1) American style options can be exercised any time up to maturity.
2) Realignment in the exchange rates of banks will eliminate locational arbitrage. More
specifically, market forces will increase the ask rate of the bank from which the
currency was bought to conduct locational arbitrage and will decrease the bid rate of the
bank to which the currency was sold to conduct locational arbitrage.
3) When the Japanese yen appreciates against the U.S. dollar, this means that the U.S.
dollar is strengthening relative to the yen.
4) Translation exposure affects an MNC’s cash flows.
5) The euro is pegged to other currencies of European countries that have not adopted
the euro.
6) Exchange rates one year in advance are typically forecasted with almost perfect
accuracy for the major currencies, but not for currencies of smaller countries.
7) The commission earned by the bank for accepting a draft is reflected in the
all-in-rate.
8) According to purchasing power parity (PPP), if a foreign country’s inflation rate is
below the inflation rate at home, home country consumers will increase their imports
from the foreign country and foreign consumers will lower their demand for home
country products. These market forces cause the foreign currency to appreciate.
9) If the Bank of England announces that it will start to frequently intervene in order to
reduce the fluctuations of British pound, the premiums on call and put options will
increase.
10) When expecting a foreign currency to depreciate, a possible way to speculate on
this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in
the foreign country, and use the proceeds from this investment to repay the dollar loan.
11) One reason an MNC may consider foreign financing is that the proceeds could be
used to offset a foreign net payables position.
12) Under FASB 52, consolidated earnings are sensitive to the functional currency’s
weighted average exchange rate.
13) The sale of accounts receivable to a third party for a discount is called factoring.
14) In what is known as dynamic hedging, banks always hedge open positions in any
foreign currencies.
15) A purely domestic firm may be affected by exchange rate fluctuations if it faces at
least some foreign competition.
16) Even if translation exposure does not affect cash flows, it is a concern of many
MNCs.
17) If the French government wants to decrease inflation in France, it will exchange
foreign currency for euros.
18) The goal of a multinational corporation (MNC) is
a.The minimization of taxes remitted from foreign subsidiaries
b.The establishment of subsidiaries in any country where operations would provide a
return over and above the cost of capital, even if better projects are available
domestically
c.The maximization of shareholder wealth
d.The maximization of social benefits resulting from actions such as the employment of
foreign managers
19) To fully benefit from economies of scale, an MNC should:
a.establish a subsidiary in a new market that can sell products produced elsewhere
b.establish a subsidiary in a market that has relatively low costs of labor or land
c.establish a subsidiary in a market where raw materials are cheap and accessible
d.participate in a joint venture in order to learn about a production process or other
operations
20) The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro
is $1.05. What is the annualized forward premium or discount of the euro?
a.1.9 percent discount
b.1.9 percent premium
c.7.6 percent premium
d.7.6 percent discount
21) As a(n) ____ to an interest rate swap, a financial institution simply arranges a swap
between two parties.
a.ultraparty
b.broker
c.counterparty
d.none of the above
22) If the Singapore dollar appreciates against the U.S. dollar over this year, the
consolidated earnings of a U.S. company with a subsidiary in Singapore will be ____ as
a result of the exchange rate movement.
a.negative
b.adversely affected
c.favorably affected
d.unaffected
23) In the U.S., the typical currency futures contract is based on a currency value in
terms of:
a.euros
b.U.S. dollars
c.British pounds
d.Canadian dollars
24) Among the reasons that purchasing power parity (PPP) does not consistently occur
are:
a.exchange rates are affected by interest rate differentials
b.exchange rates are affected by national income differentials and government controls
c.supply and demand may not adjust if no substitutable goods are available
d.all of the above are reasons that PPP does not consistently occur
25) Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based
multinational firm’s reported earnings (from the consolidated income statement) to
____. If a firm desired to protect against this possibility, it could stabilize its reported
earnings by ____ euros forward in the foreign exchange market.
a.be reduced; purchasing
b.be reduced; selling
c.increase; selling
d.increase; purchasing
26) 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
27) Refer to Exhibit 20-2. What is the expected effective financing rate of the portfolio
Luzar is contemplating (assume the two currencies move independently from one
another)?
a.9.03%
b.7.00%
c.10.00%
d.7.59%
e.none of the above
28) An argument for MNCs to have a debt-intensive capital structure is:
a.they are well diversified
b.they can reduce the chance of bankruptcy
c.it spreads the shareholder base
d.it forces subsidiaries to pay dividends to shareholders
29) You are the treasurer of Montana Corporation and must decide how to hedge (if at
all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are
available with a premium of $.01 per unit and an exercise price of $.01031 per Japanese
yen. The forecasted spot rate of the Japanese yen in 90 days is:
Future Spot RateProbability
$.0103520%
$.0103220%
$.0103030%
$.0102930%
The 90-day forward rate of the Japanese yen is $.01033.
