1) Due to market imperfections, the cost of factors of production (such as labor) may
differ substantially across countries.
2) Because increased external financing by a foreign subsidiary reduces the external
financing needed by the parent, such an action will not affect the overall MNC’s cost of
capital.
3) When a foreign currency is perceived by a firm to be undervalued, the firm may
consider direct foreign investment in that country, as the initial outlay should be
relatively low.
4) The ideal time to purchase a foreign company is when the spot rate of that company’s
currency is perceived to be very high and is expected to decrease over time.
5) Under a fixed exchange rate system, U.S. inflation would have a greater impact on
inflation in other countries than it would under a freely floating exchange rate system.
6) Implementing a forward or money market hedge to hedge translation exposure may
increase transaction exposure.
7) Two highly negatively correlated currencies move in tandem almost as if they are the
same currency.
8) A high correlation between two currencies would be desirable for achieving low
exchange rate risk if one is an inflow currency and the other is an outflow currency.
9) Along the frontier of efficient project portfolios, exactly one portfolio can be singled
out as “optimal” for all MNCs.
10) U.S.-based MNCs are typically not monitored by mutual funds and pension funds,
as these institutions rarely hold stock in MNCs.
11) When using factoring to finance international trade, a bank will provide a loan to
the exporter secured by an assignment of the account receivable.
12) A target’s previous cash flows are typically an accurate indicator of future cash
flows, especially when the target’s cash flows would have to be converted into the
acquirer’s home currency as they are remitted to the parent.
13) Since the forward rate does not capture the nominal interest rate between two
countries, it should provide a less accurate forecast for currencies in high-inflation
countries than the spot rate.
14) If inflation increases substantially in Australia while U.S. inflation remains
unchanged, this is expected to place ____ pressure on the value of the Australian dollar
with respect to the U.S. dollar.
a.upward
b.downward
c.either upward or downward (depending on the degree of the increase in Australian
inflation)
d.none of the above; there will be no impact
15) Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro
is going to depreciate substantially over time. Assuming the firm is correct, the ideal
strategy is to:
a.sell euros forward
b.purchase euro currency put options
c.purchase euro currency call options
d.purchase euros forward
e.remain unhedged
16) Assume the U.S. one-year interest rate is 15%, while the South African one-year
interest rate is 13%. If the South African rand ____ by ____%, a U.S.-based MNC is
indifferent between investing in dollars and investing in rand.
a.depreciates; 1.77
b.appreciates; 1.74
c.appreciates; 1.77
d.depreciates; 1.74
17) To the extent that individual economies are ____ each other, net cash flows from a
portfolio of subsidiaries should exhibit ____ variability, which may reduce the
probability of bankruptcy.
a.dependent on; less
b.dependent on; more
c.independent of; less
d.independent of; more
18) If a speculator expects that the Fed will intervene by exchanging euros for U.S.
dollars, she would most likely ____ to capitalize on this intervention.
a.purchase euro put options
b.purchase euro futures contracts
c.purchase yen call options
d.sell U.S. Treasury bonds
19) According to the text, a firm may be able to achieve a “more efficient” project
portfolio if it:
a.focuses solely on one product
b.focuses solely on one location to market what it produces
c.A and B
d.none of the above
20) Which of the following is indicated by research regarding purchasing power parity
(PPP)?
a.PPP clearly holds in the short run
b.Deviations from PPP are reduced in the long run
c.PPP clearly holds in the long run
d.There is no relationship between inflation differentials and exchange rate movements
in the short run or long run
21) A ____ provides a summary of freight charges and conveys title to the merchandise.
a.letter of credit
b.banker’s acceptance
c.bill of lading
d.bill of exchange
22) Agency costs faced by multinational corporations (MNCs) may be larger than those
faced by purely domestic firms because
a.Monitoring of managers located in foreign countries is more difficult
b.Foreign subsidiary managers raised in different cultures may not follow uniform goals
c.MNCs are relatively large
d.All of the above
e.A and B only
23) If a country experiences an increase in interest rates relative to U.S. interest rates,
the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds
to purchase U.S. securities should ____, and there is ____ pressure on its currency’s
equilibrium value.
a.increase; decrease; downward
b.decrease; increase; upward
c.increase; decrease; upward
d.decrease; increase; downward
e.increase; increase; upward