1) If a foreign project is financed with a subsidiary’s retained earnings, the subsidiary’s
investment could be viewed as an opportunity cost, since the funds could be remitted to
the parent rather than invested in the foreign project.
2) To hedge a payable position with a currency option hedge, an MNC would write a
call option.
3) An MNC may deviate from its target capital structure in each country where
financing is obtained, yet still achieve its target capital structure on a consolidated basis.
4) For points lying to the left of the interest rate parity (IRP) line, covered interest
arbitrage is not possible from a U.S. investor’s perspective, but is possible from a
foreign investor’s perspective.
5) Under the Imperfect Markets Theory, it is assumed that factors of production are
entirely mobile, so that firms can capitalize on a foreign country’s resources.
6) Since forward contracts are easy to use for hedging, any exposure to exchange rate
movements should be hedged.
7) If the forward rate for a currency is less than the spot rate for that currency, the
forward rate is said to exhibit a premium.
8) Research indicates that currency forecasting services almost always outperform
forecasts based on the forward rate.
9) If foreign investors fear that a peg may be broken because of fund outflows from that
country, they may attempt to purchase more of that currency before the peg is broken.
10) When investing in a portfolio of foreign currencies, the currencies represented
within the portfolio are ideally highly positively correlated.
11) Locational arbitrage explains why prices among banks at different locations will not
normally differ by a significant amount.
12) The capital account reflects changes in country ownership of long-term (but not
short-term) assets.
13) .Intracompany trade represents the exporting of products by one country to other
countries below cost.
14) Using indirect intervention, the Fed attempts to affect the dollar’s value indirectly
by influencing the factors that determine it, such as interest rates.
15) Most MNCs can completely hedge all of their transactions.
16) The Sarbanes-Oxley Act requires more accountability by executives and the board
of directors when assessing acquisitions.
17) The Canadian dollar consistently appears to move almost independently of other
currencies. That is it exhibits low correlations with the other currencies.
18) The markets that have a smaller amount of foreign exchange trading for speculatory
purposes than for trade purposes will likely experience more volatility than those where
trade flows play a larger role.
19) From an acquirer’s perspective, the ideal conditions would be a weak foreign
currency at the time of acquisition and a strengthening of the foreign currency over time
as funds are remitted back to the parent.