1) Two methods to assess exchange rate volatility are the volatility of historical
exchange rate movements and the exchange rate’s implied standard deviation from the
currency option pricing model.
2) Some MNCs use a country’s yield curve to compare annualized rates among debt
maturities, so that they can choose a maturity that has a relatively low rate.
3) Firms with more foreign costs than foreign revenues will generally be favorably
affected by a stronger foreign currency.
4) Blocked funds may penalize a project if the return on the forced reinvestment in the
foreign country is less than the required rate of return on the project.
5) A large firm may finance in a foreign currency to offset a net payable position in that
foreign country.
6) Forecasting a currency’s future value is difficult, because it is difficult to identify
how the factors affecting the currency value will change, and how they will interact to
impact the currency’s value.
7) A currency peg is insulated from economic or political conditions, such that the
exchange rate in the market will only change if the country’s government breaks the peg
and sets a new exchange rate.
8) If the pattern of currency values over time appears random, then technical
forecasting is appropriate.
9) A money market hedge involves taking a money market position to cover a future
payables or receivables position.
10) If an actual put option premium is less than what is suggested by the put-call parity
relationship, arbitrage can be conducted.
11) Who bears the payment risk in a letter of credit?
a.the exporter
b.the importer
c.the issuing bank
d.both the exporter and importer
12) The commonly accepted goal of the MNC is to:
a.maximize short-term earnings
b.maximize shareholder wealth
c.minimize risk
d.A and C
e.maximize international sales
13) ____ is not a cost-related motive for direct foreign investment.
a.Exploiting monopolistic advantages
b.Fully benefiting from economies of scale
c.Using foreign factors of production
d.Using foreign raw materials
14) In general, the ____ rate payer in a plain vanilla swap believes interest rates are
going to ____.
a.fixed; decline
b.floating; decline
c.floating; increase
d.none of the above
15) 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)
16) In general, MNCs probably prefer to use ____ foreign debt when their foreign
subsidiaries are subject to potentially ____ local currencies.
a.more; strong
b.more; weak
c.less; strong
d.less; weak
e.B and D
17) 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. Assume that NOK8,000,000 of the cash flow in year 4 represents
the salvage value. Baps is not completely certain that the salvage value will be this
amount and wishes to determine the break-even salvage value, which is $____.
a.510,088.04
b.1,710,088
c.1,040,000
d.none of the above
18) Currency futures can be used by MNCs to hedge payables. That is, an MNC would
____ futures to hedge a foreign payable position. Also, currency futures can be used for
speculation. For example, a speculator expecting a currency to appreciate would ____
futures.
a.buy; buy
b.sell; sell
c.buy; sell
d.sell; buy
19) When determining whether a particular proposed project in a foreign country is
feasible:
a.a country risk rating can adequately substitute for a capital budgeting analysis
b.country risk analysis should be incorporated within the capital budgeting analysis
c.the effect of country risk on sales revenue is more important than the effect on cash
flows
d.the project with the highest country risk rating (lowest country risk) should be
accepted
e.B and D
20) ____ represent aid, grants, and gifts from one country to another.
a.Transfer payments
b.Factor income
c.The balance of trade
d.The balance of payments
e.The capital account
21) Due to ____, market forces should realign the spot rate of a currency among banks.
a.forward realignment arbitrage
b.triangular arbitrage
c.covered interest arbitrage
d.locational arbitrage
22) When economic conditions of two countries are ____, then a firm would ____ its
risk by operating in both countries instead of concentrating just in one.
a.highly correlated; reduce
b.not highly correlated; not reduce
c.not highly correlated; reduce
d.none of the above
23) Which of the following is an example of direct foreign investment?
a.exporting to a country
b.establishing licensing arrangements in a country
c.purchasing existing companies in a country
d.investing directly (without brokers) in foreign stocks
24) The one-year forward rate of the British pound is $1.55, while the current spot rate
is $1.60. Based on the forward rate, what is the expected percentage change in the
British pound over the next year?
a.+5.0%
b.-3.1%
c.+3.1%
d.+3.2%
e.None of the above
25) When the futures price is above the forward rate, astute investors may attempt to
simultaneously buy a currency forward and sell futures in that currency. These actions
would place ____ pressure on the forward rate and ____ pressure on the futures rate.
a.upward; downward
b.upward; upward
c.downward; upward
d.downward; downward
26) The World Bank’s Multilateral Investment Guarantee Agency (MIGA):
a.offers various forms of export insurance
b.offers various forms of import insurance
c.offers various forms of exchange rate risk insurance
d.provides loans to developing countries
e.offers various forms of political risk insurance
27) Leila Corporation used the following regression model to determine if the forecasts
over the last ten years were biased:
St = a0 + a1Ft – 1 + mt,
where St is the spot rate of the yen in year t and Ft – 1 is the forward rate of the yen in
year t – 1. Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila
Corporation has reason to believe that its past forecasts have ____ the realized spot rate.
