1) Direct intervention is usually more effective than indirect intervention.
2) A parallel loan represents simultaneous loans provided by two parties with an
agreement to repay at a specified point in the future.
3) A money market hedge involves taking a money market position to cover a future
payables or receivables position.
4) Country X frequently engages in trade flows with the U.S. (such as imports and
exports). Country Y frequently engages in capital flows with the U.S. (such as financial
investments). Everything else held constant, an increase in U.S. interest rates would
affect the exchange rate of Country X’s currency more than the exchange rate of
Country Y’s currency.
5) The Theory of Comparative Advantage begins by assuming that a given firm first
becomes established in its home country and may subsequently penetrate foreign
markets via geographic or product differentiation.
6) Interest rate parity (IRP) states that the foreign currency’s forward rate premium or
discount is roughly equal to the interest rate differential between the U.S. and the
foreign country.
7) Technology enables more consistent prices among banks and reduces the likelihood
of significant discrepancies in foreign exchange quotations among locations.
8) Financial flow foreign exchange transactions are more responsive to news than
trade-related transactions.
9) A strong home currency can harm exports; exporters typically benefit from a weaker
home country currency.
10) A forecasting technique based on fundamental relationships between economic
variables and exchange rates, such as inflation, is referred to as technical forecasting.
11) Even if the interest rate associated with a foreign country is higher than the
domestic interest rate, the financing costs of a foreign bond will always be lower than
the financing rate of a domestic bond as long as the currency depreciates over the
lifetime of a bond.
12) The valuation of newly privatized businesses is generally more difficult than the
valuation of a foreign target that has operated privately for several years.
13) The goal of a multinational corporation (MNC) is the maximization of shareholder
wealth.
14) Which of the following is not a forecasting technique mentioned in your text?
a.Accounting-based forecasting
b.Technical forecasting
c.Fundamental forecasting
d.Market-based forecasting
e.Mixed forecasting
15) 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.The firm benefits from existing customer relationships
c.International acquisitions are generally cheaper than the establishment of a new
subsidiary
d.An international acquisition typically generates quicker and larger cash flows than the
establishment of a new subsidiary
e.All of the above are advantages of international acquisitions
16) According to the “J curve effect,” a weakening of the U.S. dollar relative to its
trading partners’ currencies would result in an initial ____ in the current account
balance, followed by a subsequent ____ in the current account balance.
a.decrease; increase
b.increase; decrease
c.decrease; decrease
d.increase; increase
17) 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
18) Countries that have adopted the euro must agree on a single ____ policy.
a.monetary
b.fiscal
c.worker compensation
d.foreign relations
19) Other things being equal, countries with relatively ____ populations and ____
inflation are more likely to have a low cost of capital.
a.young; high
b.old; high
c.old; low
d.young; low
20) 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%
21) When the foreign exchange market opens in the U.S. each morning, the opening
exchange rate quotations will be based on the:
a.closing prices in the U.S. during the previous day
b.closing prices in Canada during the previous day
c.prevailing prices in locations where the foreign exchange markets have been open
d.officially set by central banks before the U.S. market opens
22) As far as the managerial talent of the target is concerned:
a.the manner in which the acquirer plans to deal with the managerial talent will affect
the estimated cash flows to be generated by the target
b.downsizing will reduce expenses and increase productivity and revenues
c.governments of some countries are likely to intervene and prevent the acquisition if
downsizing is anticipated
d.all of the above
e.A and C only
23) 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
24) The ____ the percentage of an MNC’s business conducted by its foreign
subsidiaries, the ____ the percentage of a given financial statement item that is
susceptible to translation exposure.
a.greater; smaller
b.smaller; greater
c.greater; greater
d.none of the above
25) If a subsidiary project is assessed from the subsidiary’s perspective, then an
expected appreciation in the foreign currency will affect the feasibility of the project
____.
a.positively
b.negatively
c.either positively or negatively, depending on the percentage appreciation
d.none of the above
26) Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian
pound (EGP). 25% of the MNC’s funds are Taiwan dollars and 75% are pounds. The
standard deviation of exchange movements is 7% for Taiwan dollars and 5% for
pounds. The correlation coefficient between movements in the value of the Taiwan
dollar and the pound is .7. Based on this information, the standard deviation of this
two-currency portfolio is approximately:
a.5.13%
b.2.63%
c.4.33%
d.5.55%
27) Which of the following is not a method that can be used to invest internationally?
a.Investment in MNC stocks
b.American depository receipts (ADRs)
c.World Equity benchmark Shares (WEBS)
d.International mutual funds
e.All of the above are methods that can be used to invest internationally
28) Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at
Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is
$.325 at Bank Y. Given this information, what would be your gain if you use
$1,000,000 and execute locational arbitrage? That is, how much will you end up with
over and above the $1,000,000 you started with?
a.$15,385
b.$15,625
c.$22,136
d.$31,250
29) The U.S. risk-free rate is currently 3%. The expected U.S. market return is 10%.
