1) If interest rate parity (IRP) exists, then the rate of return achieved from covered
interest arbitrage should be equal to the rate available in the foreign country.
2) Assume that the real interest rate in the U.S. and in the U.K. is 3%. The expected
annual inflation in the U.S. is 3%, while in the U.K. it is 4%. The forward rate on the
pound should exhibit a premium of about 1%.
3) Some MNCs are subject to economic exposure without being subject to transaction
exposure.
4) 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.
5) Foreign exchange markets appear to be strong-form efficient.
6) Futures and options are available for crossrates.
7) The stock price of a target may decrease if investors anticipate that the target will be
acquired, since they are aware that stock prices of targets fall abruptly after a bid by the
acquiring firm.
8) When investing in a portfolio of foreign currencies, the currencies represented within
the portfolio are ideally highly positively correlated if the goal is to reduce exchange
rate risk.
9) An American tourist visiting Germany and spending money there (for lodging, food,
etc.) will reduce the U.S. current account deficit and reduce Germany’s current account
balance.
10) In general, it is more difficult to effectively hedge economic or translation exposure
than to hedge transaction exposure.
11) The foreign exchange market is an over-the-counter market.
12) The interest rate on euros is 8%. The interest rate in the U.S. is 5%. The euro’s
forward rate should exhibit a premium of about 3%.
13) If markets were perfect, then labor and other costs of production would be easily
transferable.
14) An MNC that plans to acquire a target would prefer to time its bid for the target
when the local stock market prices in the target’s country are generally high.
15) The Fed’s indirect method of intervention is to trade dollars for or against other
currencies.
16) The actual financing cost of a U.S. corporation issuing a bond denominated in euros
is affected by the euro’s value relative to the U.S. dollar during the financing period.
17) The valuation of a proposed international divestiture can be determined by
comparing the present value of the cash flows if the project is continued to the proceeds
that would be received (after taxes) if the project is divested.
18) If markets were perfect, then labor and other costs of production would be perfectly
stable (no movement across borders).
19) 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.
20) From a bank’s viewpoint, issuing a letter of credit is analogous to making a loan as
far as risk is concerned.
21) Assume that the interest rate offered on pounds is 5% and the pound is expected to
depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K.
and the U.S., the U.S. interest rate should be ____.
a.3.43%
b.5.68%
c.6.5%
d.7.3%
22) Which of the following is a reason to consider international business?
a.economies of scale
b.exploit monopolistic advantages
c.diversification
d.all of the above
23) If the observed put option premium is less than what is suggested by the put-call
parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the
call option, and ____ the underlying currency.
a.selling; buying; buying
b.buying; selling; buying
c.selling; buying; selling
d.buying; buying; buying
24) The interest rate on the syndicated loan depends on the:
a.currency denominating the loan
b.maturity of the loan
c.creditworthiness of the borrower
d.interbank lending rate
e.all of the above
25) Which of the following is not true regarding ADRs?
a.ADRs are denominated in the currency of the stock’s home country
b.ADRs enable U.S. investors to avoid cross-border transactions
c.ADRs allow non-U.S. firms to tap into U.S. market for funds
d.ADRs sometimes allow for arbitrage opportunities
26) According to the international Fisher effect, if Venezuela has a much higher
nominal rate than other countries, its inflation rate will likely be ____ than other
countries, and its currency will ____.
a.lower; strengthen
b.lower; weaken
c.higher; weaken
d.higher; strengthen
27) In general, MNCs probably prefer to use ____ foreign debt when their foreign
subsidiaries are subject to ____ local interest rates.
a.more; low
b.more; high
c.less; low
d.B and C
e.none of the above
28) If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then
the British pound (£) is expected to ____ by about ____%, according to the
international Fisher effect (IFE).
a.depreciate; 2.9
b.appreciate; 2.9
c.depreciate; 1.0
d.appreciate; 1.0
e.none of the above
29) It has been argued that the exchange rate can be used as a policy tool. Assume that
the U.S. government would like to reduce unemployment. Which of the following is an
appropriate action given this scenario?
a.Weaken the dollar
b.Strengthen the dollar
c.Buy dollars with foreign currency in the foreign exchange market
d.Implement a tight monetary policy
30) A risk-averse firm would prefer to borrow ____ when the expected financing costs
are similar in a foreign country as in the local country.
