1) If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will
need C$200,000 in 90 days to make payment on imports from Canada, it could:
a. obtain a 90-day forward purchase contract on Canadian dollars
b. obtain a 90-day forward sale contract on Canadian dollars
c. purchase Canadian dollars 90 days from now at the spot rate
d. sell Canadian dollars 90 days from now at the spot rate
2) The absolute forecast error of a currency is ____, on average, in periods when the
currency is more ____.
a. lower; volatile
b. higher; stable
c. lower; stable
d. none of the above
3) Generally, if interest rate parity holds and the forward rate is an unbiased predictor of
the future spot rate, then the international Fisher effect will also hold.
a. True
b. False
4) A balance of trade surplus indicates an excess of imports over exports.
a. True
b. False
5) Which of the following is not true regarding currency correlations?
a. Two highly positively correlated currencies act almost as if they are the same
currency
b. If two inflow currencies are highly positively correlated transaction exposure is
somewhat offset
c. If two inflow currencies are negatively correlated transaction exposure is somewhat
offset
d. If two currencies, one an inflow currency and the other an outflow currency, are
highly positively correlated, transaction exposure is somewhat offset
6) A simple method of valuing a private company is to apply the price-earnings ratios of
publicly traded firms in the same industry to the private company’s earnings.
a. True
b. False
7) An international acquisition will typically require that the acquirer pay a premium of
30 percent or more for a public target.
a. True
b. False
8) Which of the following is an example of direct intervention in foreign exchange
markets?
a. lowering interest rates
b. increasing the inflation rate
c. exchanging dollars for foreign currency
d. imposing barriers on international trade
9) Forecast errors tend to be large for short forecast horizons.
a. True
b. False
10) The least risky method by which firms conduct international business is:
a. Franchising
b. The acquisitions of existing operations
c. International Trade
d. The establishment of new subsidiaries
e. Licensing
11) Graylon, Inc., based in Washington, exports products to a German firm and will
receive payment of 200,000 in three months. On June 1, the spot rate of the euro was
$1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a
forward contract with a bank to sell 200,000 forward in three months. The spot rate of
the euro on September 1 is $1.15. Graylon will receive $____ for the euros.
a. 224,000
b. 220,000
c. 200,000
d. 230,000
12) Which of the following is not true regarding options?
a. Options are traded on exchanges, never over-the-counter
b. Similar to futures contracts, margin requirements are normally imposed on option
traders
c. Although commissions for options are fixed per transaction, multiple contracts may
be involved in a transaction, thus lowering the commission per contract
d. Currency options can be classified as either put or call options
e. All of the above are true
13) A floating coupon rate is an advantage to the bond issuer during periods of
increasing interest rates.
a. True
b. False
14) Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit
(MYR) receivables. For the next month, Money has identified its net exposure to the
ringgit as being MYR1,500,000. The 30-day forward rate is $.23. Furthermore, Money’s
financial center has indicated that the possible values of the Malaysian ringgit at the end
of next month are $.20 and $.25, with probabilities of .30 and .70, respectively. Based
on this information, the revenue from hedging minus the revenue from not hedging
receivables is____.
a. $0
b. -$7,500
c. $7,500
d. none of the above
15) 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
16) Centralized cash management is more complicated when the MNC uses multiple
currencies.
a. True
b. False
17) If the futures rate is above the forward rate, actions by rational investors would put
upward pressure on the forward rate and downward pressure on the futures rate.
a. True
b. False
18) The most useful measure of an MNC’s liquidity is its:
a. cash balance
b. amount of securities held as investments
c. political risk rating
d. potential access to funds
19) In market-based forecasting, a forward rate quoted for a specific date in the future
can be used as the forecasted spot rate on that future date.
a. True
b. False
20) If an MNC desires to offset a forward contract that it previously created, it can
simply ignore its obligation.
a. True
b. False
21) Assume that Kramer Co. will receive SF800,000 in 90 days. Today’s spot rate of the
Swiss franc is $.62, and the 90-day forward rate is $.635. Kramer has developed the
following probability distribution for the spot rate in 90 days:
The probability that the forward hedge will result in more dollars received than not
hedging is:
a. 10%
b. 20%
c. 30%
d. 50%
e. 70%
22) If a U.S. firm plans to frequently purchases goods from Hong Kong over the next
several years, it does not have to worry about exchange rate risk.
a. True
b. False
23) Under a letter of credit, the exporter will not ship the goods until the buyer has
remitted payment to the exporter.
a. True
b. False
24) Given a home country and a foreign country, the international Fisher effect (IFE)
suggests that:
a. the nominal interest rates of both countries are the same
b. the inflation rates of both countries are the same
c. the exchange rates of both countries will move in a similar direction against other
currencies
d. none of the above
25) If a U.S. firm’s cost of goods sold exposure is much greater than its sales exposure
in Switzerland, there is a ____ overall impact of the Swiss franc’s depreciation against
the dollar on ____.
a. positive; interest expenses
b. positive; gross profit
c. negative; gross profit
d. negative; interest expenses
26) When the futures price is equal to the spot rate of a given currency, and the foreign
country exhibits a higher interest rate than the U.S. interest rate, astute investors may
attempt to simultaneously ____ the foreign currency, invest it in the foreign country,
and ____ futures in the foreign currency.
a. buy; buy
b. sell; buy
c. buy; sell
d. buy; buy
27) Direct intervention is usually more effective than indirect intervention.
a. True
b. False
28) The World Bank extends loans only to developed nations, while the International
Development Association (IDA) extends loans only to developing nations.
a. True
b. False
29) Since futures contracts are traded on an exchange, the exchange will always take
the “other side” of the transaction in terms of accepting the credit risk.
a. True
b. False
30) Countries in emerging markets such as in Latin America tend to have ____ interest
rates, and so the yields offered on bonds issued in those countries is ____.
a. low; high
b. high; low
c. high; high
d. none of the above
31) If an MNC assesses net transaction exposure, this refers to the consolidation of all
expected inflows for a particular time and currency.
a. True
b. False
32) U.S. based Majestic Co. sells products to U.S. consumers and purchases all of
materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co.
is subject to:
a. economic exposure
b. translation exposure
c. transaction exposure
d. no exposure to exchange rate fluctuations
33) Assume an MNC establishes a subsidiary where it has no other existing business.
The present value of parent cash flows from this subsidiary is more sensitive to
exchange rate movements when:
a. the subsidiary finances the entire investment by local borrowing
b. the subsidiary finances most of the investment by local borrowing
c. the parent finances most of the investment
d. the parent finances the entire investment
34) Economic conditions in the host country are probably more important for an MNC
that intends to use the target to generate revenues in the host country than an MNC that
intends to focus on exporting from the target’s home country.
a. True
b. False