1) Relatively high Japanese inflation may result in an increase in the supply of yen for
sale and a reduction in the demand for yen.
2) Assuming that a subsidiary is wholly owned, a subsidiary’s perspective is appropriate
in attempting to determine whether a project will enhance the firm’s value.
3) Futures contracts are standardized with respect to delivery date and the futures price
specified for the settlement date.
4) Locational arbitrage involves investing in a foreign country and covering against
exchange rate risk by engaging in forward contracts.
5) When a country’s currency is inconvertible, the earnings generated by a subsidiary in
that country cannot be remitted to the parent through currency conversion.
6) If potential acquirers are based in different countries, their required rates of return
when considering a specific target will only vary if the desired use of the target is
different.
7) When a U.S.-based MNC wants to determine whether to establish a subsidiary in a
foreign country, it will always accept that project if the foreign currency is expected to
appreciate.
8) Preauthorized payment is an arrangement that allows a corporation to charge a
customer’s bank account up to some limit.
9) Under a countertrade arrangement, the exporter ships the goods to the importer while
retaining title to the merchandise until it is sold.
10) The yield curve of every country has its own unique shape.
11) Fixed-rate loans have interest rates that are fixed for each year but adjust at the end
of each year in response to prevailing interest rates.
12) When the parent’s home currency is weak, remitted funds from foreign subsidiaries
will convert to a smaller amount of the home currency.
13) International trade generally results in ____ exposure to international political risk
and ____ exposure to international economic conditions, when compared to other
methods of international business.
a.higher; lower
b.higher; higher
c.lower; higher
d.lower; lower
14) Assume that a speculator received news that makes her believe that the yen will
appreciate or depreciate substantially in the near future, but she is not certain of the
direction. Also assume that exercise price of call and put options are the same. The most
appropriate method for speculation is ____and it may be achieved by ____.
a.straddle; purchase put option and purchase call option
b.strangle; purchase put option and sell call option
c.strangle; sell put option and sell put option
d.straddle; sell put option and buy call option
15) If an MNC invests excess cash in a foreign county, it would like the foreign
currency to ____; if an MNC issues bonds denominated in a foreign currency, it would
like the foreign currency to ____.
a.appreciate; depreciate
b.appreciate; appreciate
c.depreciate; depreciate
d.depreciate; appreciate
16) The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48.
The following interest rates exist:
U.S.Switzerland
360-day borrowing rate7%5%
360-day deposit rate6%4%
You need to purchase SF200,000 in 360 days. If you use a money market hedge, the
amount of dollars you need in 360 days is:
a.$101,904
b.$101,923
c.$98,770
d.$96,914
e.$92,307
17) If today’s exchange rate reflects any historical trends in Canadian dollar exchange
rate movements, but not all relevant public information, then the Canadian dollar
market is:
a.weak-form efficient
b.semistrong-form efficient
c.strong-form efficient
d.all of the above
18) A call option exists on British pounds with an exercise price of $1.60, a 90-day
expiration date, and a premium of $.03 per unit. A put option exists on British pounds
with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per
unit. You plan to purchase options to cover your future receivables of 700,000 pounds
in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of
the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after
deducting payment for the option premium.
a.$1,169,000
b.$1,099,000
c.$1,106,000
d.$1,143,100
e.$1,134,000
19) The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a
2% discount. What is the 90-day forward rate of the pound?
a.$1.52
b.$1.61
c.$1.37
d.$1.46
20) An obligation to purchase a specific amount of currency at a future point in time is
called a:
a.call option
b.spot contract
c.put option
d.forward contract
e.both B and D
21) An international project’s NPV is ____ related to the size of the initial investment
and ____ related to the project’s required rate of return.
a.positively; positively
b.positively; negatively
c.negatively; positively
d.negatively; negatively
22) An MNC may be more exposed to agency problems if most of its shares are held
by:
a.a few mutual funds
b.a widely dispersed set of individual investors
c.a few pension funds
d.all of the above would prevent agency problems
23) ____ represents any impact of exchange rate fluctuations on a firm’s future cash
flows.