a.locally
b.in the foreign country
c.either A or B
d.part of the funds locally, and part from the foreign country
31) Assume that a yield curve’s shape is caused by liquidity. An MNC may be tempted
to finance with a maturity that is less than the expected life of the project when the yield
curve is:
a.flat
b.inverted
c.upward-sloping
d.downward sloping
32) An MNC is attempting to reduce its economic exposure by financing a portion of its
business with loans in the foreign currency. If the foreign currency weakens, the MNC
will need ____ of the foreign currency to cover the loan payment, while the MNC’s
foreign currency revenues will convert to ____ dollars.
a.more; fewer
b.more; more
c.less; fewer
d.less; more
33) The ____ is (are) likely the major source of funds to support a particular project.
a.initial investment
b.variable costs
c.fixed costs
d.none of the above
34) Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican
customers amounting to MXP98 million, while its peso-denominated expenses amount
to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S.
suppliers, it could reduce peso-denominated expenses by MXP12 million and increase
dollar-denominated expenses by $800,000. This strategy would ____ the Sycamore’s
exposure to changes in the peso’s movements against the U.S. dollar. Regardless of
whether the firm shifts expenses, it is likely to perform better when the peso is valued
____ relative to the dollar.
a.reduce; high
b.reduce; low
c.increase; low
d.increase; high
35) 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:
Possible Spot Rate
in 90 DaysProbability
$.6110%
$.6320%
$.6440%
$.6530%
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%
36) Which of the following is probably not a scenario under which a U.S.-based MNC
would consider short-term foreign financing?
a.Canadian dollars offer a lower interest rate than available in the U.S. and are expected
to appreciate over the maturity of the loan
b.Australian dollars offer a lower interest rate than available in the U.S. and are
expected to depreciate over the maturity of the loan
c.A U.S. firms has net receivables in Cyprus pounds
d.A and C
e.None of the above
37) With regard to corporate goals, an MNC is mostly concerned with maximizing
____, and a purely domestic firm is mostly concerned with maximizing ____.
a.shareholder wealth; short-term earnings
b.shareholder wealth; shareholder wealth
c.short-term earnings; sales volume
d.short-term earnings; shareholder wealth
38) If a country’s government imposes a tariff on imported goods, that country’s current
account balance will likely ____ (assuming no retaliation by other governments).
a.decrease
b.increase
c.remain unaffected
d.either A or C are possible
39) The following regression model was estimated to forecast the value of the
Malaysian ringgit (MYR):
MYRt = a0 + a1INCt – 1 + a2INFt – 1 + mt,
where MYR is the quarterly change in the ringgit, INF is the previous quarterly
percentage change in the inflation differential, and INC is the previous quarterly
percentage change in the income growth differential. Regression results indicate
coefficients of a0 = 0.005; a1 = 0.4; and a2 = 0.7. The most recent quarterly percentage
change in the inflation differential is -5%, while the most recent quarterly percentage
change in the income differential is 3%. Using this information, the forecast for the
percentage change in the ringgit is
a.4.60%
b.-1.80%
c.5.2%
d.-4.60%
e.None of the above
40) Assume the following information:
U.S. deposit rate for 1 year=11%
U.S. borrowing rate for 1 year=12%
Swiss deposit rate for 1 year=8%
Swiss borrowing rate for 1 year=10%
Swiss forward rate for 1 year=$.40
Swiss franc spot rate=$.39
Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and
expects to receive SF600,000 in 1 year.
Using the information above, what will be the approximate value of these exports in 1
year in U.S. dollars given that the firm executes a forward hedge?
a.$234,000
b.$238,584
c.$240,000
d.$236,127
41) Which of the following is true regarding the euro?
a.Exchange rate risk between participating European currencies is completely
eliminated, encouraging more trade and capital flows across European borders
b.It allows for more consistent economic conditions across countries
c.It prevents each country from conducting its own monetary policy
d.All of the above are true
42) If Salerno Inc. desired to lock in a minimum rate at which it could sell its net
receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates
substantially against the dollar by the time payment arrives, the most appropriate hedge
would be:
a.a money market hedge
b.a forward sale of yen
c.purchasing yen call options
d.purchasing yen put options
e.selling yen put options
43) Silicon Co. has forecasted the Canadian dollar for the most recent period to be
$0.73. The realized value of the Canadian dollar in the most recent period was $0.80.
