1) If the one-year forward rate for the euro is $1.07, while the current spot rate is $1.05,
the expected percentage change in the euro is ____%.
a. 1.90
b. 2.00
c. -1.87
d. none of the above
2) In a countertrade transaction, banks on both ends act as intermediaries in the
processing of shipping documents and the collection of payment.
a. True
b. False
3) Which one of the following is a disadvantage of a fixed exchange rate system:
a. Importers are insulated from the risk that the currency will appreciate over time
b. Management of an MNC is less difficult
c. The government might change the value of the currency
d. Exporters are insulated from the risk that the currency will depreciate over time
4) If Salerno Inc. desired to lock in a minimum rate at which it could sell its net
receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates
substantially against the dollar by the time payment arrives, the most appropriate hedge
would be:
a. a money market hedge
b. a forward sale of yen
c. purchasing yen call options
d. purchasing yen put options
e. selling yen put options
5) 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
6) Your company will receive C$600,000 in 90 days. The 90-day forward rate in the
Canadian dollar is $.80. If you use a forward hedge, you will:
a. receive $750,000 today
b. receive $750,000 in 90 days
c. pay $750,000 in 90 days
d. receive $480,000 today
e. receive $480,000 in 90 days
7) To make an MNC’s operations coincide with its own goal, a host government could
do all of the following, except:
a. require the use of local employees for managerial positions
b. require social facilities
c. subsidize the MNC
d. require environmental controls
8) Currency correlations are generally negative.
a. True
b. False
9) Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic
and political considerations, only one eligible target remains in Malaysia. Klimewsky
would like you to value this target and has provided you with the following
information:
Refer to Exhibit 15-1. The target’s board has indicated that it finds a premium of 30
percent appropriate. You have been asked to negotiate for Klimewsky with the
Malaysian target. What is the maximum percentage premium you should be willing to
offer?
a. 30.0%
b. 25.9%
c. you should not offer any premium because the market’s valuation is below
Klimewsky’s valuation
d. none of the above
10) 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
11) From the perspective of Detroit Co., which has payables in Mexican pesos and
receivables in Canadian dollars, hedging the payables would be most desirable if the
expected real cost of hedging payables is ____, and hedging the receivables would be
most desirable if the expected real cost of hedging receivables is ____.
a. negative; positive
b. zero; positive
c. zero; zero
d. positive; negative
e. negative; negative
12) Which of the following is not true regarding host government attitudes towards
direct foreign investment (DFI)?
a. Host governments may offer incentives to MNCs in the form of subsidies in certain
circumstances
b. Host governments generally perceive DFI as a remedy for their national problems
c. The ability of a host government to attract DFI is dependent on the country’s markets
and resources
d. Some types of DFI will be more attractive to some governments than to others
e. All of the above are true
13) If an actual put option premium is less than what is suggested by the put-call parity
relationship, arbitrage can be conducted.
a. True
b. False
14) In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.
a. callable
b. putable
c. amortizing
d. zero-coupon
15) In an open account transaction, the exporter ships the goods to the importer but
retains title to the goods until they have been sold.
a. True
b. False
16) The bid-ask spread on an exchange rate can be used to directly determine:
a. how an exchange rate will change
b. the transaction cost of foreign exchange
c. the forward premium
d. the currency option premium
17) If interest rate parity does not hold, and the forward ____ is ____ the interest rate
differential, then foreign financing with a simultaneous hedge of that position in the
forward market results in higher financing costs than those of domestic financing
a. premium; higher than
b. discount; higher than
c. premium; less than
d. A and B
18) Assume that the U.S. inflation rate is higher than the New Zealand inflation rate.
This will cause U.S. consumers to ____ their imports from New Zealand and New
Zealand consumers to ____ their imports from the U.S. According to purchasing power
parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).
a. reduce; increase; appreciation
b. increase; reduce; appreciation
c. reduce; increase; depreciation
d. reduce; increase; appreciation
19) Consider a country that presently has a high level of unemployment because of
weak economic conditions. Its income levels are very low. This country may be an
attractive target as a result of ____ motives by U.S. firms that engage in direct foreign
investment.
a. revenue-related
b. cost-related
c. A and B
d. none of the above
20) Under a pegged exchange rate system, the home currency’s value is pegged to a
foreign currency.
a. True
b. False
21) 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.
22) To diversify internationally for the purpose of reducing risk, which strategy is
appropriate?
a. Establish subsidiaries in markets whose business cycles are the same as those where
existing subsidiaries are based
b. Establish a subsidiary in a market that has relatively low cost of labor or land
c. Establish a subsidiary in a market where the local currency is weak but is expected to
appreciate over time
d. Establish subsidiaries in markets whose business cycles differ from those where
existing subsidiaries are based
23) Any event that increases the supply of British pounds to be exchanged for U.S.
dollars should result in a(n) ____ in the value of the British pound 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
24) Lantana Co. conducts pays for many imports denominated in Canadian dollars. It is
a major exporter to France, and invoices the exports in euros. It also has much business
in U.S. dollars. It has no other international business and does not hedge its
transactions. It is about to obtain a small loan. It could reduce its exchange rate risk if
its loan is denominated in:
a. U.S. dollars
b. Euros
c. Canadian dollars
d. none of the above
25) A company may become more exposed or sensitive to an individual currency’s
movements over time for several reasons, including a reduction in hedging, a greater
involvement in the foreign country, or an increased use of the foreign currency.
a. True
b. False
26) If a firm repeatedly borrows a foreign currency portfolio, the variability of the
portfolio’s effective financing rate will be highest if the correlations between currencies
in the portfolio are ____ and the individual variability of each currency is ____.
a. high; low
b. high; high
c. low; low
d. low; high
27) The ____ the existing spot price relative to the strike price, the ____ valuable the
put options will be.
a. higher; less
b. higher; more
c. lower; less
d. lower; more
28) The Fed’s indirect method of intervention is to trade dollars for or against other
currencies.
a. True
b. False
29) A decentralized management style of MNC results in relatively high agency costs.
a. True
b. False
30) Which of the following is a reason to consider international business?
a. economies of scale.
b. exploit monopolistic advantages.
c. diversification.
d. all of the above
31) Both call and put option premiums are affected by the level of the existing spot
price relative to the strike price; for example, a high spot price relative to the strike
price will result in a relatively high premium for a call option but a relatively low
premium for a put option.
a. True
b. False
32) The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The
current exchange rate for the Japanese yen () is $0.0080. After supply and demand for
the Japanese yen has adjusted according to purchasing power parity, the new exchange
rate for the yen will be
a. $0.0078
b. $0.0082
c. $0.0111
d. $0.00492
e. None of the above
33) Delphi analysis examines the financial and political factors of various countries and
attempts to identify which factors help to distinguish between tolerable-risk and
intolerable-risk countries.
a. True
b. False