1) A centralized management style, where major decisions about a foreign subsidiary
are made by the parent company, results in an increase in agency costs.
2) If the futures rate is lower than the forward rate, astute investors would attempt to
simultaneously buy futures and sell forward. Such actions would place downward
pressure on the futures price and upward pressure on the forward rate.
3) According to the IFE, when the nominal interest rate at home exceeds the nominal
interest rate in the foreign country, the home currency should depreciate.
4) Capitalizing on discrepancies in quoted prices involving no risk and no investment of
funds is referred to as interest rate parity.
5) Under a pegged exchange rate system, the home currency’s value is pegged to a
foreign currency.
6) Since supply and demand for a currency are constant (primarily due to government
intervention), currency values seldom fluctuate.
7) If an MNC assesses net transaction exposure, this refers to the consolidation of all
expected inflows for a particular time and currency.
8) One of the most prevalent factors conflicting with the realization of the goal of an
MNC is the existence of agency problems.
9) A macroeconomic perspective focuses on the financial management decisions that
affect the value of MNC.
10) If the pattern of currency values over time appears random, then technical
forecasting is appropriate.
11) Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to
variable rate debt. Assume the following information for Good and Bad Companies:
Fixed Rate BondVariable Rate Bond
Good Company10%LIBOR + 1%
Bad Company12% LIBOR + 1.5%
Given this information:
a.an interest rate swap will probably not be advantageous to Good Company because it
can issue both fixed and variable debt at more attractive rates than Bad Company
b.an interest rate swap attractive to both parties could result if Good Company agreed to
provide Bad Company with variable rate payments at LIBOR + 1% in exchange for
fixed rate payments of 10.5%
c.an interest rate swap attractive to both parties could result if Bad Company agreed to
provide Good Company with variable rate payments at LIBOR + 1% in exchange for
fixed rate payments of 10.5%
d.none of the above
12) Which of the following is not a form of financial risk?
a.Exchange rate movements
b.Inflation rates
c.Blockage of fund transfers
d.All of the above are forms of financial risk
13) Assume that a U.S. investor invests in a British CD offering a six-month interest
rate of 5%. Over this six-month period, the pound depreciates by 9%. The effective
yield on the British CD for the U.S. investor is:
a.14.45%
b.-4.45%
c.14.00%
d.-4.00%
14) Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The
forward rate of this currency exhibits a ____ of ____ on an annualized basis.
a.discount; 11.11%
b.premium; 11.11%
c.premium; 10.81%
d.discount; 10.81%
15) Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest
rate is 13%. If the Chilean peso ____ by ____%, a U.S.-based MNC would incur the
same financing cost in dollars versus Chilean pesos over a one year period.
a.depreciates; 3.54
b.appreciates; 3.54
c.depreciates; 3.67
d.appreciates; 3.67
16) 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
17) To force the value of the British pound to depreciate against the dollar, the Federal
Reserve should:
a.sell dollars for pounds in the foreign exchange market and the Bank of England
should sell dollars for pounds in the foreign exchange market
b.sell pounds for dollars in the foreign exchange market and the Bank of England
should sell dollars for pounds in the foreign exchange market
c.sell pounds for dollars in the foreign exchange market and the Bank of England
should sell pounds for dollars in the foreign exchange market
d.sell dollars for pounds in the foreign exchange market and the Bank of England
should sell pounds for dollars in the foreign exchange market
18) A firm forecasts the euro’s value as follows for the next year:
Possible
Percentage ChangeProbability
-2%10%
3%50%
6%40%
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%
19) If inflation in New Zealand suddenly increased while U.S. inflation stayed the
same, there would be:
a.an inward shift in the demand schedule for NZ$ and an outward shift in the supply
schedule for NZ$
b.an outward shift in the demand schedule for NZ$ and an inward shift in the supply
schedule for NZ$
c.an outward shift in the demand schedule for NZ$ and an outward shift in the supply
schedule for NZ$
d.an inward shift in the demand schedule for NZ$ and an inward shift in the supply
schedule for NZ$
20) The following regression analysis was conducted for the inflation rate information
and exchange rate of the British pound:
Regression results indicate that a0 = 0 and a1 = 0.4. Therefore:
a.purchasing power parity holds
b.purchasing power parity overestimated the exchange rate change during the period
under examination
c.purchasing power parity underestimated the exchange rate change during the period
under examination
d.purchasing power parity will overestimate the exchange rate change of the British
pound in the future
21) In capital budgeting analysis, the use of a cumulative NPV is useful for:
a.determining a probability distribution of NPVs
b.determining the time required to achieve a positive NPV
c.determining how the required rate of return changes over time
d.determining how the cost of capital changes over time
e.A and B
22) Assume you discovered an opportunity for locational arbitrage involving two banks
and have taken advantage of it. Because of your and other arbitrageurs’ actions, the
following adjustments must take place.
a.One bank’s ask price will rise and the other bank’s bid price will fall
b.One bank’s ask price will fall and the other bank’s bid price will rise
c.One bank’s bid/ask spread will widen and the other bank’s bid/ask spread will fall
d.A and C
23) Assume that interest rate parity holds, and the euro’s interest rate is 9% while the
U.S. interest rate is 12%. Then the euro’s interest rate increases to 11% while the U.S.
interest rate remains the same. As a result of the increase in the interest rate on euros,
the euro’s forward ____ will ____ in order to maintain interest rate parity.