Thus, the absolute forecast error as a percentage of the realized value was ____%.
a.9.6
b.-9.6
c.8.8
d.-8.8
44) When an MNC assesses targets among countries, it would prefer a country where
the growth potential for its industry is ____ and the competition within the industry is
____.
a.low; not excessive
b.high; excessive
c.high; not excessive
d.low; excessive
45) Assume that the U.S. experiences a significant decline in income, while Japan’s
income remains steady. This event should place ____ pressure on the value of the
Japanese yen, other things being equal. (Assume that interest rates and other factors are
not affected.)
a.upward
b.downward
c.no
d.upward and downward (offsetting)
46) Assume that U.S. interest rate for the next three years is 5%, 6%, and 7%
respectively. Also assume that Canadian interest rates for the next three years are 3%,
6%, 9%. The current Canadian spot rate is $.840. What is the approximate three-year
forecast of Canadian dollar spot rate if the three-year forward rate is used as a forecast?
a.$.840
b.$.890
c.$.856
d.$.854
47) Sarakose Co. is a U.S. company with sales to Canada amounting to C$5 million. Its
cost of materials attributable to the purchase of Canadian goods is C$7 million. Its
interest expense on Canadian loans is C$5 million. The dollar value of Sarakose’s
“earnings before interest and taxes” would ____ if the Canadian dollar appreciates; the
dollar value of its cash flows would ____ if the Canadian dollar appreciates.
a.increase; increase
b.decrease; increase
c.decrease; decrease
d.increase; decrease
e.increase; be unaffected
48) Exhibit 21-1
To benefit from the low correlation between the Trinidad dollar and the Japanese yen (),
Sciorra Corporation decides to invest 50% of total funds invested in Trinidad dollars
and the remainder in yen. The domestic yield on a one-year deposit is 8%. The Trinidad
one-year interest rate is 10% and the Japanese one-year interest rate is 7%. Sciorra has
determined the following possible percentage changes in the two individual currencies
as follows:
CurrencyPercentage ChangeProbability
Trinidad dollar-1.0%35%
Trinidad dollar 2.0%65%
Japanese yen-2.0%45%
Japanese yen 1.0%55%
Refer to Exhibit 21-1. What is the probability that the yield of the two-currency
portfolio is less than the domestic yield?
a..1575
b..35
c..6425
d.1
e.none of the above
49) When an MNC needs to finance a portion of a foreign project within the foreign
country, the best method to account for a foreign project’s risk is to:
a.apply a required return that is based on the CAPM
b.apply a required return based on unsystematic risk
c.derive the net present value of the equity investment
d.apply the required return equal to the risk-free rate in the foreign country
50) Assume that the total value of investment transactions between U.S. and Mexico is
minimal. Also assume that total dollar value of trade transactions between these two
countries is very large. Now assume that Mexico’s inflation has suddenly increased, and
Mexican interest rates have suddenly increased. Overall, this would put ____ pressure
on the value of Mexican peso. The inflation effect should be ____ pronounced than the
interest rate effect.
a.downward; more
b.upward; more
c.downward; less
d.upward; less
51) The direct foreign investment positions by U.S. firms have generally ____ over
time. Restrictions by governments on direct foreign investment have generally ___ over
time.
a.increased; increased
b.increased; decreased
c.decreased; decreased
d.decreased; increased
52) If the spot rate of the euro increased substantially over a one-month period, the
futures price on euros would likely ____ over that same period.
a.increase slightly
b.decrease substantially
c.increase substantially
d.stay the same
53) Assume that Boca Co. wants to expand its business to Japan, and wants complete
control over the operations in Japan. Which method of international business is most
appropriate for Boca Co?
a.Joint venture
b.Licensing
c.Partial acquisition of existing Japanese firm
d.Establishment of Japanese subsidiary
54) Given a home country and a foreign country, purchasing power parity (PPP)
suggests that:
a.a home currency will depreciate if the current home inflation rate exceeds the current
foreign interest rate
b.a home currency will appreciate if the current home interest rate exceeds the current
foreign interest rate
c.a home currency will appreciate if the current home inflation rate exceeds the current
foreign inflation rate
d.a home currency will depreciate if the current home inflation rate exceeds the current
foreign inflation rate
55) News of a potential surge in U.S. inflation and zero Chilean inflation places ____
pressure on the value of the Chilean peso. The pressure will occur ____.
a.upward; only after the U.S. inflation surges
b.downward; only after the U.S. inflation surges
c.upward; immediately
d.downward; immediately