1) The highest amount a buyer of a call or a put option can lose is the exercise price.
a. True
b. False
2) Even if the interest rate associated with a foreign country is higher than the domestic
interest rate, the financing costs of a foreign bond will always be lower than the
financing rate of a domestic bond as long as the currency depreciates over the lifetime
of a bond.
a. True
b. False
3) According to the text, the average foreign exchange trading around the world ____
per day.
a. equals about $200 billion
b. equals about $400 billion
c. equals about $700 billion
d. exceeds $1 trillion
4) According to the international fisher effect (IFE), the exchange rate percentage
change should be approximately equal to the differential in income levels between two
countries.
a. True
b. False
5) Assume that Japan and the United States frequently trade with each other. Under the
freely floating exchange rate system, high inflation in the U.S. will place ____ pressure
on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____
inflation in Japan.
a. upward; reduce; unchanged
b. upward; increase; higher
c. downward; reduce; unchanged
d. downward; increase; higher
6) The ADR of a British firm is convertible into 3 shares of stock. The share price of the
firm was 30 pounds when the British market closed. When the U.S. market opens, the
pound is worth $1.63. The price of this ADR should be $____.
a. 48.90
b. 146.70
c. 55.21
d. none of the above
7) Exhibit 14-1
Assume that Baps Corporation is considering the establishment of a subsidiary in
Norway. The initial investment required by the parent is $5,000,000. If the project is
undertaken, Baps would terminate the project after four years. Baps’ cost of capital is
13%, and the project is of the same risk as Baps’ existing projects. All cash flows
generated from the project will be remitted to the parent at the end of each year. Listed
below are the estimated cash flows the Norwegian subsidiary will generate over the
project’s lifetime in Norwegian kroner (NOK):
The current exchange rate of the Norwegian kroner is $.135. Baps’ exchange rate
forecast for the Norwegian kroner over the project’s lifetime is listed below:
Refer to Exhibit 14-1. What is the net present value of the Norwegian project?
a. -$803,848
b. $5,803,848
c. $1,048,829
d. none of the above
8) When using a checklist approach to assess country risk, factors should be converted
to some numerical forms and assigned equal weights.
a. True
b. False
9) Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35.
The value of the Peruvian Sol in Canadian dollars is:
a. about .3621 Canadian dollars
b. about .3977 Canadian dollars
c. about 2.36 Canadian dollars
d. about 2.51 Canadian dollars
10) Franchising is the process by which national governments sell state owned
operations to corporations and other investors.
a. True
b. False
11) Assume that U.S. and British investors require a real return of 2%. If the nominal
U.S. interest rate is 15%, and the nominal British rate is 13%, then according to the IFE,
the British inflation rate is expected to be about ____ the U.S. inflation rate, and the
British pound is expected to ____.
a. 2 percentage points above; depreciate by about 2%
b. 3 percentage points above; depreciate by about 3%
c. 3 percentage points below; appreciate by about 3%
d. 3 percentage points below; depreciate by about 3%
e. 2 percentage points below; appreciate by about 2%
12) Trade-related foreign exchange transactions are more responsive to news than
financial flow transactions.
a. True
b. False
13) Yomance Co. is a U.S. company that has exposure to Japanese yen and British
pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The
present exchange rate of the Japanese yen is $.012 while the present exchange rate of
the British pound is $1.50. Yomance Co. has not hedged its positions. The yen and
pound movements against the dollar are highly and positively correlated. If the dollar
strengthens, then Yomance Co. will:
a. benefit, because the dollar value of its pound position exceeds the dollar value of its
yen position
b. benefit, because the dollar value of its yen position exceeds the dollar value of its
pound position
c. be adversely affected, because the dollar value of its pound position exceeds the
dollar value of its yen position
d. be adversely affected, because the dollar value of its yen position exceeds the dollar
value of its pound position
14) Which of the following forecasting techniques would best represent the use of
relationships between economic factors and exchange rate movements to forecast the
future exchange rate?
a. fundamental forecasting
b. market-based forecasting
c. technical forecasting
d. mixed forecasting
15) On January 1st, Madison Co. ordered raw material from Japan and agreed to pay
100 million yen for this order on April 1st. It negotiated a 3-month forward contract to
obtain 100 million Japanese yen on that date at $.009. On February 1st, the Japanese
firm informed Madison Co. that it won’t be able to fulfill that order. The Japanese yen
spot rate on February 1st is $.0087 and 2-month forward rate exhibits 3% discount. To
offset its existing contract Madison Co. will negotiate a forward contract to ____ for the
date of April 1st and the profit/loss generated from this transaction is a ____ U.S.
dollars.
a. sell yen; gain of $60,000
b. sell yen; loss of $60,000
c. buy yen; gain of $30,000
d. to buy yen; loss of $30,000
16) Under the system known as the “dirty” float, official boundaries for the exchange
rate exist, but they are wider than they are under a fixed exchange rate system.
a. True
b. False
17) Country risk assessment should be used when:
a. determining whether to establish a subsidiary in a foreign country
b. determining whether to continue business in a foreign country
c. A and B
d. none of the above
18) A macro-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
19) There is an advantage to using equity rather than debt financing because dividend
payments are tax deductible.
a. True
b. False
20) Sometimes, a multinational project may appear feasible from the subsidiary’s
perspective but not from the parent’s perspective and vice versa.
a. True
b. False
21) Assume the U.S. financing rate is 10 percent and that the financing rate in Germany
is 9 percent. An MNC would be indifferent between financing in dollars and financing
in euros next year if the euro is expected to ____.
a. appreciate by 0.92%
b. depreciate by 0.92%
c. appreciate by 1.00%
d. depreciate by 1.00%
22) If a government wishes to stimulate its economy in the form of increased foreign
demand for its country’s products, it could attempt to weaken its currency.
a. True
b. False
23) From an acquirer’s perspective, the ideal conditions would be a weak foreign
currency at the time of acquisition and a strengthening of the foreign currency over time
as funds are remitted back to the parent.
a. True
b. False
24) Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value of
the Thai baht (THB), which has a current exchange rate of $0.022. Inflation in the U.S.
is expected to be 3% during the next year, while inflation in Thailand is expected to be
10%. Under this scenario, Pro Corp would forecast the value of the baht at the end of
the year to be:
a. $0.023
b. $0.021
c. $0.020
d. None of the above
25) Which of the following is not true regarding Thailand?
a. Thailand was one of the slowest growing countries before the Asian crisis
b. High levels of spending and low levels of saving placed upward pressure on prices of
real estate, products, and on Thailand’s local interest rate
c. Thailand’s baht was linked to the dollar prior to July 1997, which made Thailand an
attractive site for foreign investors
d. Thai banks provided many loans that were very risky in their attempt to make use of
all of their funds
e. All of the above are true
26) Along the frontier of efficient project portfolios, exactly one portfolio can be
singled out as “optimal” for all MNCs.
a. True
b. False
27) While acquisitions of privatized businesses may be attractive because of the
potential for MNCs to increase their efficiency, the valuation of these businesses is
generally more difficult.
a. True
b. False
28) The Smithsonian Agreement was an agreement to allow currencies of major
countries to float without any barriers.
a. True
b. False
29) Which of the following is not a host country characteristic than can affect an MNC’s
capital structure decision?
a. The strength of host country currencies
b. The country risk in host countries
c. Political decisions to increase penalties for criminals
d. Tax laws in host countries
30) 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%
31) 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