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1) A cross exchange rate expresses the amount of one foreign currency per unit of
another foreign currency.
a. True
b. False
2) If interest rate parity exists, and transaction costs do not exist, the money market
hedge will yield the same result as the ____ hedge.
a. put option
b. forward
c. call option
d. none of the above
3) 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
4) If an MNC is hedging various currencies, it should measure the real cost of hedging
in each currency as a dollar amount for comparison purposes.
a. True
b. False
5) Which of the following theories identifies specialization as a reason for international
business?
a. theory of comparative advantage
b. imperfect markets theory
c. product cycle theory
d. none of the above
6) 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
7) MNCs commonly consider direct foreign investment because it can improve their
profitability and enhance shareholder wealth.
a. True
b. False
8) Which of the following theories identifies the non-transferability of resources as a
reason for international business?
a. theory of comparative advantage
b. imperfect markets theory
c. product cycle theory
d. none of the above
9) If the forward rate was expected to be an unbiased estimate of the future spot rate,
and interest rate parity holds, then:
a. covered interest arbitrage is feasible
b. the international Fisher effect (IFE) is supported
c. the international Fisher effect (IFE) is refuted
d. the average absolute error from forecasting would equal zero
10) Which of the following payment terms provides the supplier with the greatest
degree of protection?
a. letters of credit
b. consignment
c. prepayment
d. drafts (sight/time)
11) The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S.
balance of payments account.
a. True
b. False
12) Which of the following is not an instrument used by U.S.-based MNCs to cover
their foreign currency positions?
a. forward contracts
b. futures contracts
c. non-deliverable forward contracts
d. options
e. all of the above are instruments used to cover foreign currency positions
13) Since earnings can affect stock prices, many MNCs are concerned about translation
exposure.
a. True
b. False
14) Any restructuring of operations that ____ the difference between a foreign
currency's inflows and outflows may ____ economic exposure.
a. reduces; increase
b. increases; reduce
c. reduces; reduce
d. A and B
e. none of the above
15) If a foreign country's consumers tend to only purchase products that are produced
locally, the least effective strategy for a U.S. firm is to:
a. use a licensing arrangement with a local firm in that country
b. enter into a joint venture in that country
c. develop a subsidiary (under the U.S. name) that manufactures and sells products in
that country
d. develop a subsidiary (under the U.S. name) that manufactures products in that
country and exports them to border countries
16) When a foreign subsidiary is not wholly owned by the parent and a foreign project
is partially financed with retained earnings of the parent and of the subsidiary, then:
a. the parent's perspective should be used to evaluate a foreign project
b. the subsidiary's perspective should be used to evaluate a foreign project
c. the foreign project should enhance the value of both the parent and the subsidiary
d. none of the above
17) ____ exposure is the degree to which the value of contractual transactions can be
affected by exchange rate fluctuations.
a. Transaction
b. Economic
c. Translation
d. None of the above
18) To reduce economic exposure when a foreign currency has a greater impact on cash
inflows, an MNC could reduce its level of foreign sales, increase its foreign supply
orders, or restructure debt to increase debt payments in the foreign currency.
a. True
b. False
19) According to the CAPM, the required rate of return on stock is a positive function
of all of the following, except:
a. the risk-free rate of interest
b. the market rate of return
c. the stock's beta
d. the company's earnings
20) Using indirect intervention, the Fed attempts to affect the dollar's value indirectly
by influencing the factors that determine it, such as interest rates.
a. True
b. False
21) If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then
the British pound (£) is expected to ____ by about ____%, according to the
international Fisher effect (IFE).
a. depreciate; 2.9
b. appreciate; 2.9
c. depreciate; 1.0
d. appreciate; 1.0
e. none of the above
22) Once a decision to establish a foreign subsidiary has been made, it is irreversible.
