1) Although netting typically increases the need for foreign exchange conversion, it
generally reduces the number of cross border transactions between subsidiaries.
a. True
b. False
2) The valuation of MNC accounts for all the cash flows received by the foreign
subsidiaries plus all the cash flows remitted by the subsidiaries.
a. True
b. False
3) Which of the following forecasting techniques would best represent the sole use of
the pattern of historical currency values of the euro to predict the euro’s future currency
value?
a. fundamental forecasting
b. market-based forecasting
c. technical forecasting
d. mixed forecasting
4) A weak dollar is normally expected to cause:
a. high unemployment and high inflation in the U.S
b. high unemployment and low inflation in the U.S
c. low unemployment and low inflation in the U.S
d. low unemployment and high inflation in the U.S
5) 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.
a. True
b. False
6) Firms that believe the forward rate is an unbiased predictor of the future spot rate
will prefer borrowing the foreign currency.
a. True
b. False
7) A purely domestic firm may be affected by exchange rate fluctuations if it faces at
least some foreign competition.
a. True
b. False
8) A large firm may finance in a foreign currency to offset a net payable position in that
foreign country.
a. True
b. False
9) To hedge payables with futures, an MNC would sell futures; to hedge receivables
with futures, an MNC would buy futures.
a. True
b. False
10) Subsidiary A of Mega Corporation has net inflows in Australian dollars of
A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000.
The expected exchange rate of the Australian dollar is $.55. What is the net inflow or
outflow as measured in U.S. dollars?
a. $500,000 outflow
b. $500,000 inflow
c. $275,000 inflow
d. $275,000 outflow
11) If both interest rate parity and the international Fisher effect hold, then between the
forward rate and the spot rate, the ____ rate should provide more accurate forecasts for
currencies in ____-inflation countries.
a. spot; high
b. spot; low
c. forward; high
d. forward; low
12) It is possible to have an opportunity loss when using futures to hedge.
a. True
b. False
13) 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
14) Assume the U.S. one-year interest rate is 8%, and the British one-year interest rate
is 6%. The one-year forward rate of the pound is $1.97. The spot rate of the pound at
the beginning of the year is $1.95. By the end of the year, the pound’s spot rate is $2.05.
Based on the information, what is the effective financing rate for a U.S. firm that takes
out a one-year, uncovered British loan?
a. about 12.4%
b. about 7.1%
c. about 13.5%
d. about 10.3%
e. about 11.3%
15) Which of the following is not one of the major reasons for MNCs to forecast
exchange rates?
a. to decide in which foreign market to invest the excess cash
b. to decide where to borrow at the lowest cost
c. to determine whether to require the subsidiary to remit the funds or invest them
locally
d. to speculate on the exchange rate movements
16) 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
17) 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
18) MNCs often attempt to set up production in locations where land and labor are
expensive, because expensive factors of production indicate high demand.
a. True
b. False
19) Simulation is useful in the bond-denomination decision since it can:
a. precisely compute the cost of financing with bonds denominated in a single foreign
currency
b. precisely compute the cost of financing with bonds denominated in a portfolio of
foreign currencies
c. assess the probability that a bond denominated in a foreign currency will be less
costly than a bond denominated in the home currency
d. A and B
20) An international acquisition may be preferable to the establishment of a new
subsidiary because the firm can immediately expand its international business and
benefit from existing customer relationships.
a. True
b. False
21) If an MNC uses a long-term forward contract to hedge the exchange rate risk
associated with a bond denominated in euros, it would sell euros forward.
a. True
b. False
22) 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
23) The price at which a currency put option allows the holder to sell a currency is
called the settlement price.
a. True
b. False
24) The shorter the time to the expiration date for a currency, the ____ will be the
premium of a call option, and the ____ will be the premium of a put option, other things
equal.
a. greater; greater
b. greater; lower
c. lower; lower
d. lower; greater
25) If an MNC has a net inflow in one currency and a net outflow of about the same
amount in another currency, then the MNCs’ transaction exposure is ____ if the two
currencies are ____ correlated.