a.discount; increase
b.discount; decrease
c.premium; increase
d.premium; decrease
24) Consider two countries that trade with each other, called X and Y. According to the
text, inflation in Country X will have a greater impact on inflation in Country Y under
the ____ system. Now, consider two other countries that trade with each other, called A
and B. Unemployment in Country A will have a greater impact on unemployment in
Country B under the ____ system.
a.floating rate; fixed rate
b.floating rate; floating rate
c.fixed rate; fixed rate
d.fixed rate; floating rate
25) The phrase “the dollar was mixed in trading” means that:
a.the dollar was strong in some periods and weak in other periods over the last month
b.the volume of trading was very high in some periods and low in other periods
c.the dollar was involved in some currency transactions, but not others
d.the dollar strengthened against some currencies and weakened against others
26) Given a home country and a foreign country, purchasing power parity suggests that:
a.the inflation rates of both countries will be the same
b.the nominal interest rates of both countries will be the same
c.A and B
d.none of the above
27) Capital asset pricing theory would most likely suggest that the cost of capital is
generally ____ for ____.
a.higher; MNCs
b.lower; domestic firms
c.lower; MNCs
d.none of the above
28) Which of the following will probably not result in an increase in a country’s current
account balance (assuming everything else constant)?
a.A decrease in the country’s rate of inflation
b.A decrease in the country’s national income level
c.An increase in government restrictions in the form of tariffs or quotas
d.An appreciation of the country’s currency
e.All of the above will result in an increased current account balance
29) Which of the following is not a factor that should be considered in multinational
capital budgeting?
a.Blocked funds
b.Exchange rate fluctuations
c.Inflation
d.Financing arrangements
e.All of the above should be considered
30) Countries with a ____ rate of inflation tend to have a ____ interest rate.
a.high; low
b.low; high
c.high; high
d.A and B are correct
31) Which of the following is not true regarding options?
a.The buyer of a call option has the right to buy the currency at the strike price
b.The writer of a call option has the obligation to sell the currency to the buyer if the
option if exercised
c.The buyer of a put option has the right to sell the currency at the strike price
d.The writer of a put option has the obligation to sell the currency to the buyer if the
option is exercised
32) The premium on a euro call option is $.02. The exercise price is $1.32. The
break-even point is ____ for the buyer of the call, and ____ for the seller of the call.
(Assume zero transactions costs and that the buyer and seller of the put option are
speculators.)
a.$1.30; $1.30
b.$1.34; $1.30
c.$1.30; $1.34
d.$1.34; $1.34
33) The larger the degree by which the foreign interest rate exceeds the home interest
rate, the larger will be the forward discount of the foreign currency specified by the
interest rate parity (IRP) formula.
34) Sensitivity analysis allows for all of the following except:
a.accountability for uncertainty
b.focus on a single point estimate of future exchange rates
c.development of a range of possible future values
d.consideration of alternative scenarios
35) The term “global” target capital structure for an MNC represents the MNC’s capital
structure:
a.in the U.S
b.relative to competitors across all countries
c.where it has its largest subsidiary
d.when consolidating all of its subsidiaries
36) Which of the following is not true regarding the Mexican peso crisis?
a.Mexico encouraged firms and consumers to buy an excessive amount of imports
because the peso was stronger than it should have been
b.Many speculators based in the U.S. speculated on the potential decline in the peso by
investing their funds in Mexico
c.In December of 1994, the central bank of Mexico allowed the peso to float freely
d.The central bank of Mexico increased interest rates after the peso declined in value in
order to prevent investors from withdrawing their investments in Mexico’s debt
securities
e.All of the above are true
37) Assume that the British pound (£) futures price for September is $1.60. Given that
62,500 units are in a British pound futures contract, the seller of British pound futures
will receive $____ on the delivery date.
a.39,062.50
b.100,000
c.48,000
d.87,062.50
38) ____ is not a method of incorporating an adjustment for risk into the capital
budgeting analysis.
a.Discriminant analysis
b.Risk-adjusted discount rate
c.Sensitivity analysis
d.Simulation
39) Research has found that the options market is:
a.efficient before controlling for transaction costs
b.efficient after controlling for transaction costs
c.highly inefficient
d.none of the above
40) You just received a gift from a friend consisting of 1,000 Thai baht, which you
would like to exchange for Australian dollars (A$). You observe that exchange rate
quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576.
How many Australian dollars should you expect to receive for your baht?
a.A$39.93
b.A$25,043.48
c.A$553.00
d.none of the above
41) As opposed to transaction exposure, managing economic exposure involves
developing a(n) ____ solution.
a.short-term
b.long-term
c.immediate
d.none of the above
42) According to the text, the cost of capital for an international project will:
a.always be greater than the firm’s cost of capital
b.always be less than the firm’s cost of capital
c.always be the same as the firm’s cost of capital
d.none of the above
43) Severus Co. has to pay 5 million Canadian dollars for supplies it recently received
from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S.
dollar. Severus has determined that whenever the Canadian dollar appreciates against
the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent on the
following day. Based on this information, the Canadian dollar is expected to ____
tomorrow, and Severus would prefer to make payment ____.
a.depreciate by .8%; today
b.depreciate by .8%; tomorrow
c.appreciate by .8%; today
d.appreciate by .8%; tomorrow