What is the probability that the call option will be exercised (assuming Montana
purchased it)?
a.30%
b.60%
c.20%
d.40%
30) The international money market is primarily served by:
a.the governments of European countries, which directly intervene in foreign currency
markets
b.government agencies such as the International Monetary Fund that enhance
development of countries
c.several large banks that accept deposits and provide loans in various currencies
d.small banks that convert foreign currency for tourists and business visitors
31) A money market hedge on payables would involve, among others, borrowing ____
and investing in the ____.
a.the foreign currency; U.S
b.the foreign currency; foreign country
c.dollars; foreign country
d.dollars; U.S
32) Assume that Jones Co. will need to purchase 100,000 Singapore dollars (S$) in 180
days. Today’s spot rate of the S$ is $.50, and the 180-day forward rate is $.53. A call
option on S$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day
expiration date. A put option on S$ exists, with an exercise price of $.51, a premium of
$.02, and a 180-day expiration date. Jones has developed the following probability
distribution for the spot rate in 180 days:
Possible Spot Rate
in 90 DaysProbability
$.4810%
$.5360%
$.5530%
The probability that the forward hedge will result in a higher payment than the options
hedge is ____ (include the amount paid for the premium when estimating the U.S.
dollars required for the options hedge).
a.0%
b.10%
c.30%
d.40%
e.70%
33) When quantifying country risk:
a.weights should be equally allocated among factors
b.weights should be assigned to the political and financial factors according to their
perceived importance
c.it is not generally necessary to construct separate ratings for political and financial
risk since these will be equally weighed in the final analysis
d.the derived factors will be identical for all MNCs conducting business in that country
34) 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%
35) 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
36) A strong dollar places ____ pressure on U.S. inflation, which in turn places ____
pressure on U.S. interest rates, which in turn place ____ pressure on U.S. bond prices.
a.downward; upward; upward
b.downward; downward; upward
c.upward; upward; downward
d.upward; downward; upward
37) Direct foreign investment into the U.S. represents a ____.
a.capital inflow
b.trade inflow
c.capital outflow
d.trade outflow
38) A syndicated loan:
a.represents a loan by a single bank to a syndicate of corporations
b.represents a loan by a single bank to a syndicate of country governments
c.represents a direct loan by a syndicate of oil-producing exporters to a less developed
country
d.represents a loan by a group of banks to a borrower
e.A and B
39) Vermont Co. has foreign expenses denominated in euros that exceed foreign
revenues. Appreciation of the euro relative to the U.S. dollar will cause this firm’s
reported earnings (from the consolidated income statement) to ____. If a firm desired to
protect against this possibility, it could stabilize its reported earnings by ____ euros
forward in the foreign exchange market.
a.decrease; purchasing
b.decrease; selling
c.increase; selling
d.increase; purchasing
40) Which of the following is not a characteristic of a country to be considered within
an MNC’s international tax assessment?
a.corporate income taxes
b.withholding taxes
c.provisions for carrybacks and carryforwards
d.tax treaties
e.all of the above are characteristics to be considered
41) A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to
the parent on an annual basis. It also imports supplies from China, invoiced in Chinese
yuan. The firm has no other foreign business, and needs a small loan. The firm could
best reduce its exposure to exchange rate risk by borrowing:
a.U.S. dollars
b.Canadian dollars
c.Chinese yuan
d.a combination of Canadian dollars and Chinese yuan
42) Diz Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of
Swiss francs. These two currencies are highly correlated in their movements against the
dollar. Yanta Co. is a U.S.-based MNC that has the same level of net cash flows in these
currencies as Diz Co. except that its euros represent net cash outflows. Which firm has
a higher exposure to exchange rate risk?
a.Diz Co
b.Yanta Co
c.the firms have about the same level of exposure
d.neither firm has any exposure
43) 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):
Year 1Year 2Year 3Year 4
NOK10,000,000NOK15,000,000NOK17,000,000NOK20,000,000
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:
Year 1Year 2Year 3Year 4
$.13$.14$.12$.15
Refer to Exhibit 14-1. Baps is also uncertain regarding the cost of capital. Recently,
Norway has been involved in some political turmoil. What is the net present value
(NPV) of this project if a 16% cost of capital is used instead of 13%?
a.-$17,602.62
b.$8,000,000
c.$1,048,829
d.$645,147
44) If revenues and costs are equally sensitive to exchange rate movements, MNCs may
reduce their economic exposure by restructuring their operations to shift the sources of
costs or revenues to other locations so that:
a.cash inflows exceed cash outflows in each foreign currency
b.cash outflows exceed cash inflows in each foreign currency
c.cash inflows match cash outflows in each foreign currency
d.none of the above