1) Even if an existing business adds value to an MNC, it may be worthwhile to assess
whether the business would generate more value to the MNC if it was restructured.
2) If interest rate parity holds, then the international Fisher effect must hold.
3) The exposure of an MNC’s consolidated financial statements to exchange rate
fluctuations is known as transaction exposure.
4) Foreign subsidiaries of U.S. MNCs can finance projects with dollars in order to
avoid exchange rate risk.
5) If the currency denominating a foreign bond depreciates against the firm’s home
currency over the lifetime of the bond, the funds needed to make coupon payments will
increase.
6) It is always the best course of action to divest of a foreign project if the expected
cash flows from the project decline substantially.
7) Market forces are the determinant of exchange rates in a freely floating exchange
rate system.
8) To hedge a payable position with a currency option hedge, an MNC would write a
call option.
9) Options can be traded on an exchange or over the counter.
10) Under prepayment, the exporter will not ship the goods until the buyer has remitted
payment to the exporter.
11) If purchasing power parity holds, then the Fisher effect must also hold.
12) Long-term forward contracts are a possible way to hedge the distant sale of fixed
assets in foreign countries, but they may not be available for many emerging market
currencies.
13) Corporations tend to make only limited use of technical forecasting because it
typically focuses on the near future, which is not very helpful for developing corporate
policies.
14) The price of a futures contract will generally vary significantly from that of a
forward contract.
15) In an open account transaction, the exporter ships the goods to the importer but
retains title to the goods until they have been sold.
16) A blockage of fund transfers imposed by a host government usually forces a
subsidiary to donate the funds to the host government.
17) The hedging of a foreign currency for which no forward contract is available with a
highly correlated currency for which a forward contract is available is referred to as
cross-hedging.
18) Licensing is the process by which a firm provides its technology (copyrights,
patents, trademarks, or trade names) in exchange for fees or some other specified
benefits.
19) The term “local target capital structure” is used in the text to represent the:
a.average capital structure of local firms where the MNC’s subsidiary is based
b.average capital structure of local firms where the MNC’s parent is based
c.capital structure of a subsidiary of a particular MNC
d.capital structure of a particular MNC overall (including all subsidiaries)
20) The ____ hedge is not a technique to eliminate transaction exposure discussed in
your text.
a.index
b.futures
c.forward
d.money market
e.currency option
21) Capital asset pricing theory suggests that ____ risk of projects can be ignored and
that ____ is relevant.
a.unsystematic; unsystematic
b.unsystematic; systematic
c.systematic; unsystematic
d.systematic; systematic
22) Which of the following is mentioned in the text as a possible means by which the
government may attempt to improve its balance of trade position (increase its exports or
reduce its imports).
a.It could attempt to reduce its home currency’s value
b.The government could require firms to engage in outsourcing
c.The government could require that its local firms pursue outsourcing
d.All of the above are mentioned
23) When currency options are not standardized and traded over-the-counter, there is
____ liquidity and a ____ bid/ask spread.
a.less; narrower
b.more; narrower
c.more; wider
d.less; wider
24) The Delphi technique:
a.is a method of purchasing information about inspections of the country being
evaluated
b.requires the use of discriminant analysis to assess country risk
c.involves the collection of independent opinions on country risk
d.none of the above
25) Assume the correlation coefficient between the return on the existing project and
the return on a proposed foreign project is 1. Also assume the returns on the existing
project and the new project are equal, and that the existing project has a lower standard
deviation than the proposed project. Under this scenario, undertaking the proposed
project will ____ the variance of the firm’s overall returns.
a.decrease
b.increase
c.decrease or increase, depending on the exact size of the returns and standard
deviations
d.none of the above
26) MNCs can use ____ to reduce exchange rate risk. This occurs when two parties
provide simultaneous loans with an agreement to repay at a specified point in the future.
a.forward contracts
b.currency swaps
c.parallel loans
d.none of the above
27) According to the text, the most appropriate method of incorporating country risk
into capital budgeting analysis is to:
a.compare each form of a country risk rating to a benchmark level
b.estimate the effect of each form of country risk on cash flows
c.estimate the effect of each form of country risk on the income statement and balance
sheet
d.adjust the discount rate to reflect the level of country risk using the conventional
adjustment formula that is used by virtually all MNCs
28) The purchase of a currency put option would be appropriate for which of the
following?
a.Investors who expect to buy a foreign bond in one month
b.Corporations who expect to buy foreign currency to finance foreign subsidiaries
c.Corporations who expect to collect on a foreign account receivable in one month
d.all of the above
29) A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£)
payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot
rate at the time of maturity is $0.65, what is the total amount paid by the corporation if
it acts rationally?
a.$33,600
b.$46,900
c.$44,100
d.$36,400
30) Which of the following is not true regarding host government attitudes towards
direct foreign investment (DFI)?
a.Host governments may offer incentives to MNCs in the form of subsidies in certain
circumstances
b.Host governments generally perceive DFI as a remedy to eliminate a country’s
political problems
c.The ability of a host government to attract DFI is dependent on the country’s markets
and resources
d.Some types of DFI will be more attractive to some governments than to others
e.All of the above are true
31) Higher interest rates in a foreign country tend to ____ the growth of an economy
and ____ demand for the MNC’s product.
