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1) If the U.S. dollar appreciates,
a. an MNC's U.S. sales will probably decrease
b. an MNC's exports denominated in U.S. dollars will probably increase
c. an MNC's interest owed on foreign funds borrowed will probably increase
d. an MNC's exports denominated in foreign currencies will probably increase
e. all of the above
2) Large commercial banks play a major role in the international money market by
accepting short-term deposits in large amounts (such as the equivalent of $1 million or
more) and in various currencies, and channeling the money to corporations and
government agencies that need to borrow those short-term funds in the desired
currencies.
a. True
b. False
3) Managing economic exposure is generally perceived to be ____ managing
transaction exposure.
a. more difficult than
b. less difficult than
c. just as difficult as
d. none of the above
4) The term "global capital structure" is used in the text to represent the:
a. average capital structure of all MNCs across countries
b. average capital structure of all domestic firms across countries
c. capital structure of a subsidiary of a particular MNC
d. capital structure of a particular MNC overall (including all subsidiaries)
5) According to the international Fisher effect (IFE):
a. the nominal rate of return on a foreign investment should be equal to the nominal rate
of return on the domestic investment
b. the exchange rate adjusted rate of return on a foreign investment should be equal to
the interest rate on a local money market investment
c. the percentage change in the foreign spot exchange rate will be positive if the foreign
interest rate is higher than the local interest rate
d. the percentage change in the foreign spot exchange rate will be negative if foreign
interest rate is lower than the local interest rate
6) In general, MNCs probably prefer to use ____ foreign debt when their foreign
subsidiaries are subject to potentially ____ local currencies.
a. more; strong
b. more; weak
c. less; strong
d. less; weak
e. B and D
7) The ____ is a private corporation owned by a consortium of commercial banks and
industrial companies, but the ____ is a self-sustaining government agency.
a. Overseas Private Investment Corporation (OPIC); Private Export Funding
Corporation (PEFCO)
b. Private Export Funding Corporation (PEFCO); Overseas Private Investment
Corporation (OPIC)
c. Private Export Funding Corporation (PEFCO); Ex-Imbank
d. Overseas Private Investment Corporation (OPIC); Ex-Imbank
8) 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%
9) Since country risk is constantly changing and events in other parts of the world are
largely unpredictable, country risk analysis is not important for MNCs.
a. True
b. False
10) Market-based forecasting involves the use of historical exchange rate data to predict
future values.
a. True
b. False
11) 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
12) 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
13) The required rate of return used to discount the relevant cash flows from a foreign
project may differ from the MNC's cost of capital because of that particular project's
risk.
a. True
b. False
14) Nonsterilized intervention is intervention by a central bank in the foreign exchange
market without adjusting for the change in money supply.
a. True
b. False
15) 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
16) Which of the following is true regarding the euro?
a. Exchange rate risk between participating European currencies is completely
eliminated, encouraging more trade and capital flows across European borders
b. It allows for more consistent economic conditions across countries
c. It prevents each country from conducting its own monetary policy
d. All of the above are true
17) Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In
order to do so, it has applied regression analysis to determine whether the percentage
change in its total cash flow is related to the percentage change in the euro. A ____ and
statistically significant slope coefficient resulting from this analysis implies that the
cash flows are ____ related to the percentage changes in the euro.
a. positive; positively
b. positive; negatively
c. negative; positively
d. B and C
e. none of the above
18) The government of a country may prevent a foreign firm from acquiring local
targets and downsizing the targets.
a. True
b. False
19) When viewed as a project, the international acquisition usually generates quicker
and larger cash flows than the establishment of a new subsidiary, but it also requires a
larger initial outlay.
a. True
b. False
20) 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
21) The Overseas Private Investment Corporation (OPIC) is owned by a consortium of
commercial banks and industrial companies; it cooperates closely with the
Export-Import Bank.
a. True
b. False
22) 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%
23) A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash
inflows denominated in Barbados dollars. Given this information, the MNC would ____
from a(n) ____ of the Barbados dollar.
a. benefit; appreciation
b. benefit; depreciation
c. not benefit; appreciation
d. none of the above
24) FAI Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days.
Currently, a 90-day call option with an exercise price of $0.75 and a premium of $0.01
is available. Also, a 90-day put option with an exercise price of $0.73 and a premium of
$0.01 is available. FAI plans to purchase options to hedge its receivable position.
Assuming that the spot rate in 90 days is $0.71, what is the net amount received from
the currency option hedge?
a. $219,000
b. $222,000
c. $216,000
d. $213,000
25) 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
26) Which of the following is not an example of political risk?
a. The Japanese government requires an MNC's subsidiary to install exercise rooms for
its employees
b. The Swiss government requires an MNC's subsidiary to install filters in its
manufacturing plants to reduce pollution
c. Country X, considered for expansion, frequently goes to war with its neighbors
d. Country Y's government has recently taken over the subsidiary of one of your
competitors, another U.S.-based MNC
e. All of the above are examples of political risk
27) According to the text, the cost of debt:
a. for each country is somewhat stable over time
b. among countries changes over time, and these changes are negatively correlated
c. among countries changes over time, and these changes are positively correlated
d. among countries changes over time, and are not correlated
28) Using the inflation differential between two countries to forecast their exchange
rates is not always accurate because of such factors as the uncertain timing of the
impact of inflation and barriers to trade.
a. True
b. False
29) Assume that interest rate parity holds. The U.S. one-year interest rate is 10% and
the Australian one-year interest rate is 8%. What will the approximate effective yield be
for an Australian citizen of a one-year deposit denominated in U.S. dollars? Assume the
deposit is covered by a forward sale of dollars.
a. 10%
b. 8%
c. 2%
d. cannot answer without more information
30) Which of the following is true for futures, but not for forwards?
a. actual delivery
b. no transactions costs
c. self regulation
d. none of the above
31) The overall variability of a firm's returns depends on the expected return of each
individual project, percentage of funds invested in each individual project, and
correlation coefficient of returns between the investments.
a. True
b. False
32) Regarding the U.S. balance of payments, capital account items are relatively minor
compared to the financial account items.
a. True
b. False
33) 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
34) Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows
of Sunland francs. These two currencies are highly negatively correlated in their
movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same
exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash
outflows. Which firm has a high exposure to exchange rate risk?
a. Jacko Co
b. Kriner Co
c. the firms have about the same level of exposure
d. neither firm has any exposure
35) Assume that Boca Co. wants to expand its business to Japan, and wants complete
control over the operations in Japan. Which method of international business is most
appropriate for Boca Co?
a. Joint venture
b. Licensing
c. Partial acquisition of existing Japanese firm
d. Establishment of Japanese subsidiary
36) If interest rate parity exists, transactions costs are zero, and the forward rate is an
accurate predictor of the future spot rate, then the effective financing rate on a foreign
currency:
a. would be equal to the U.S. interest rate
b. would be less than the U.S. interest rate
c. would be more than the U.S. financing rate
d. would be less than the U.S. interest rate if the forward rate exhibited a discount and
more than the U.S. interest rate of the forward rate exhibited a premium
