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1) Which of the following is not true regarding options?
a. Options are traded on exchanges, never over-the-counter
b. Similar to futures contracts, margin requirements are normally imposed on option
traders
c. Although commissions for options are fixed per transaction, multiple contracts may
be involved in a transaction, thus lowering the commission per contract
d. Currency options can be classified as either put or call options
e. All of the above are true
2) Long-term forward contracts are a possible way to hedge the distant sale of fixed
assets in foreign countries, but they may not be available for many emerging market
currencies.
a. True
b. False
3) When the futures price on euros is below the forward rate on euros for the same
settlement date, astute investors may attempt to simultaneously ____ euros forward and
____ euro futures.
a. sell; sell
b. buy; sell
c. sell; buy
d. buy; buy
4) If inflation increases substantially in Australia while U.S. inflation remains
unchanged, this is expected to place ____ pressure on the value of the Australian dollar
with respect to the U.S. dollar.
a. upward
b. downward
c. either upward or downward (depending on the degree of the increase in Australian
inflation)
d. none of the above; there will be no impact
5) An MNC can avoid translation exposure if its earnings are not remitted by the
foreign subsidiary to the parent.
a. True
b. False
6) It is always the best course of action to divest of a foreign project if the expected
cash flows from the project decline substantially.
a. True
b. False
7) Lagging refers to the delay of payment by a subsidiary if the currency denominating
the payable is expected to depreciate.
a. True
b. False
8) If there is a large supply of savings relative to the demand for short-term funds, the
interest rate for that country will be relatively low.
a. True
b. False
9) Which of the following is true regarding the options markets?
a. Hedgers and speculators both attempt to lower risk
b. Hedgers attempt to lower risk, while speculators attempt to make riskless profits
c. Hedgers and speculators are both necessary in order for the market to be liquid
d. all of the above
10) When the existing spot rate exceeds the exercise price, a call option is ____, and a
put option is ____.
a. out of the money; in the money
b. out of the money; out of the money
c. in the money; in the money
d. in the money; out of the money
11) International trade is the most common form of direct foreign investment (DFI).
a. True
b. False
12) The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate
of Japanese yen is quoted at $.011. The forward ____ is ____ percent.
a. discount; 18.18
b. premium; 18.18
c. discount; 15.38
d. premium; 15.38
13) Futures contracts are typically ____; forward contracts are typically ____.
a. sold on an exchange; sold on an exchange
b. offered by commercial banks; sold on an exchange
c. sold on an exchange; offered by commercial banks
d. offered by commercial banks; offered by commercial banks
14) Because before-tax cash flows are necessary for an adequate capital budgeting
analysis, international tax effects need not be determined on a proposed foreign project.
a. True
b. False
15) 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
16) If a country's government imposes a tariff on imported goods, that country's current
account balance will likely ____ (assuming no retaliation by other governments).
a. decrease
b. increase
c. remain unaffected
d. either A or C are possible
17) Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that
Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is
more appropriate in this situation:
a. Buy dollars forward
b. Sell dollars forward
c. Purchase call option
d. Purchase put option
18) It is probably easier to estimate the cost of equity than it is to estimate the cost of
debt.
a. True
b. False
19) Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S.
nominal interest rate decreases while the Chilean nominal interest rate remains stable.
According to the international Fisher effect, this implies expectations of ____ than
before, and that the Chilean peso should ____ against the dollar.
a. lower U.S. inflation; depreciate
b. lower U.S. inflation; appreciate
c. higher U.S. inflation; depreciate
d. higher U.S. inflation; appreciate
20) The lower bound of the call option premium is the greater of zero and the difference
between the spot rate and the exercise price; the upper bound of a currency call option
is the spot rate.
a. True
b. False
21) Monson Co., based in the U.S., exports products to Japan denominated in yen. If the
forecasted value of the yen is substantially ____ than the forward rate, Monson Co. will
likely decide ____ the payments.
a. higher; to hedge
b. lower; not to hedge
c. higher; not to hedge
d. none of the above
22) Exhibit 10-1
Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the
Netherlands. Cerra estimates the standard deviation of daily percentage changes of the
euro to be 1 percent over the last 100 days. Assume that these percentage changes are
normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence
level for the following question(s).
Refer to Exhibit 10-1. What is the maximum one-day loss in dollars if the expected
percentage change of the euro tomorrow is 0.5%? The current spot rate of the euro
(before considering the maximum one-day loss) is $1.01
a. -$75,750
b. -$60,600
c. -$111,100
d. -$25,250
23) The agency costs of an MNC are likely to be lower if it:
a. scatters its subsidiaries across many foreign countries
b. increases its volume of international business
c. uses a centralized management style
d. A and B
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) The valuation of a proposed international divestiture can be determined by
comparing the present value of the cash flows if the project is continued to the proceeds
that would be received (after taxes) if the project is divested.
a. True
b. False
