1) Research indicates that deviations from purchasing power parity (PPP) are reduced
over the long run.
a. True
b. False
2) To reduce the exposure to a host government takeover, an MNC may attempt to
recover cash flows from the foreign project more quickly or hire local labor.
a. True
b. False
3) When currency options are not standardized and traded over-the-counter, there is
____ liquidity and a ____ bid/ask spread.
a. less; narrower
b. more; narrower
c. more; wider
d. less; wider
4) You are a speculator who sells a put option on Canadian dollars for a premium of
$.03 per unit, with an exercise price of $.86. The option will not be exercised until the
expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration
date, your net profit per unit is:
a. -$.08
b. -$.03
c. $.05
d. $.08
e. none of the above
5) A ____ is not normally used for hedging long-term transaction exposure.
a. long-term forward contact
b. futures contract
c. currency swap
d. parallel loan
6) The “J curve” effect describes:
a. the continuous long-term inverse relationship between a country’s current account
balance and the country’s growth in gross national product
b. the short-run tendency for a country’s balance of trade to deteriorate even while its
currency is depreciating
c. the tendency for exporters to initially reduce the price of goods when their own
currency appreciates
d. the reaction of a country’s currency to initially depreciate after the country’s inflation
rate declines
7) 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
8) The transaction exposure of two inflow currencies is offset when the correlation
between the currencies is high.
a. True
b. False
9) A product cycle is the process by which a firm provides a specialized sales or service
strategy, support assistance, and possibly an initial investment in the franchise in
exchange for periodic fees.
a. True
b. False
10) The lower bound of a put option premium is the greater of zero and the difference
between the exercise price and the spot rate; the upper bound of a currency put option is
the exercise price.
a. True
b. False
11) Which of the following is correct?
a. The longer the time to maturity, the less the value of a currency call option, other
things equal
b. The longer the time to maturity, the less the value of a currency put option, other
things equal
c. The higher the spot rate relative to the exercise price, the greater the value of a
currency put option, other things equal
d. The lower the exercise price relative to the spot rate, the greater the value of a
currency call option, other things equal
12) Which of the following countries purchases the largest amount of exports by U.S.
firms?
a. Mexico
b. Japan
c. Canada
d. France
13) If interest rate parity exists, the forward hedge will always outperform the money
market hedge.
a. True
b. False
14) A firm without any exposure to foreign exchange rates would likely increase this
exposure the most by:
a. borrowing domestically
b. borrowing a portfolio of foreign currencies that are not highly correlated
c. borrowing a portfolio of foreign currencies that are highly correlated
d. borrowing two foreign currencies that are negatively correlated
15) The premium on a pound put option is $.03 per unit. The exercise price is $1.60.
The break-even point is ____ for the buyer of the put, and ____ for the seller of the put.
(Assume zero transactions costs and that the buyer and seller of the put option are
speculators.)
a. $1.63; $1.63
b. $1.63; $1.60
c. $1.63; $1.57
d. $1.57; $1.63
e. none of the above
16) Economic exposure can affect:
a. MNCs only
b. purely domestic firms only
c. A and B
d. none of the above
17) Exhibit 20-1
Assume a U.S.-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8%
for one year. Also assume that the spot rate of the leu is $.00012 and the one-year
forward rate of the leu is $.00010. The expected spot rate of the leu one-year from now
is $.00011.
Refer to Exhibit 20-1. What is the effective financing rate for the MNC assuming it
borrows leu on a covered basis?
a. 10%
b. -10%
c. -1%
d. 1%
e. none of the above
18) Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to
Italy invoiced in dollars. Additionally, Lazer Co. has a subsidiary in Korea that
produces computers in South Korea and sells them there. Lazer also has competitors in
different countries. Lazer Co. is subject to:
a. transaction exposure
b. economic exposure
c. translation exposure
d. all of the above
19) Which of the following is not directly considered in the decision by a U.S.-based
MNC to divest a subsidiary?
