash balances in a money market hedge.
When deciding between a forward hedge and a money market hedge, it ____ determine
which hedge is preferable before implementing the hedge. It ____ determine whether
either hedge will outperform an unhedged strategy before implementing the hedge.
a.can; can
b.can; cannot
c.cannot; can
d.cannot; cannot
41) If a foreign country’s interest rate is similar to the U.S. rate, the forward rate
premium or discount will be ____, meaning that the forward rate and spot rate will
provide ____ forecasts.
a.substantial; similar
b.substantial; very different
c.close to zero; similar
d.close to zero; very different
42) Foreign exchange markets are generally found to be at least ____ efficient.
a.weak-form
b.semistrong-form
c.strong form
d.none of the above
43) Exhibit 20-1
Assume a U.S.-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8%
for one year. Also assume that the spot rate of the leu is $.00012 and the one-year
forward rate of the leu is $.00010. The expected spot rate of the leu one-year from now
is $.00011.
Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it
borrows leu on a covered basis?
a.10%
b.-10%
c.-1%
d.1%
e.none of the above
44) Campbell Company has a subsidiary located in Jamaica. The subsidiary has
generated losses for the last five years and is expected to generate losses for the next ten
years. Campbell is reluctant to divest of this subsidiary, however. Given this
information, Campbell would ____ from a(n) ____ of the Jamaican dollar.
a.benefit; appreciation
b.benefit; depreciation
c.not benefit; appreciation
d.not benefit; depreciation
e.B and C
45) To best reduce exposure to a host government takeover, a subsidiary could:
a.use a long-run profit perspective for business in that country
b.hire people from its own country (where the parent is located)
c.attempt to obtain supplies from its parent for which substitutes are not available
d.borrow funds from its parent rather than from the host country’s creditors
46) To strengthen the dollar using sterilized intervention, the Fed would ____ dollars
and simultaneously ____ Treasury securities.
a.buy; sell
b.sell; buy
c.buy; buy
d.sell; sell
47) Exhibit 11-1
U.S.Jordan
360-day borrowing rate6%5%
360-day deposit rate5%4%
Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360
days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is
$1.50. How much will Perkins receive in 360 days from implementing a money market
hedge (assume any receipts before the date of the receivable are invested)?
a.$377,115
b.$373,558
c.$363,019
d.$370,000