1) The Sarbanes-Oxley Act ensures a more transparent process for managers to report
on the productivity and financial condition of their firm.
2) Franchising is the process by which national governments sell state owned
operations to corporations and other investors.
3) A straddle can only be achieved if the exercise prices of put and call options are the
same.
4) Interest rate parity can only hold if purchasing power parity holds.
5) The sale of a subsidiary by an MNC is referred to as a divestiture.
6) Relatively high Japanese inflation may result in an increase in the supply of yen for
sale and a reduction in the demand for yen, other things being equal.
7) In general, any key managerial decision that is based on forecasted exchange rates
should rely completely on one forecast rather than alternative exchange rate scenarios.
8) The European Central Bank is responsible for monetary policy in all countries that
adopted the euro as its currency.
9) If an investor who previously sold futures contracts wishes to liquidate his position,
he could sell futures contracts with the same maturity date.
10) According to the international fisher effect (IFE), the exchange rate percentage
change should be approximately equal to the differential in income levels between two
countries.
11) If hedging projections cause a firm to believe that it will definitely be adversely
affected by its transaction exposure, a currency option hedge is more appropriate than
other methods.
12) A negative effective financing rate implies that the U.S. firm actually paid fewer
dollars in total loan repayment than the number of dollars borrowed.
13) A bank issuing a letter of credit on behalf of an importer is obligated to honor the
letter of credit regardless of the buyer’s willingness or ability to pay.
14) The valuation of a target (from the parent’s perspective) should increase when the
potential acquirer’s cost of capital increases.
15) Under a fixed exchange rate system, U.S. inflation would have a greater impact on
inflation in other countries than it would under a freely floating exchange rate system.
16) If all currencies in a financing portfolio are not correlated with each other, financing
with such a portfolio would not be very different from financing with a single foreign
currency.
17) The greater the uncertainty about a project’s forecasted cash flows, the larger should
be the discount rate applied to cash flows, other things being equal.
18) If an MNC targets a successful foreign company with plans to continue the target’s
local business in a more efficient manner, the risk of the business will be relatively
____, and therefore the MNC’s required return from acquiring the target will be
relatively ____.
a.high; high
b.high; low
c.low; high
d.low; low
19) Which of the following is not true regarding interest rate parity (IRP)?
a.When interest rate parity holds, covered interest arbitrage is not possible
b.When the interest rate in the foreign country is higher than that in the home country,
the forward rate of that country’s currency should exhibit a discount
c.When the interest rate in the foreign country is lower than that in the home country,
the forward rate of that country’s currency should exhibit a premium
d.When covered interest arbitrage is not feasible, interest rate parity must hold
e.All of the above are true
20) Assume zero transaction costs. If the 180-day forward rate overestimates the spot
rate 180 days from now, then the real cost of hedging payables will be:
a.positive
b.negative
c.positive if the forward rate exhibits a premium, and negative if the forward rate
exhibits a discount
d.zero
21) A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash
inflows denominated in Barbados dollars. Given this information, the MNC would ____
from a(n) ____ of the Barbados dollar.
a.benefit; appreciation
b.benefit; depreciation
c.not benefit; appreciation
d.none of the above
22) Assume that the risk-free interest rate in the U.S. is the same as that in Country M.
Assume that the government of Country M is more likely to rescue local firms that
experience financial problems. Other things being equal, Country M’s firms are likely to
use a ____ degree of financial leverage than U.S. firms. If a firm based in Country M
had the same degree of financial leverage and the same operating characteristics as a
U.S. firm, its cost of capital would be ____ than that of the U.S. firm.
a.higher; higher
b.higher; lower
c.lower; lower
d.lower; higher
23) If the interest rate is lower in the U.S. than in the United Kingdom, and if the
forward rate of the British pound is the same as its spot rate:
a.U.S. investors could possibly benefit from covered interest arbitrage
b.British investors could possibly benefit from covered interest arbitrage
c.neither U.S. nor British investors could benefit from covered interest arbitrage
d.A and B
24) A banker’s acceptance is a draft drawn on and accepted by a(n) ____.
a.bank
b.importer
c.exporter
d.none of the above
25) According to the text:
a.banks in the U.S. are prohibited from facilitating cash transfers for MNCs
b.banks in most non-U.S. countries are more advanced than the U.S. in facilitating cash
transfers for MNCs
c.an MNC with subsidiaries in several different countries has no problems in
coordinating its cash transfers since a uniform global banking system exists
d.none of the above
26) The capital asset pricing model (CAPM) suggests that the required return on a
firm’s stock is a positive function of the risk-free rate of interest and the market rate of
return and a negative function of the stock’s beta.