a. the required rate of return on the subsidiary
b. forecasted exchange rates of the subsidiary’s currency relative to the dollar
c. the initial outlay on the project
d. the possible selling price of the project
20) An increase in the current account deficit will place ____ pressure on the home
currency value, other things equal.
a. upward
b. downward
c. no
d. upward or downward (depending on the size of the deficit)
21) If the home currency begins to appreciate against other currencies, this should ____
the current account balance, other things equal (assume that substitutes are readily
available in the countries, and that the prices charged by firms remain the same).
a. increase
b. have no impact on
c. reduce
d. all of the above are equally possible
22) Cross-hedging may involve taking a forward position in a currency that is highly
correlated with the currency an MNC needs to hedge.
a. True
b. False
23) Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a
180-day call option with an exercise price of $.68 and a premium of $.02 is available.
Also, a 180-day put option with an exercise price of $.66 and a premium of $.02 is
available. Mender plans to purchase options to hedge its receivables position. Assuming
that the spot rate in 180 days is $.67, what is the amount received from the currency
option hedge (after considering the premium paid)?
a. $330,000
b. $325,000
c. $320,000
d. $340,000
24) Direct foreign investment would typically be welcomed if:
a. the products to be produced are substitutes for other locally produced products
b. people from the country of the company’s headquarter are transferred to the foreign
country to work at the subsidiary
c. the products to be produced are going to be exported
d. all of the above
25) An MNC frequently uses either forward or futures contracts to hedge its exposure to
foreign receivables. To do so, the MNC can either sell the foreign currency forward or
sell futures.
a. True
b. False
26) Assume that the British government eliminates all controls on imports by British
companies. Other things being equal, the U.S. demand for pounds would ____, the
supply of pounds for sale would ____, and the equilibrium value of the pound would
____.
a. increase; increase; increase
b. decrease; increase; decrease
c. remain unchanged; increase; decrease
d. remain unchanged; increase; increase
27) Assume that the dollar has been consistently appreciating over a long period. The
Fed decides to counteract this movement by intervening in the foreign exchange market
using nonsterilized intervention. The Fed would
a. buy dollars with foreign currency and simultaneously sell Treasury securities for
dollars
b. buy dollars with foreign currency and simultaneously buy Treasury securities with
dollars
c. sell dollars for foreign currency and simultaneously sell Treasury securities for
dollars
d. sell dollars for foreign currency and simultaneously buy Treasury securities with
dollars
e. none of the above
28) Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the
equilibrium prices of their currencies adjust to ____ changes in supply and demand
conditions.
a. less; even minor
b. less; only large
c. more; even minor
d. more; only large
e. none of the above
29) Which of the following forecasting techniques would best represent sole use of
today’s spot exchange rate of the euro to forecast the euro’s future exchange rate?
a. fundamental forecasting
b. market-based forecasting
c. technical forecasting
d. mixed forecasting
30) Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____
in the value of the Japanese yen 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
31) Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure.
Mercury forecasts that its earnings next year will be 10 million. Mercury decides to
hedge the expected earnings by selling 10 million forward. During the next year, the
euro appreciated. Mercury’s consolidated earnings were ____ affected by the euro’s
movement, and Mercury’s hedge position was ____ affected by the euro’s movement.
a. favorably; favorably
b. favorably; adversely
c. adversely; favorably
d. adversely; adversely
32) Exhibit 10-2
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments
denominated in both euros and Canadian dollars in one month. Based on today’s spot
rates, the dollar value of the funds to be received is estimated at $500,000 for the euros
and $300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia
estimates the standard deviation of monthly percentage changes to be 8 percent for the
euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro
and the Canadian dollar is 0.30.
Refer to Exhibit 10-2. What is the portfolio standard deviation?
a. 3.00%
b. 5.44%
c. 17.98%
d. none of the above
33) Translation exposure affects an MNC’s cash flows.
a. True
b. False
34) A money market hedge involves taking a money market position to cover a future
payables or receivables position.
a. True
b. False