Solso, Inc. is considering a project that has a beta of 1.2. What is the cost of
dollar-denominated equity?
a.8.4%
b.11.4%
c.10%
d.None of the above
30) If the one-year forward rate for the euro is $1.07, while the current spot rate is
$1.05, the expected percentage change in the euro is ____%.
a.1.90
b.2.00
c.-1.87
d.none of the above
31) Which of the following forecasting techniques would best represent the use of
today’s forward exchange rate to forecast the future exchange rate?
a.fundamental forecasting
b.market-based forecasting
c.technical forecasting
d.mixed forecasting
32) To enter markets where superior profits are possible, an MNC should:
a.acquire a competitor that has controlled its local market
b.establish a subsidiary or acquire a competitor in a new market
c.establish a subsidiary in a market where tougher trade restrictions will adversely
affect the firm’s export volume
d.establish subsidiaries in markets whose business cycles differ from those where
existing subsidiaries are based
33) Direct foreign investment is perceived by foreign governments to:
a.be a cause of national problems
b.be a remedy for national problems
c.either A or B is possible
d.have no impact on national problems
34) Intracompany trade makes up approximately ____ percent of all international trade.
a.50
b.70
c.25
d.13
e.5
35) A perfect hedge (full coverage) on translation exposure can usually be achieved
when:
a.using the money market hedge
b.using the forward hedge
c.using the futures hedge
d.none of the above, since a perfect hedge is nearly impossible
36) According to the text, international trade activity has generally ____ over time. This
should cause the popularity of trade finance techniques to ____ over time.
a.increased; increase
b.increased; decrease
c.decreased; increase
d.decreased; decrease
37) If the Japanese yen is expected to appreciate against the U.S. dollar and interest
rates in the U.S. and Japan are similar, banks may try speculating on this anticipated
exchange rate movement by borrowing ____ and investing in ____.
a.yen; dollars
b.yen; yen
c.dollars; yen
d.dollars; dollars
38) The ____ does not represent an obligation.
a.long-term forward contract
b.currency swap
c.parallel loan
d.currency option
39) American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian
rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025.
Locational arbitrage would involve:
a.buying rupees from American Bank at the bid rate and selling them to National Bank
at the ask rate
b.buying rupees from National Bank at the ask rate and selling them to American Bank
at the bid rate
c.buying rupees from American Bank at the ask rate and selling to National Bank at the
bid rate.
d.buying rupees from National Bank at the bid rate and selling them to American Bank
at the ask rate
e.Locational arbitrage is not possible in this case
40) Which of the following is not true regarding options?
a.Options are traded on exchanges, never over-the-counter
b.Similar to futures contracts, margin requirements are normally imposed on option
traders
c.Although commissions for options are fixed per transaction, multiple contracts may
be involved in a transaction, thus lowering the commission per contract
d.Currency options can be classified as either put or call options
e.All of the above are true
41) Everything else being equal, the ____ the depreciation expense is in a given year,
the ____ a foreign project’s NPV will be.
a.higher; lower
b.higher; higher
c.lower; higher
d.none of the above
42) 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
43) 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%
44) Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another
subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the
parent company. The German subsidiary generated a net outflow of 2,000,000 this year,
while the Greek subsidiary generated a net inflow of 1,500,000. What is the net inflow
or outflow as measured in U.S. dollars this year? The exchange rate for the euro is
$1.05.
a.$3,675,000 outflow
b.$525,000 outflow
c.$525,000 inflow
d.$210,000 outflow
45) It has been argued that the exchange rate can be used as a policy tool. Assume that
the U.S. government would like to reduce inflation. Which of the following is an
appropriate action given this scenario?
a.Sell dollars for foreign currency
b.Buy dollars with foreign currency
c.Lower interest rates
d.None of the above
46) Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in U.S. $=$.32
Exchange rate of pound in U.S. $=$1.50
Exchange rate of pound in Singapore dollars=S$4.50
Based on the information given, as you and others perform triangular arbitrage, what
should logically happen to the spot exchange rates?
a.The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.
dollars should appreciate, and the pound value in Singapore dollars should depreciate
b.The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.
dollars should appreciate, and the pound value in Singapore dollars should depreciate
c.The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.
dollars should appreciate, and the pound value in Singapore dollars should appreciate
d.The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.
dollars should depreciate, and the pound value in Singapore dollars should appreciate
47) Exhibit 7-1
Assume the following information:
You have $300,000 to invest:
The spot bid rate for the euro () is $1.08
The spot ask quote for the euro is $1.10
The 180-day forward rate (bid) of the euro is $1.08
The 180-day forward rate (ask) of the euro is $1.10
The 180-day interest rate in the U.S. is 6%
The 180-day interest rate in Europe is 8%
Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what is your percentage
return after 180 days? Is covered interest arbitrage feasible in this situation?
a.7.96%; feasible
b.6.04%; feasible
c.6.04%; not feasible
d.4.07%; not feasible
e.10.00%; feasible
48) According to the CAPM, the required rate of return on stock is a positive function
of all of the following, except:
a.the risk-free rate of interest
b.the market rate of return
c.the stock’s beta
d.the company’s earnings
49) A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is
the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a
yen)?
a.73.75
b.125
c.1.69
d.0.014
e.none of the above
50) Which of the following is not a method of forecasting exchange rate volatility?
a.using the absolute forecast error as a percentage of the realized value
b.using the volatility of historical exchange rate movements as a forecast for the future
c.using a time series of volatility patterns in previous periods
d.deriving the exchange rate’s implied standard deviation from the currency option
pricing model
51) Huge Corporation has just initiated a market-based forecast system using the
forward rate as an estimate of the future spot rate of the Japanese yen () and the
Australian dollar (A$). Listed below are the forecasted and realized values for the last
period:
CurrencyForecasted ValueRealized Value
Australian dollar $.60 $.55
Japanese yen$.0067$.0069
According to this information and using the absolute forecast error as a percentage of
the realized value, the forecast of the yen by Huge Corp. is ____ the forecast of the
Australian dollar.
a.more accurate than
b.less accurate than
c.more biased than
d.the same as