1) A parallel loan represents simultaneous loans provided by two parties with an
agreement to repay at a specified point in the future.
a. True
b. False
2) If interest rate parity does not hold, and the forward ____ is greater than the interest
rate differential, then covered interest arbitrage is feasible for investors residing in the
____ country.
a. premium; home
b. discount; home
c. premium; foreign
d. B and C
3) When an MNC finances with a floating-rate loan in a currency that matches its
long-term cash inflows, the MNC is exposed to ____ risk.
a. short; interest rate
b. long; interest rate
c. short; exchange rate
d. none of the above
4) Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1 . It is
now May 1 . Johnson has negotiated a non-deliverable forward contract with its bank.
The reference rate is the baht’s closing exchange rate (in $) quoted by Thailand’s central
bank in 90 days. The baht’s spot rate today is $.02. If the rate quoted by Thailand’s
central bank on August 1 is $.022, Johnson will ____ $____.
a. pay; 20,000
b. be paid; 20,000
c. pay; 2,000
d. be paid; 2,000
e. none of the above
5) Purchasing power parity is used in:
a. technical forecasting
b. fundamental forecasting
c. market-based accounting
d. all of the above
6) Shareholders can have influence on a wider variety of management issues in some
countries.
a. True
b. False
7) When the value from the prior period of an influential factor affects the forecast in
the future period, this is an example of a(n):
a. lagged input
b. instantaneous input
c. simultaneous input
d. B and C
8) An option writer is the seller of a call or a put option.
a. True
b. False
9) If the futures rate is lower than the forward rate, astute investors would attempt to
simultaneously buy futures and sell forward. Such actions would place downward
pressure on the futures price and upward pressure on the forward rate.
a. True
b. False
10) The Bretton Woods Agreement created a system under which exchange rates are
determined by market forces without intervention by various governments.
a. True
b. False
11) According to the IFE, when the nominal interest rate at home exceeds the nominal
interest rate in the foreign country, the home currency should depreciate.
a. True
b. False
12) Which of the following is probably not an example of the use of forward contracts
by an MNC?
a. Hedging pound payables by selling pounds forward
b. Hedging peso receivables by selling pesos forward
c. Hedging yen payables by purchasing yen forward
d. Hedging peso payables by purchasing pesos forward
e. All of the above are examples of using forward contracts
13) LIBOR is:
a. the interest rate commonly charged for loans between banks
b. the average inflation rate in European countries
c. the maximum loan rate ceiling on loans in the international money market
d. the maximum deposit rate ceiling on deposits in the international money market
e. the maximum interest rate offered on bonds that are issued in London
14) The potential forecast error is larger for currencies that are more volatile.
a. True
b. False
15) Assume that interest rates of most industrialized countries are similar to the U.S.
interest rate. In the last few months, the currencies of all industrialized countries
weakened substantially against the U.S. dollar. If non-U.S. firms based in these
countries financed with U.S. dollars during this period (even when they had no
receivables in dollars), their effective financing rate would have been:
a. negative
b. zero
c. positive, but lower than the interest rate of their respective countries
d. higher than the interest rate of their respective countries
16) The Theory of Comparative Advantage begins by assuming that a given firm first
becomes established in its home country and may subsequently penetrate foreign
markets via geographic or product differentiation.
a. True
b. False
17) If a currency’s forward rate exhibits a premium, that currency is forced to
depreciate.
a. True
b. False
18) A firm produces goods for which substitute goods are produced in all countries.
Depreciation of the firm’s local currency should:
a. decrease local sales as foreign competition in local markets is reduced
b. decrease the firm’s exports denominated in the local currency
c. decrease the returns earned on the firm’s foreign bank deposits
d. decrease the firm’s cash outflow required to pay for imported supplies denominated
in a foreign currency
e. none of the above
19) Euronotes are unsecured debt securities whose interest rate is based on the London
Interbank Offer Rate (LIBOR) with typical maturities of one, three, and six months.
a. True
b. False
20) Forward contracts are usually liquidated by actual delivery of the currency, while
futures contracts are usually liquidated by offsetting transactions.
a. True
b. False
21) Under purchasing power parity, the future spot exchange rate is a function of the
initial spot rate in equilibrium and:
a. the income differential
b. the forward discount or premium
c. the inflation differential
d. none of the above
22) A motivation for forecasting exchange rate volatility is to obtain a range
surrounding the forecast.
a. True
b. False
23) Celine Co. will need 500,000 in 90 days to pay for German imports. Today’s 90-day
forward rate of the euro is $1.07. There is a 40 percent chance that the spot rate of the
euro in 90 days will be $1.02, and a 60 percent chance that the spot rate of the euro in
90 days will be $1.09. Based on this information, the expected value of the real cost of
hedging payables is $____.
a. -35,000
b. 25,000
c. -1,000
d. 1,000
24) An MNC that plans to acquire a target would prefer to make a bid at a time when
the local stock market prices are generally ____. Assume that economic conditions are
held constant when completing this statement.
a. low
b. high
c. volatile
d. none of the above
25) Which of the following events would most likely result in an appreciation of the
U.S. dollar?
a. U.S. inflation is very high
b. The Fed indicates that it will raise U.S. interest rates
c. Future U.S. interest rates are expected to decline
d. Japan is expected to increase interest rates in the near future
26) Exchange rates for purposes of multinational capital budgeting:
a. are very difficult to forecast
b. can be easily hedged with currency swaps
c. are unimportant, as they do not affect the cash flows of the multinational project
d. all of the above