1) Fundamental models examine moving averages over time and thus allow the
development of a forecasting rule.
2) Changes in country ownership of long-term and short-term assets are measured in the
balance of payments with the capital account.
3) The MNC’s cost of equity is unrelated to the local risk-free rate.
4) MNCs can probably achieve more desirable risk-return characteristics from their
project portfolios if they sufficiently diversify among products and geographical
markets.
5) A purely domestic firm is never exposed to exchange rate fluctuations.
6) If interest rate parity exists, the forward hedge will always outperform the money
market hedge.
7) An MNC’s size, its access to international capital markets, and international
diversification are unfavorable to an MNC’s cost of capital.
8) If a target is privately held, general stock market conditions will not affect the
amount that an acquirer has to pay for a foreign target.
9) Since the results of both a money market hedge and a forward hedge are known
beforehand, an MNC can implement the one that is more feasible.
10) The required rate of return used to discount the relevant cash flows from a foreign
project may differ from the MNC’s cost of capital because of that particular project’s
risk.
11) If a currency put option is out of the money, then the present exchange rate is less
than the strike price.
12) Under a letter of credit, the exporter will not ship the goods until the buyer has
remitted payment to the exporter.
13) In a bilateral netting system, transactions between the parent and a subsidiary or
between two subsidiaries are consolidated over a specific period of time.
14) It is probably easier to estimate the cost of equity than it is to estimate the cost of
debt.
15) A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to
increase its investment there. Its value should increase if the value of the euro weakens
over time.
16) Generally, if interest rate parity holds and the forward rate is an unbiased predictor
of the future spot rate, then the international Fisher effect will also hold.
17) The impact of blocked funds on the net present value of a foreign project will be
greater if interest rates are ____ in the host country and there are ____ investment
opportunities in the host country.
a.very high; limited
b.very low; limited
c.very low; numerous
d.very high; numerous
18) The one-year forward rate of the British pound is quoted at $1.60, and the spot rate
of the British pound is quoted at $1.6 The forward ____ is ____ percent.
a.discount; 1.9
b.discount; 1.8
c.premium; 1.9
d.premium; 1.8
19) The Central American Trade Agreement (CAFTA) is intended to raise tariffs and
regulations between the U.S., the Dominican Republic, and Central American countries.
20) 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
21) Any event that increases the U.S. demand for euros should result in a(n) ____ in the
value of the euro with respect to ____, other things being equal.
a.increase; U.S. dollar
b.increase; nondollar currencies
c.decrease; nondollar currencies
d.decrease; U.S. dollar
22) If interest rate parity does not hold, and the forward ____ is greater than the interest
rate differential, then covered interest arbitrage is feasible for investors residing in the
____ country.
a.premium; home
b.discount; home
c.premium; foreign
d.B and C
23) Which of the following forecasting techniques would best represent the use of
relationships between economic factors and exchange rate movements to forecast the
future exchange rate?
a.fundamental forecasting
b.market-based forecasting
c.technical forecasting
d.mixed forecasting
24) A firm without any exposure to foreign exchange rates would likely increase this
exposure the most by:
a.borrowing domestically
b.borrowing a portfolio of foreign currencies that are not highly correlated
c.borrowing a portfolio of foreign currencies that are highly correlated
d.borrowing two foreign currencies that are negatively correlated
25) 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
26) According to the text, an MNC’s “global” target capital structure is:
a.always debt-intensive
b.always equity-intensive
c.sometimes different from an MNC’s “local” capital structures (at subsidiaries)
d.none of the above
27) Assume Countries A, B, and C produce goods that are substitutes of each other and
that these countries engage in trade with each other. Assume that Country A’s currency
floats against Country B’s currency, and that Country C’s currency is pegged to B’s. If
A’s currency depreciates against B, then A’s exports to C should ____, and A’s imports
from C should ____.
a.decrease; increase
b.decrease; decrease
c.increase; decrease
d.increase; increase
28) From a financial management perspective, which of the following is true regarding
the introduction of the Euro?
a.U.S.-based MNCs are not subject to exchange rate risk when they have transactions in
euros
b.The euro is pegged to all other European currencies
c.Transactions costs decline for MNCs that conduct transactions within Europe
d.The euro replaced the British pound
29) 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
30) The Working Capital Guarantee Program is administered by the:
a.Private Export Funding Corporation (PEFCO)
b.Overseas Private Investment Corporation (OPIC)
c.Ex-Imbank
d.Foreign Credit Insurance Association (FCIA)
31) When an MNC finances with a floating-rate loan in a currency that matches its
long-term cash inflows, the MNC is exposed to ____ risk.
a.short; interest rate
b.long; interest rate
c.short; exchange rate
d.none of the above
32) The currency of Country X is pegged to the currency of Country Y. Assume that
Country Y’s currency depreciates against the currency of Country Z. It is likely that
Country X will export ____ to Country Z and import ____ from Country Z.
a.more; more
b.less; less
c.more; less
d.less; more
33) If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day
forward rate on the yen, they will ____ the yen forward and put ____ pressure on the
yen’s forward rate.
a.higher; buy; upward
b.higher; sell; downward
c.higher; sell; upward
d.lower; buy; upward
34) You are a speculator who sells a put option on Canadian dollars for a premium of
$.03 per unit, with an exercise price of $.86. The option will not be exercised until the
expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration
date, your net profit per unit is:
a.-$.08
b.-$.03
c.$.05
d.$.08
e.none of the above
35) Assume no transactions costs exist for any futures or forward contracts. The price of
British pound futures with a settlement date 180 days from now will:
a.definitely be above the 180-day forward rate
b.definitely be below the 180-day forward rate
c.be about the same as the 180-day forward rate
d.none of the above; there is no relation between the futures and forward prices
36) ____ exposure occurs when an MNC translates each subsidiary’s financial data to
its home currency for consolidated financial statements.
a.Translation
b.Transaction
c.Economic
d.None of the above
37) MNCs often use ____ to invest excess cash while retaining liquidity.
a.international bond markets
b.international equity markets
c.international money markets
d.the market for acquisitions
38) To force the value of the pound to appreciate against the dollar, the Federal Reserve
should:
a.sell dollars for pounds in the foreign exchange market and the European Central Bank
(ECB) should sell dollars for pounds in the foreign exchange market
b.sell pounds for dollars in the foreign exchange market and the European Central Bank
(ECB) should sell dollars for pounds in the foreign exchange market
c.sell pounds for dollars in the foreign exchange market and the European Central Bank
(ECB) should not intervene
d.sell dollars for pounds in the foreign exchange market and the European Central Bank
(ECB) should sell pounds for dollars in the foreign exchange market
39) A ____ is an unconditional promise drawn by one party, instructing the buyer to pay
the face amount upon presentation.
a.draft
b.bill of lading
c.trade acceptance
d.letter of credit
40) The U.S. inflation rate is expected to be 4 percent over the next year, while the
European inflation rate is expected to be 3 percent. The current spot rate of the euro is
$1.03. Using purchasing power parity, the expected spot rate at the end of one year is
$____.
a.1.02
b.1.03
c.1.04
d.none of the above
41) If the parent’s government imposes a ____ tax rate on funds remitted from a foreign
subsidiary, a project is less likely to be feasible from the ____ point of view.
a.high; subsidiary’s
b.high; parent’s
c.low; parent’s
d.A and C
e.none of the above