1) China is commonly criticized for keeping the yuan’s value at superficially high
levels.
2) An MNC frequently uses either forward or futures contracts to hedge its exposure to
foreign receivables. To do so, the MNC can either sell the foreign currency forward or
sell futures.
3) Liquidity of a currency can affect the extent to which speculation can impact the
currency’s value.
4) If an MNC desires to offset a forward contract that it previously created, it can
simply ignore its obligation.
5) The disadvantage of a long strangle relative to a long straddle is that the underlying
currency has to fluctuate more prior to expiration.
6) If points are scattered evenly on both sides of the perfect forecast line, then the
forecast appears to be very accurate.
7) If a parent company backs the debt of a foreign subsidiary, the borrowing capacity of
the parent might be reduced as creditors are not willing to provide as many funds to the
parent if those funds may possibly be needed to rescue a parent’s subsidiary.
8) Triangular arbitrage tends to force a relationship between the interest rates of two
countries and their forward exchange rate premium or discount.
9) Inflation and interest rate differentials between the U.S. and foreign countries are
examples of variables that could be used in fundamental forecasting.
10) Currency devaluations have the potential to reduce unemployment, while currency
revaluations have the potential to reduce inflation.
11) Because their economies have lower growth, the cost of debt in industrialized
countries is much higher than the cost of debt in many less developed countries.
12) Exporting of products by one country to other countries at prices below cost is
called elasticity.
13) Hedging the position of individual subsidiaries is generally necessary, even if the
overall performance of the MNC is already insulated by the offsetting positions
between subsidiaries.
14) In general, an MNC’s size, its access to international capital markets, and
international diversification are unfavorable to an MNC’s cost of capital.
15) The transaction exposure of two inflow currencies is offset when the correlation
between the currencies is high.
16) Country risk can affect an MNC’s cash flows but cannot affect its cost of capital.
17) Because before-tax cash flows are necessary for an adequate capital budgeting
analysis, international tax effects need not be determined on a proposed foreign project.
18) The Asian crisis is generally believed to have started in Japan.
19) Futures contracts are typically ____; forward contracts are typically ____.
a.sold on an exchange; sold on an exchange
b.offered by commercial banks; sold on an exchange
c.sold on an exchange; offered by commercial banks
d.offered by commercial banks; offered by commercial banks
20) Generally, MNCs with less foreign revenues than foreign costs will be ____
affected by a ____ foreign currency.
a.favorably; stronger
b.favorably; weaker
c.not; stronger
d.not; weaker
21) Assume that interest rate parity exists, and there are zero transactions costs. If the
forward rate consistently underestimates the future spot rate, then:
a.on average, the foreign effective financing rate is greater than the domestic interest
rate
b.on average, the foreign effective financing rate is less than the domestic rate
c.the foreign effective financing rate exceeds the U.S. interest rate when its forward rate
exhibits a discount and is less than the U.S. interest rate when its forward rate exhibits a
premium
d.the foreign effective financing rate is less than the U.S. interest rate when its forward
rate exhibits a discount and exceeds the U.S. interest rate when its forward rate exhibits
a discount
22) A put option premium has a lower bound that is equal to the greater of zero and the
difference between the underlying ____ prices. The upper bound of a call option
premium is the ____ price.
a.spot and exercise; exercise
b.spot and exercise; spot
c.exercise and spot; exercise
d.exercise and spot; spot
23) Which of the following events would most likely result in an appreciation of the
U.S. dollar?
a.U.S. inflation is very high
b.The Fed indicates that it will raise U.S. interest rates
c.Future U.S. interest rates are expected to decline
d.Japan is expected to increase interest rates in the near future
24) An MNC can obtain equity by all of the following except:
a.retained earnings
b.a global equity offering
c.a domestic equity offering
d.none of the above
25) Assume that there are several foreign currencies that exhibit a higher interest rate
than the U.S. interest rate. The U.S. firm has a higher probability of generating a higher
effective yield on a portfolio of currencies (relative to the domestic yield) if:
a.the foreign currency movements against the U.S. dollar are highly correlated
b.the foreign currency movements against the U.S. dollar are perfectly positively
correlated
c.the foreign currency movements against the U.S. dollar exhibit low correlations
d.none of the answers above would have any impact on the probability of a foreign cash
investment generating a higher effective yield than a U.S. investment
26) 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
27) Assume that the U.S. interest rate is 11 percent, while Australia’s one-year interest
rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the
Australian dollar was used to forecast the future spot rate, the forecast would reflect an
expectation of:
a.depreciation in the Australian dollar’s value over the next year
b.appreciation in the Australian dollar’s value over the next year
c.no change in the Australian dollar’s value over the next year
d.information on future interest rates is needed to answer this question
28) Which of the following is not true regarding electronic communications networks
(ECNs)?
a.They have a visible trading floor
b.Trades are executed by a computer network
c.They have been created in many countries to match orders between buyers and sellers
d.They allow investors to place orders on their computers
e.All of the above are true
29) When the value from the prior period of an influential factor affects the forecast in
the future period, this is an example of a(n):
a.lagged input
b.instantaneous input
c.simultaneous input
d.B and C
30) If today’s exchange rate reflects all relevant public information about the euro’s
exchange rate, but not all relevant private information, then ____ would be refuted.
a.weak-form efficiency
b.semistrong-form efficiency
c.strong-form efficiency
d.A and B
e.B and C
31) When conducting a capital budgeting analysis and attempting to account for effects
of exchange rate movements for a foreign project, inflation ____ included explicitly in
the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in
the cash flow analysis.