a.increase; increase
b.reduce; reduce
c.increase; reduce
d.reduce; increase
32) Among the reasons for government intervention are:
a.to smooth exchange rate movement
b.to establish implicit exchange rate boundaries
c.to respond to temporary disturbances
d.all of the above
33) Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is
a..01
b.118
c.1.18
d..0087
34) Which of the following factors is least likely to cause the required rate of return to
vary among MNCs assessing the same foreign target?
a.differences in the timing of remittances from the target to the parent
b.differences in the desired use of the target
c.differences in the local risk-free interest rate
d.differences in the ability to use financial leverage
35) The greater the variability of a currency, the ____ will be the premium of a call
option on this currency, and the ____ will be the premium of a put option on this
currency, other things equal.
a.greater; lower
b.greater; greater
c.lower; greater
d.lower; lower
36) Under a(n) ____ arrangement, the exporter ships the goods to the importer while
still retaining actual title to the merchandise.
a.draft
b.consignment
c.prepayment
d.open account
37) Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to
Mexican customers and remit earnings back to the U.S. parent. The value of this project
will be favorably affected if the value of the peso ____ while it establishes the new
subsidiary and ____ when the subsidiary starts operations.
a.depreciates; appreciates
b.appreciates; appreciates
c.appreciates; depreciates
d.depreciates; depreciates
38) Which of the following tax-related factors need not be considered in assessing a
foreign target?
a.corporate tax rates in the host country
b.withholding tax rates in the host country
c.withholding tax rates in the home country
d.corporate tax rates in the home country
e.all of the above must be considered in assessing a foreign target
39) When a firm analyzes the feasibility of a project, it should consider the:
a.variability of the project’s cash flow
b.correlation of the project’s cash flow relative to the prevailing cash flows of the MNC
c.A and B
d.none of the above
40) Assume that Canada places a strict quota on goods imported from the U.S. and that
the U.S. does not retaliate. Holding other factors constant, this event should
immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to
____ and the value of the Canadian dollar to ____.
a.increase; increase
b.increase; decline
c.decline; decline
d.decline; increase
41) A weak home currency may not be a perfect solution to correct a balance of trade
deficit because:
a.it reduces the prices of imports paid by local companies
b.it increases the prices of exports by local companies
c.it prevents international trade transactions from being prearranged
d.foreign companies may reduce the prices of their products to stay competitive
42) The ____ the existing spot price relative to the strike price, the ____ valuable the
put options will be.
a.higher; less
b.higher; more
c.lower; less
d.lower; more
43) 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
44) A macro-assessment of country risk:
a.is adjusted for the particular business of the firm involved
b.excludes all aspects relevant to a particular firm or project
c.A and B
d.none of the above
45) Direct foreign investment would typically be welcomed if:
a.the products to be produced are substitutes for other locally produced products
b.people from the country of the company’s headquarter are transferred to the foreign
country to work at the subsidiary
c.the products to be produced are going to be exported
d.all of the above
46) Which of the following is not a program of the Export-Import Bank of the U.S.?
a.working capital guarantee program
b.project finance loan program
c.direct loan program
d.the foreign sales corporation program
47) Conditional currency options are:
a.options that do not require premiums
b.options where the premiums are canceled if a trigger level is reached
c.options that allow the buyer to decide what currency the option will be settled in
d.none of the above
48) If the interest rate is higher in the U.S. than in the United Kingdom, and if the
forward rate of the British pound (in U.S. dollars) is the same as the pound’s spot rate,
then:
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
49) Which of the following is not true regarding covered interest arbitrage?
a.Covered interest arbitrage tends to force a relationship between the interest rates of
two countries and their forward exchange rate premium or discount
b.Covered interest arbitrage involves investing in a foreign country and covering
against exchange rate risk
c.Covered interest arbitrage opportunities only exist when the foreign interest rate is
higher than the interest rate in the home country
d.If covered interest arbitrage is possible, you can guarantee a return on your funds that
exceeds the returns you could achieve domestically
e.All of the above are true regarding covered interest arbitrage
50) Netting can achieve all but one of the following:
a.Cross border transactions between subsidiaries are reduced
b.Transactions costs are reduced
c.Currency conversion costs are reduced
d.Transaction exposure is eliminated
51) A U.S. firm could issue bonds denominated in euros and partially hedge against
exchange rate risk by:
a.invoicing its exports in U.S. dollars
b.requesting that any imports ordered by the firm be invoiced in U.S. dollars
c.invoicing its exports in euros
d.requesting that any imports ordered by the firm be invoiced in the currency
denominating the bonds
52) Assume that a currency’s spot and future prices are the same, and the currency’s
interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this
higher foreign return would ____ the currency’s spot rate and ____ the currency’s
futures price.
a.put upward pressure on; put upward pressure on
b.put downward pressure on; put upward pressure on
c.put upward pressure on; put downward pressure on
d.put downward pressure on; put downward pressure on
53) In general, a firm ____ exposed to exchange rate fluctuations will usually have a
____ distribution of possible cash flows in future periods.
a.more; narrower
b.less; wider
c.more; wider
d.none of the above
54) Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is
$.66. The forward rate exhibits a ____ of ____.
a.premium; about 6%
b.discount; about 6%
c.discount; about 6.45%
d.premium; about 6.45%