a.Translation exposure
b.Economic exposure
c.Transaction exposure
d.None of the above
24) The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate
$.83:
a.U.S. demand for Swiss francs would exceed the supply of francs for sale and there
would be a shortage of francs in the foreign exchange market
b.U.S. demand for Swiss francs would be less than the supply of francs for sale and
there would be a shortage of francs in the foreign exchange market
c.U.S. demand for Swiss francs would exceed the supply of francs for sale and there
would be a surplus of francs in the foreign exchange market
d.U.S. demand for Swiss francs would be less than the supply of francs for sale and
there would be a surplus of Swiss francs in the foreign exchange market
25) The international Fisher effect (IFE) suggests that:
a.a home currency will depreciate if the current home interest rate exceeds the current
foreign interest rate
b.a home currency will appreciate if the current home interest rate exceeds the current
foreign interest rate
c.a home currency will appreciate if the current home inflation rate exceeds the current
foreign inflation rate
d.a home currency will depreciate if the current home inflation rate exceeds the current
foreign inflation rate
26) The valuation of a newly privatized business is generally more difficult than the
valuation of a publicly traded firm because:
a.It has previously operated in environments of very high competition
b.Interest rates in the countries where privatization takes place are extremely high
c.The stock markets in the countries where privatization takes place are overvalued
d.Economic conditions in the countries where privatization takes place are very
uncertain
e.None of the above
27) A forward contract can be used to lock in the ____ of a specified currency for a
future point in time.
a.purchase price
b.sale price
c.A or B
d.none of the above
28) Tennessee Co. conducts business in the U.S. and Canada. The net cash flows from
Canadian operations are expected to be C$500,000 next year. The Canadian dollar is
valued at about $.90. The net cash flows from U.S. operations are supposed to be
$200,000. To reduce sensitivity of its net cash flows without reducing its volume of
business in Canada, Tennessee Co. could:
a.purchase Canadian supplies
b.increase its borrowings in U.S
c.decrease prices on Canadian goods
d.decrease its borrowed funds in Canada
29) If interest rates on the euro are consistently below U.S. interest rates, then for the
international Fisher effect (IFE) to hold:
a.the value of the euro would often appreciate against the dollar
b.the value of the euro would often depreciate against the dollar
c.the value of the euro would remain constant most of the time
d.the value of the euro would appreciate in some periods and depreciate in other
periods, but on average have a zero rate of appreciation
30) If interest rate parity exists, transactions costs are zero, and the forward rate is an
accurate predictor of the future spot rate, then the effective financing rate on a foreign
currency:
a.would be equal to the U.S. interest rate
b.would be less than the U.S. interest rate
c.would be more than the U.S. financing rate
d.would be less than the U.S. interest rate if the forward rate exhibited a discount and
more than the U.S. interest rate of the forward rate exhibited a premium
31) Which of the following forecasting techniques would best represent the sole use of
the pattern of historical currency values of the euro to predict the euro’s future currency
value?
a.fundamental forecasting
b.market-based forecasting
c.technical forecasting
d.mixed forecasting
32) Assume that Parker Company will receive SF200,000 in 360 days. Assume the
following interest rates:
U.S.Switzerland
360-day borrowing rate7%5%
360-day deposit rate6%4%
Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc
is $.48. If Parker Company uses a money market hedge, it will receive ____ in 360
days.
a.$101,904
b.$101,923
c.$98,769
d.$96,914
e.$92,307
33) Economic exposure refers to:
a.the exposure of a firm’s international contractual transactions to exchange rate
fluctuations
b.the exposure of a firm’s local currency value to transactions between foreign exchange
traders
c.the exposure of a firm’s financial statements to exchange rate fluctuations
d.the exposure of a firm’s cash flows to exchange rate fluctuations
e.the exposure of a country’s economy (specifically GNP) to exchange rate fluctuations
34) A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____
pressure on U.S. interest rates, which places ____ pressure on U.S. bond prices.
a.upward; downward; upward
b.upward; downward; downward
c.upward; upward; downward
d.downward; upward; upward
e.downward; downward; upward
35) Other things being equal, a blocked funds restriction is more likely to have a
significant adverse effect on a project if the currency of that country is expected to ____
over time, and if the interest rate in that country is relatively ____.
a.appreciate; low
b.appreciate; high
c.depreciate; high
d.depreciate; low
36) Assume that the Japanese yen is expected to depreciate substantially over the next
year. The U.S.-based MNC has a subsidiary in Japan, where its costs exceed revenues.
