1) The exchange rates of smaller countries are very stable because the market for their
currency is very liquid.
2) Leading refers to the payment of supplies earlier than necessary; lagging refers to the
payment of supplies later than allowed.
3) While an overall risk rating of a country can be useful, it cannot always detect
upcoming crises.
4) Since country risk is constantly changing and events in other parts of the world are
largely unpredictable, country risk analysis is not important for MNCs.
5) A company may become more exposed or sensitive to an individual currency’s
movements over time for several reasons, including a reduction in hedging, a greater
involvement in the foreign country, or an increased use of the foreign currency.
6) The interest rate on pounds in the U.K. is 8%. The interest rate in the U.S. is 5%.
Interest rate parity exists. U.S. investors will earn a lower return domestically than
British investors earn domestically.
7) An advantage of a fixed exchange rate system is that governments are not required to
constantly intervene in the foreign exchange market to maintain exchange rates within
specified boundaries.
8) If shipment is made under a forfaiting draft, the exporter is paid once shipment has
been made and the draft is presented to the buyer for payments.
9) Some governments restrict foreign ownership of local firms. Such restrictions may
limit or prevent international acquisitions.
10) Currency call options allow the purchaser to lock in the price paid for a currency.
Therefore, they are often used by MNCs to hedge foreign currency payables.
11) Premiums required to entice a target’s board of directors to approve an acquisition
are usually between 1 and 3 percent of the target’s market price.
12) If the IFE theory holds, that means that covered interest arbitrage is not feasible.
13) If the functional currencies for reporting purposes are highly correlated, translation
exposure is magnified.
14) MNCs generally do not need to hedge because shareholders can hedge their own
risk.
15) The Bretton Woods Agreement called for the establishment of a single European
currency.
16) If a host government restricts the remittances from a foreign subsidiary, a possible
solution is to let the subsidiary obtain partial financing for the project.
17) If the British government desires an appreciation in its currency with respect to the
U.S. dollar, it would consider intervening in the foreign exchange market by buying
dollars with pounds.
18) If interest rate parity (IRP) does not hold, there is still the possibility that covered
interest arbitrage is not worthwhile because of such factors as transaction costs,
currency restrictions, and differential tax laws.
19) The most sophisticated forecasting techniques provide consistently accurate
forecasts.
20) A central bank may attempt to stimulate a stagnant economy by weakening the
value of the currency.