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1) 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
2) Institutional investors such as mutual funds or pension funds which have large
holdings of an MNC's stock do not normally want to take control of it and therefore
have no influence over management of the MNC.
a. True
b. False
3) The LIBOR varies among currencies because the market supply of and demand for
funds vary among currencies.
a. True
b. False
4) An advantage of using options to hedge is that the MNC can let the option expire.
However, a disadvantage of using options is that a premium must be paid for it.
a. True
b. False
5) According to the text, the most appropriate method of incorporating country risk into
capital budgeting analysis is to:
a. compare each form of a country risk rating to a benchmark level
b. estimate the effect of each form of country risk on cash flows
c. estimate the effect of each form of country risk on the income statement and balance
sheet
d. adjust the discount rate to reflect the level of country risk using the conventional
adjustment formula that is used by virtually all MNCs
6) The objective of sensitivity analysis in capital budgeting is to determine how
sensitive the NPV is to alternative values of the input variables.
a. True
b. False
7) In a sterilized exchange rate arrangement, a country's home currency value is pegged
to a foreign currency or to some unit of account.
a. True
b. False
8) Under a countertrade arrangement, the exporter ships the goods to the importer while
retaining title to the merchandise until it is sold.
a. True
b. False
9) The VAR method assumes that the volatility (standard deviation) of exchange rate
movements changes over time.
a. True
b. False
10) Relatively high Japanese inflation may result in an increase in the supply of yen for
sale and a reduction in the demand for yen.
a. True
b. False
11) An MNC can obtain equity by all of the following except:
a. retained earnings
b. a global equity offering
c. a domestic equity offering
d. none of the above
12) The World Bank's Multilateral Investment Guarantee Agency (MIGA):
a. offers various forms of export insurance
b. offers various forms of import insurance
c. offers various forms of exchange rate risk insurance
d. provides loans to developing countries
e. offers various forms of political risk insurance
13) Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which
are priced in yen. The demand for those cars declines when the yen is strong. The
manufacturer also produces some cars in the U.S. with U.S. materials and those cars are
priced in dollars. The manufacturer could reduce its economic exposure by:
a. closing down most of its plants in the U.S.
b. producing more automobiles in the U.S.
c. relying completely on Japanese suppliers for its parts
d. pricing its exports in dollars
14) 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
15) Futures and options are available for crossrates.
a. True
b. False
16) When a parent company tries to convince a subsidiary to hedge its transaction
exposure, this is called leading.
a. True
b. False
17) Assume the following information:
Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and
expects to receive SF600,000 in 1 year.
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 forward hedge?
a. $234,000
b. $238,584
c. $240,000
d. $236,127
18) An MNC issues ten-year bonds denominated in 500,000 Philippines pesos (PHP) at
par. The bonds have a coupon rate of 15%. If the peso remains stable at its current level
of $.025 over the lifetime of the bonds and if the MNC holds the bonds until maturity,
the financing cost to the MNC will be:
a. 10.0%
b. 12.5%
c. 15.0%
d. none of the above
19) When an MNC needs to finance a portion of a foreign project within the foreign
country, the best method to account for a foreign project's risk is to:
a. apply a required return that is based on the CAPM
b. apply a required return based on unsystematic risk
c. derive the net present value of the equity investment
d. apply the required return equal to the risk-free rate in the foreign country
20) According to the international Fisher effect, if investors in all countries require the
same real rate of return, the differential in nominal interest rates between any two
countries:
a. follows their exchange rate movement
b. is due to their inflation differentials
c. is zero
d. is constant over time
e. C and D
21) The primary purpose of country risk analysis when applied to capital budgeting is
usually to:
a. measure the effect of country risk on sales
b. measure the effect of country risk on cash flows
c. measure the effect of country risk on the consolidated balance sheet
d. measure the effect of country risk on the consolidated income statement
22) ____ is an input required for a multinational capital budgeting analysis, given that it
is conducted from the parent's viewpoint.
a. Salvage value
b. Price per unit sold
c. Initial investment
d. Consumer demand
e. All of the above are inputs required for capital budgeting analysis
23) The monetary policy implemented by the European Central Bank always results in
favorable effects on all countries in the eurozone.
a. True
b. False
24) International governance is achieved by all of the following except:
a. poison pills
b. board of directors
c. institutional investors
d. blockholders
e. All of the above achieve governance
25) To ____, MNCs can use preauthorized payments.
a. accelerate cash inflows
b. minimize currency conversion costs
c. manage blocked funds
d. manage intersubsidiary cash transfers
26) Overhedging refers to the hedging of a larger amount in a currency than the actual
transaction amount.
a. True
b. False
27) Margin is used in the forward market to mitigate default risk.
a. True
b. False
28) A firm forecasts the euro's value as follows for the next year:
The annual interest rate on the euro is 7%. The expected value of the effective financing
rate from a U.S. firm's perspective is about:
a. 8.436%
b. 10.959%
c. 11.112%
d. 11.541%
29) A bill of exchange requesting the bank to pay the face amount upon presentation of
documents is a:
a. banker's acceptance
b. time draft
c. letter of credit
d. sight draft
30) 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