a.overestimated
b.underestimated
c.correctly estimated
d.none of the above
28) British investors frequently invest in the U.S. or Italy, depending on the prevailing
interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors
will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure
on the value of the pound against the U.S. dollar.
a.increase; downward
b.decrease; upward
c.increase; upward
d.decrease; downward
29) Assume a U.S. firm initiates direct foreign investment in the U.K. If the British
pound is expected to appreciate against the dollar, the dollar value of earnings remitted
to the parent should ____. The parent may request that the subsidiary ____ in order to
benefit from the expectation about the pound.
a.increase; postpone remitting earnings until the pound strengthens
b.decrease; postpone remitting earnings until the pound strengthens
c.decrease; remit earnings immediately before the pound strengthens
d.increase; remit earnings immediately before the pound strengthens
30) FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a
payable position. Currently, a 90-day call option with an exercise price of $.75 and a
premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73
and a premium of $.01 is available. FAB plans to purchase options to hedge its payable
position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid,
assuming FAB wishes to minimize its cost?
a.$144,000
b.$148,000
c.$152,000
d.$150,000
31) If a particular currency is consistently declining substantially over time, then a
market-based forecast will usually have:
a.underestimated the future exchange rates over time
b.overestimated the future exchange rates over time
c.forecasted future exchange rates accurately
d.forecasted future exchange rates inaccurately but without any bias toward consistent
underestimating or overestimating
32) An MNC’s short-term financing decisions are satisfied in the ____ market, while its
medium debt financing decisions are satisfied in the ____ market.
a.international money; international credit
b.international money; international bond
c.international credit; international money
d.international bond; international credit
e.international money; international stock
33) ____ can cause the parent’s after-tax cash flows to differ from the subsidiary’s
after-tax cash flows.
a.The number of units sold by the subsidiary
b.The subsidiary’s earnings before income and taxes (EBIT)
c.The tax rate the subsidiary is subject to in the host country
d.Withholding taxes imposed by the host government
34) When assessing a German project administered by a German subsidiary of a
U.S.-based MNC solely from the German subsidiary’s perspective, which variable will
most likely influence the capital budgeting analysis?
a.the withholding tax rate
b.the euro’s exchange rate
c.the U.S. tax rate on earnings remitted to the U.S
d.the German government’s tax rate
e.A and C
35) A ____ allows customers to send payments to a post office box number.
a.bilateral netting system
b.multilateral netting system
c.lockbox
d.preauthorized payment
36) An interest rate swap is commonly used by an issuer of fixed-rate bonds to:
a.convert to floating-rate debt
b.hedge exchange rate risk
c.lock in the interest payments on debt
d.remove the default risk of its debt
37) Frank is an option speculator. He anticipates the Danish kroner to appreciate from
its current level of $.19 to $.21. Currently, kroner call options are available with an
exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option?
If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per
unit?
a.no; -$0.01
b.yes; $0.01
c.yes; -$0.01
d.yes; $0.03
38) Assume the following information:
Exchange rate of Japanese yen in U.S. $=$.011
Exchange rate of euro in U.S. $=$1.40
Exchange rate of euro in Japanese yen=140 yen
What will be the yield for an investor who has $1,000,000 available to conduct
triangular arbitrage?
a.$100,000
b.-$90,909
c.10%
d.-9.09%
39) The annualized forward premium on the euro is 7%. What is the 90-day forward
rate on the euro if the spot rate today is $1.25?
a.$1.27
b.$1.34
c.$1.16
d.$1.23
40) Assume that a bank’s bid rate on Swiss francs is $.45 and its ask rate is $.47. Its
bid-ask percentage spread is:
a.about 4.44%
b.about 4.26%
c.about 4.03%
d.about 4.17%
41) Banks charge larger bid/ask spreads than they would on less liquid, less traded
currencies.
42) Global regulations require that shareholders in all countries have the same rights
wherever there are stock markets.
43) The legal protection of shareholders is the same among countries.
44) The Basel Accord is an agreement among the major European countries to make
regulations more uniform across European countries and to reduce taxes on goods
traded between these countries.
45) A currency put option provides the right, but not the obligation, to buy a specific
currency at a specific price within a specific period of time.
46) Eurobonds are certificates representing bundles of stock.
47) Large commercial banks play a major role in the international money market by
accepting short-term deposits in large amounts (such as the equivalent of $1 million or
more) and in various currencies, and channeling the money to corporations and
government agencies that need to borrow those short-term funds in the desired
currencies.
48) When receiving quotations on a currency’s exchange rate, the bank’s bid quote is the
rate at which the bank is willing to sell currency.