a.should be; should be
b.should definitely not be; should definitely not be
c.should definitely not be; should be
d.should be; should definitely not be
32) Consider an importer that issues a promissory note to pay for the imported capital
goods over a period of five years. The notes are extended to an exporter who sells them
at a discount to a bank. This reflects:
a.accounts receivable financing
b.forfaiting
c.factoring
d.a letter of credit
33) ____ is (are) not a determinant of translation exposure.
a.The MNC’s degree of foreign involvement
b.The locations of foreign subsidiaries
c.The local (domestic) earnings of the MNC
d.The accounting methods used
34) When a perfect hedge is not available to eliminate transaction exposure, the firm
may consider methods to at least reduce exposure, such as ____.
a.leading
b.lagging
c.cross-hedging
d.currency diversification
e.all of the above
35) A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:
a.increased trade restrictions outside of North America
b.lower trade restrictions around the world
c.uniform environmental standards around the world
d.uniform worker health laws
36) Assume the following information for Brama 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 Brama’s after-tax cost of dollar-denominated debt?
a.7.0%
b.4.9%
c.8.0%
d.5.6%
37) Assume a two-country world: Country A and Country B. Which of the following is
correct about purchasing power parity (PPP) as related to these two countries?
a.If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency
will weaken
b.If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency
will weaken
c.If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency
will strengthen
d.If Country B’s inflation rate exceeds Country A’s inflation rate, Country A’s currency
will weaken
38) Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000
Malaysian ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is
extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is
$.28, the dollar amount initially obtained from the loan is $____, and $____ are needed
to repay the loan.
a.375,000; 449,400
b.449,400; 375,000
c.6,000,000; 5,357,143
d.5,357,143; 6,000,000
39) Which of the following is not mentioned in the text as an additional risk resulting
from international business?
a.exchange rate fluctuations
b.political risk
c.interest rate risk
d.exposure to foreign economies
40) Based on information in your text, all of the following factors should be considered
in an international acquisition, except:
a.the target’s willingness to be acquired
b.the target’s previous acquisition history
c.the target’s previous cash flows
d.the target’s local economic conditions
41) Assume Costner Corporation, a U.S.-based MNC, invests 2,500,000 Zambian
kwacha (ZMK) for a one-year period at a nominal interest rate of 9%. At the time the
loan is extended, the spot rate of the kwacha is $.00060. If the spot rate of the kwacha
in one year is $.00056, the dollar amount initially invested in Zambia is $____, and
$____ are paid out after one year.
a.1,500; 1,526
b.1,526; 1,500
c.1,500; 1,400
d.1,400; 1,500
42) Assume the annual British interest rate is above the annual U.S. interest rate. Also
assume the pound’s forward rate of $1.75 equals the pound’s spot rate. Given this
information, interest rate parity ____ exist, and the U.S. firm ____ lock in a lower
financing cost by borrowing pounds for one year.
a.does; could
b.does; could not
c.does not; could not
d.does not; could
43) Under a managed float exchange rate system, the Fed may attempt to stimulate the
U.S. economy by ____ the dollar. Such an adjustment in the dollar’s value should ____
the U.S. demand for products produced by major foreign countries.
a.weakening; increase
b.weakening; decrease
c.strengthening; increase
d.strengthening; decrease
44) Assume that the U.S. inflation rate is higher than the New Zealand inflation rate.
This will cause U.S. consumers to ____ their imports from New Zealand and New
Zealand consumers to ____ their imports from the U.S. According to purchasing power
parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).
a.reduce; increase; appreciation
b.increase; reduce; appreciation
c.reduce; increase; depreciation
d.reduce; increase; appreciation
45) To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars
and simultaneously ____ Treasury securities.
a.buy; sell
b.sell; sell
c.sell; buy
d.buy; sell
46) Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from
Canada. Kalons is typically invoiced for these goods in Canadian dollars and is
concerned that the Canadian dollar will appreciate in the near future. Which of the
following is not an appropriate hedging technique under these circumstances?
a.purchase Canadian dollars forward
b.purchase Canadian dollar futures contracts
c.purchase Canadian dollar put options
d.purchase Canadian dollar call options
47) A call option on Japanese yen has a strike (exercise) price of $.012. The present
exchange rate is $.011. This call option can be referred to as:
a.in the money
b.out of the money
c.at the money
d.at a discount
48) A put option is the amount or percentage by which the existing spot rate exceeds the
forward rate.
49) The Bretton Woods Agreement is an agreement to standardize banks’ capital
requirements across countries; the resulting capital ratios are computed using
risk-weighted assets.
50) An investor engaging in a transaction whereby he or she contracts to purchase
British pounds one year from now is an example of a spot market transaction.
51) The international money market is frequently accessed by MNCs for short-term
investment and financing decisions, while longer term financing decisions are made in
the international credit market or the international bond market and in international
stock markets.
52) The existence of imperfect markets has prevented the internationalization of
financial markets.
53) The term “eurobor” is widely used to reflect the interbank offer rate on euros.
54) The more intense the competition for the traded currency, the larger the bid/ask
spread.
55) If there is a strong demand to borrow a currency, and a low supply of savings in that
currency, the interest rate will be relatively low.
56) Shareholders have more voting power in some countries than others.
57) Under the gold standard, each currency was convertible into gold at a specified rate,
and the exchange rate between two currencies was determined by their relative
convertibility rates per ounce of gold.