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1) The Asian crisis is generally believed to have started in Japan.
a. True
b. False
2) Assume that the bank's bid quote of Mexican peso is $.126 and ask price is $.129. If
you have Mexican pesos, what is the amount of pesos that you need to purchase
$100,000?
a. 12,600
b. 775,194
c. 793,651
d. 12,900
3) A forecasting technique based on fundamental relationships between economic
variables and exchange rates, such as inflation, is referred to as technical forecasting.
a. True
b. False
4) The Fisher effect is used to determine the:
a. real inflation rate
b. real interest rate
c. real spot rate
d. real forward rate
5) Which of the following is not an advantage of international acquisitions over the
establishment of a new subsidiary?
a. The firm can immediately expand its international business
b. An international acquisition typically generates quicker cash flows than the
establishment of a new subsidiary
c. International acquisitions are generally cheaper than the establishment of a new
subsidiary
d. An international acquisition typically generates larger cash flows than the
establishment of a new subsidiary
e. All of the above are advantages of international acquisitions
6) One argument why exchange rate risk is irrelevant to corporations is that
shareholders can deal with this risk individually.
a. True
b. False
7) Which of the following is not true with respect to spot market liquidity?
a. The more willing buyers and sellers there are, the more liquid a market is
b. The spot markets for heavily traded currencies such as the Japanese yen are very
liquid
c. A currency's liquidity affects the ease with which an MNC can obtain or sell that
currency
d. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at
a reasonable exchange rate
8) Forward contracts:
a. contain a commitment to the owner, and are standardized
b. contain a commitment to the owner, and can be tailored to the desire of the owner
c. contain a right but not a commitment to the owner, and can be tailored to the desire of
the owner
d. contain a right but not a commitment to the owner, and are standardized
9) Lampon Co. is a U.S. firm that has a subsidiary in Hong Kong that produces light
fixtures and sells them to Japan, denominated in Japanese yen. Its subsidiary pays all of
its expenses, including the cost of goods sold, in U.S. dollars. The Hong Kong dollar is
pegged to the U.S. dollar. If the Japanese yen appreciates against the U.S. dollar, the
Hong Kong subsidiary's revenue will ____, and its expenses will ____.
a. increase; decrease
b. decrease; remain unchanged
c. decrease; increase
d. increase; remain unchanged
10) Assume the following information for Pexi Co., a U.S.-based MNC that needs
funding for a project in Germany:
U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%
What is Pexi's cost of dollar-denominated equity?
a. 12.0%
b. 11.2%
c. 10.0%
d. 7.2%
11) If the foreign currency that was borrowed appreciates over time, an MNC will need
fewer funds to cover the coupon or principal payments. [Assume the MNC has no other
cash flows in that currency.]
a. True
b. False
12) Assume that in recent months, most currencies of industrialized countries
depreciated substantially against the dollar. Assume that their interest rates were similar
to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during
this period, their effective yield would have been:
a. negative
b. zero
c. positive, but less than the interest rate of their respective countries
d. more than the interest rate of their respective countries
13) Which of the following could reduce agency problems for an MNC?
a. stock options as managerial compensation
b. hostile takeover threat
c. investor monitoring
d. all of the above are forms of corporate control that could reduce agency problems for
an MNC
14) Which of the following is an appropriate form of indirect intervention?
a. To strengthen the dollar, the Fed increases the money supply to lower interest rates
b. To weaken the dollar, the Fed reduces the money supply to increase interest rates
c. To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation
d. To weaken the dollar in the long run, the Fed attempts to reduce U.S. inflation
15) Which of the following is not true regarding simulation?
a. It can be used to generate a probability distribution of NPVs
b. It generates a probability distribution of NPVs by randomly drawing values for the
input variable(s)
c. It can only be used for one variable at a time
d. It can be used to develop probability distributions of all variables with uncertain
future values
16) They key to international diversification is selecting foreign projects whose
performance levels are highly correlated over time.
a. True
b. False
17) An international project's NPV is ____ related to consumer demand and ____
related to the project's salvage value.
a. positively; positively
b. positively; negatively
c. negatively; positively
d. negatively; negatively
18) The interest rate in developing countries is usually very low.
a. True
b. False
19) Any event that increases the U.S. demand for euros should result in a(n) ____ in the
value of the euro 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
20) The initial outlay for a project in a foreign country may decline if property values in
that country decline.
a. True
b. False
21) Which of the following did not occur as a result of Bretton Woods Agreement?
a. Each currency was valued in terms of gold
b. Values of all currencies were fixed with respect to each other
c. Currencies were allowed to fluctuate no more than 1% above or below the initially
set rates
d. The United States experienced no balance-of-trade deficits
22) If countries are highly influential upon each other, the correlations of their
economic growth levels would likely be ____. A firm would benefit ____ by
diversifying sales among these countries relative to another set of countries that were
not influential upon each other.
a. high and positive; more
b. close to zero; more
c. high and positive; less
d. close to zero; less
23) ____ is not a factor that affects the bid/ask spread.
a. Order costs
b. Inventory costs
c. Volume
d. All of the above factors affect the bid/ask spread
24) Which of the following would increase the current account of Country X? Country
Y is Country X's sole trading partner.
a. Inflation increases in countries X and Y by comparable amounts
b. Country X's and Country Y's currencies depreciate by the same amount
c. Country X imposes tariffs on imports from Country Y, and Country Y retaliates by
imposing an identical tax on X's exports
d. The central banks of Country X and Country Y reduce the money supply to increase
interest rates
e. Country X imposes a quota on imports, and Country Y retaliates by imposing an
identical quota on X's exports
25) The interest rate commonly charged for loans between banks is called the cross rate.
a. True
b. False
26) 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.
a. True
b. False
27) According to the text, a firm may be able to achieve a "more efficient" project
portfolio if it:
a. focuses solely on one product
b. focuses solely on one location to market what it produces
c. A and B
d. none of the above