a. high; positively
b. low; negatively
c. high; negatively
d. none of the above
26) Spears Co. will receive SF1,000,000 in 30 days. Use the following information to
determine the total dollar amount received (after accounting for the option premium) if
the firm purchases and exercises a put option:
a. $630,000
b. $610,000
c. $600,000
d. $590,000
e. $580,000
27) An acquirer based in a low-tax country may be able to generate higher cash flows
from acquiring a foreign target than an acquirer based in a high-tax country.
a. True
b. False
28) Assume that the dollar has been consistently depreciating over a long period. The
Fed decides to counteract this movement by intervening in the foreign exchange market
using sterilized intervention. The Fed would
a. buy dollars with foreign currency and simultaneously sell Treasury securities for
dollars
b. buy dollars with foreign currency and simultaneously buy Treasury securities with
dollars
c. sell dollars for foreign currency and simultaneously sell Treasury securities for
dollars
d. sell dollars for foreign currency and simultaneously buy Treasury securities with
dollars
e. none of the above
29) To force the value of the pound to appreciate against the dollar, the Federal Reserve
should:
a. sell dollars for pounds in the foreign exchange market and the European Central
Bank (ECB) should sell dollars for pounds in the foreign exchange market
b. sell pounds for dollars in the foreign exchange market and the European Central
Bank (ECB) should sell dollars for pounds in the foreign exchange market
c. sell pounds for dollars in the foreign exchange market and the European Central
Bank (ECB) should not intervene
d. sell dollars for pounds in the foreign exchange market and the European Central
Bank (ECB) should sell pounds for dollars in the foreign exchange market
30) Assume that Subsidiaries X and Y often trade with each other. Assume that
Subsidiary X has excess cash while Subsidiary Y is short on cash. How can Subsidiary
X help out Subsidiary Y?
a. X should lag its payments sent to Y to pay for imports from Y
b. X should request that Y lead its payments to be sent for goods that Y sent to X
c. A and B
d. None of the above
31) Margin requirements are deposits placed by investors in futures contracts with their
respective brokerage firms when they take their position. They are intended to minimize
credit risk associated with futures contracts.
a. True
b. False
32) A regression model was applied to explain movements in the Canadian dollar’s
value over time. The coefficient for the inflation differential between the U.S. and
Canada was -0.2. The coefficient of the interest rate differential between the U.S. and
Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the
inflation differential ____ and the interest rate differential ____.
a. increases; increases
b. decreases; increases
c. increases; decreases
d. increases; decreases
33) Which of the following is not true regarding government intervention?
a. Under the direct method of intervention, an appreciation of the dollar would be
accomplished by exchanging dollars for foreign currencies
b. Under nonsterilized intervention, the Fed would intervene in the foreign exchange
market without adjusting the money supply
c. Under sterilized intervention, the Fed would intervene simultaneously in the foreign
exchange and Treasury markets
d. Under indirect intervention, the Fed would attempt to affect the dollar’s value by
indirectly influencing the factors that determine it, such as interest rates
e. All of the above are true
34) U.S.-based MNCs are typically not monitored by mutual funds and pension funds,
as these institutions rarely hold stock in MNCs.
a. True
b. False
35) If U.S. firms issue bonds in ____, the dollar outflows to cover fixed coupon
payments increase as the dollar ____.
a. a foreign currency; weakens
b. dollars; strengthens
c. a foreign currency; strengthens
d. dollars; weakens
36) Which of the following is not mentioned in the text as a factor affecting exchange
rates?
a. relative interest rates
b. relative inflation rates
c. government controls
d. expectations
e. all of the above are mentioned in the text as factors affecting exchange rates
37) Assume that the international Fisher effect (IFE) holds between the U.S. and the
U.K. The U.S. inflation is expected to be 5%, while British inflation is expected to be
3%. The interest rates offered on pounds are 7% and U.S. interest rates are 7%. What
does this say about real interest rates expected by British investors?
a. real interest rates expected by British investors are equal to the interest rates expected
by U.S. investors
b. real interest rates expected by British investors are 2 percentage points lower than the
real interest rates expected by U.S. investors
c. real interest rates expected by British investors are 2 percentage points above the real
interest rates expected by U.S. investors
d. IFE doesn’t hold in this case because the U.S. inflation is higher than the British
inflation, but the interest rates offered in both countries are equal