The overall value of MNC will ____ because of the yen’s depreciation.
a.decrease
b.increase
c.remain unchanged
d.A and C are possible
37) Which of the following is not one of the major reasons for MNCs to forecast
exchange rates?
a.to decide in which foreign market to invest the excess cash
b.to decide where to borrow at the lowest cost
c.to determine whether to require the subsidiary to remit the funds or invest them
locally
d.to speculate on the exchange rate movements
38) If you purchase a straddle on euros, this implies that you:
a.finance the purchase of a call option by selling a put option in the euros
b.finance the purchase of a call option by selling a call option in the euros
c.finance the purchase of a put option by selling a put option in the euros
d.finance the purchase of a put option by selling a call option in the euros
e.none of the above
39) In a forward hedge, if the forward rate is an accurate predictor of the future spot
rate, the real cost of hedging payables will be:
a.highly positive
b.highly negative
c.zero
d.none of the above
40) A common purpose of inter-subsidiary leading or lagging strategies is to:
a.allow subsidiaries with excess funds to provide financing to subsidiaries with
deficient funds
b.assure that the inventory levels at subsidiaries are maintained within tolerable ranges
c.change the prices a high-tax rate subsidiary charges a low-tax rate subsidiary
d.measure the performance of subsidiaries according to how quickly subsidiaries remit
dividend payments to the parent
41) In a(n) ____ swap, two parties agree to exchange payments associated with bonds;
in a(n) ____ swap, two parties agree to periodically exchange foreign currencies.
a.interest rate; currency
b.currency; interest rate
c.interest rate; interest rate
d.currency; currency
42) Assume the British pound appreciates against the dollar while the Japanese yen
depreciates against the dollar. Which of the following is true?
a.Japanese exporters can increase American sales by shifting operations from their
British subsidiaries to Japan
b.British exporters can increase American sales by shifting operations from their
Japanese subsidiaries to Britain
c.American exporters can increase sales to Japan by shifting operations from Japanese
subsidiaries to American subsidiaries
d.B and C
43) If you have bought the right to sell, you are a:
a.call writer
b.put buyer
c.futures buyer
d.put writer
44) If Lazer Co. desired to lock in the maximum it would have to pay for its net
payables in euros but wanted to be able to capitalize if the euro depreciates substantially
against the dollar by the time payment is to be made, the most appropriate hedge would
be:
a.a money market hedge
b.purchasing euro put options
c.a forward purchase of euros
d.purchasing euro call options
e.selling euro call options
45) The Mexican one-year interest rate is 27 percent, while the U.S. one-year interest
rate is 9 percent. If a U.S. firm creates a one-year deposit in Mexico, the Mexican peso
would have to ____ against the U.S. dollar by ____ in order to make that investment
have an effective yield that is achievable in the U.S.
a.appreciate; 18%
b.depreciate; 36%
c.depreciate; 14%
d.appreciate; 14%
e.depreciate; 8.5%
46) Which of the following is not a strategy that could be used by an MNC to reduce its
exposure to a host government takeover?
a.Attempt to recover cash flows from a foreign investment as quickly as possible
b.Rely on unique supplies and/or technology
c.Hire local labor
d.Borrow local funds
e.All of the above are strategies to reduce an MNC’s exposure to a host government
takeover
47) Which of the following is not a form of exposure to exchange rate fluctuations?
a.transaction exposure
b.credit exposure
c.economic exposure
d.translation exposure
48) Currency options sold through an options exchange:
a.contain a commitment to the owner, and are standardized
b.contain a commitment to the owner, and can be tailored to the desire of the owner
c.contain a right but not a commitment to the owner, and can be tailored to the desire of
the owner
d.contain a right but not a commitment to the owner, and are standardized
49) Forward markets for currencies of developing countries are:
a.prohibited
b.less liquid than markets for developed countries
c.more liquid than markets for developed countries
d.only available for use by government agencies
50) A callable swap gives the ____ payer the right to terminate the swap; the MNC
would exercise this right if interest rates ____ substantially.
a.floating-rate; rise
b.floating-rate; fall
c.fixed-rate; rise
d.fixed-rate; fall
e.none of the above