27) You are a speculator who sells a call option on Swiss francs for a premium of $.06,
with an exercise price of $.64. The option will not be exercised until the expiration date,
if at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit
per unit, assuming that you have to buy Swiss francs in the market to fulfill your
obligation, is:
a.-$.02
b.-$.01
c.$.01
d.$.02
e.none of the above
28) Exhibit 10-1
Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the
Netherlands. Cerra estimates the standard deviation of daily percentage changes of the
euro to be 1 percent over the last 100 days. Assume that these percentage changes are
normally distributed. Use the value-at-risk (VAR) method based on a 95% confidence
level for the following question(s).
Refer to Exhibit 10-1. What is the maximum one-day loss if the expected percentage
change of the euro tomorrow is 0.5%?
a.-0.5%
b.-2.2%
c.-1.5%
d.-1.2%
29) Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value of
the Thai baht (THB), which has a current exchange rate of $0.022. Inflation in the U.S.
is expected to be 3% during the next year, while inflation in Thailand is expected to be
10%. Under this scenario, Pro Corp would forecast the value of the baht at the end of
the year to be:
a.$0.023
b.$0.021
c.$0.020
d.None of the above
30) As foreign exchange activity has grown, a given degree of central bank intervention
has become:
a.more effective
b.more frequent
c.less effective
d.none of the above
31) Assume that some U.S. firms will purchase supplies from either China or from U.S.
firms. If the Chinese yuan appreciates against the dollar, it should reduce the U.S.
balance of trade deficit with China.
32) Assume the U.S. interest rate is 7.5%, the New Zealand interest rate is 6.5%, the
spot rate of the NZ$ is $.52, and the one-year forward rate of the NZ$ is $.50. At the
end of the year, the spot rate is $.48. Based on this information, what is the effective
financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan?
a.about -1.7%
b.about 0.0%
c.about 14.7%
d.about 15.4%
e.about 8.3%
33) A firm’s cost of ____ reflects an opportunity cost: what the existing shareholders
could have earned if they had received the earnings as dividends and invested the funds
themselves.
a.debt
b.retained earnings
c.short-term loans
d.none of the above
34) The main participants in the international money market are:
a.consumers
b.small firms
c.large corporations
d.small European firms needing European currencies for international trade
35) The ____ is a private corporation owned by a consortium of commercial banks and
industrial companies, but the ____ is a self-sustaining government agency.
a.Overseas Private Investment Corporation (OPIC); Private Export Funding
Corporation (PEFCO)
b.Private Export Funding Corporation (PEFCO); Overseas Private Investment
Corporation (OPIC)
c.Private Export Funding Corporation (PEFCO); Ex-Imbank
d.Overseas Private Investment Corporation (OPIC); Ex-Imbank
36) The Fisher effect is used to determine the:
a.real inflation rate
b.real interest rate
c.real spot rate
d.real forward rate
37) Under FASB 52:
a.translation gains and losses are included in the reported net income
b.translation gains and losses are included in stockholder’s equity
c.A and B
d.none of the above
38) According to interest rate parity (IRP):
a.the forward rate differs from the spot rate by a sufficient amount to offset the inflation
differential between two currencies
b.the future spot rate differs from the current spot rate by a sufficient amount to offset
the interest rate differential between two currencies
c.the future spot rate differs from the current spot rate by a sufficient amount to offset
the inflation differential between two currencies
d.the forward rate differs from the spot rate by a sufficient amount to offset the interest
rate differential between two currencies
39) Which of the following countries was probably the least affected (directly or
indirectly) by the Asian crisis?
a.Thailand
b.Indonesia
c.Russia
d.China
e.Malaysia
40) To hedge a contingent exposure, in which an MNC’s exposure is contingent on a
specific event occurring, the appropriate hedge would be a(n) ____ hedge.
a.money market
b.futures
c.forward
d.options
41) Assume that the Fed intervenes by exchanging dollars for euros in the foreign
exchange market. This will cause an ____ U.S. dollars and an ____ euros.
a.inward shift in demand for; outward shift in supply of
b.inward shift in demand for; inward shift in supply of
c.outward shift in supply of; outward shift in demand for
d.outward shift in supply of; inward shift in demand for
42) Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that
Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is
more appropriate in this situation:
a.Buy dollars forward
b.Sell dollars forward
c.Purchase call option
d.Purchase put option
43) In recent years, the U.S. has had a relatively (compared to other countries) ____
balance of trade ____ with China.
a.small; surplus
b.large; surplus
c.small; deficit
d.large; deficit
44) The exchange rate mechanism (ERM) refers to the method of linking ____
currencies to each other within boundaries.
a.Latin American
b.European
c.Asian
d.North American
45) 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