Therefore, no periodic monitoring of the project is necessary.
a. True
b. False
23) The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The
spot rate for the British pound is $1.50. According to the international Fisher effect
(IFE), the British pound should adjust to a new level of:
a. $1.47
b. $1.53
c. $1.43
d. $1.57
24) If the currency denominating a foreign bond depreciates against the firm's home
currency, the funds needed to make coupon payments will increase.
a. True
b. False
25) Hanson Corp. frequently uses a forward hedge to hedge its British pound (£)
payables. For the next quarter, Hanson has identified its net exposure to the pound as
being £1,000,000. The 90-day forward rate is $1.50. Furthermore, Hanson's financial
center has indicated that the possible values of the British pound at the end of next
quarter are $1.57 and $1.59, with probabilities of .50 and .50, respectively. Based on
this information, what is the expected real cost of hedging payables?
a. $80,000
b. -$80,000
c. $1,570,000
d. $1,580,000
26) Which of the following is true?
a. The futures market is primarily used by speculators while the forward market is
primarily used for hedging
b. The futures market is primarily used for hedging while the forward market is
primarily used for speculating
c. The futures market and the forward market are primarily used for speculating
d. The futures market and the forward market are primarily used for hedging
27) ____ is (are) income received by investors on foreign investments in financial
assets (securities).
a. Portfolio income
b. Direct foreign income
c. Unilateral transfers
d. Factor income
28) 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
29) Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%.
According to the international Fisher effect, British pound's spot exchange rate should
____ by about ____ over the year.
a. depreciate; 1.9%
b. appreciate; 1.9%
c. depreciate; 3.94%
d. appreciate; 3.94%
30) To fully benefit from use of foreign raw materials:
a. establish a subsidiary in a market where raw materials are cheap and accessible
b. sell the finished product to countries where the raw materials are more expensive
c. establish a subsidiary in a new market that can sell products produces elsewhere
d. A and B
31) Insurance purchased to cover the risk of expropriation ____, and will typically
cover ____.
a. will be the same for all firms; only a portion of the firm's total exposure
b. will be the same for all firms; all of the firm's total exposure
c. will be dependent on the firm's risk; all of the firm's total exposure
d. will be dependent on the firm's risk; only a portion of the firm's total exposure
32) The following regression was conducted for the exchange rate of the Cyprus pound
(CYP):
Regression results indicate that a0 = 0 and a1 = 2. 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 Cyprus
pound in the future
33) The U.S. typically has a balance of trade surplus in its trade with ____.
a. China
b. Japan
c. A and B
d. none of the above
34) A micro-assessment of country risk:
a. is adjusted for the particular business of the firm involved
b. excludes all aspects relevant to a particular firm or project
c. A and B
d. none of the above
35) Economic exposure represents any impact of exchange rate fluctuations on a firm's
future cash flows and thus includes transaction exposure.
a. True
b. False
36) One argument for why subsidiaries should be only partly-owned by the parent is:
a. that the potential conflict of interests between the MNC's managers and shareholders
is avoided
b. that the potential conflict of interests between the MNC's majority shareholders and
minority shareholders is avoided
c. that the potential conflict of interests between the MNC's existing creditors is avoided
d. to motivate subsidiary managers by allowing them partial ownership
37) The Sarbanes-Oxley Act improves corporate governance of MNCs because it:
a. makes executives more accountable for verifying financial statements
b. eliminates stock options as a form of compensation
c. ties executive compensation to firm performance
d. places a limit on the amount of funds that managers can spend
38) The earnings of a private European firm are 5 million, and the average P/E ratio of
publicly traded European firms in the same industry is 12. This firm is considering the
possibility of going public in which it would issue one million shares. If the private firm
has similar growth potential and other characteristics similar to other publicly traded
firms in the industry, its value can be estimated as ____ million euros.
a. 2.4
b. 60.0
c. 41.7
d. 12
39) The required rate of return used to discount the relevant cash flows from a foreign
project may differ from the MNC's cost of capital because of that particular project's
risk.
a. True
b. False
40) When a perfect hedge is not available to eliminate transaction exposure, the firm
may consider methods to at least reduce exposure, such as ____.
a. leading
b. lagging
c. cross-hedging
d. currency diversification
e. all of the above
