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1) If markets were perfect, then labor and other costs of production would be perfectly
stable (no movement across borders).
a. True
b. False
2) If the functional currencies for reporting purposes are highly correlated, translation
exposure is magnified.
a. True
b. False
3) If you have bought a right to buy foreign currency, you are:
a. a call writer
b. a call buyer
c. a put writer
d. a put buyer
4) According to the IFE, if British interest rates exceed U.S. interest rates:
a. the British pound's value will remain constant
b. the British pound will depreciate against the dollar
c. the British inflation rate will decrease
d. the forward rate of the British pound will contain a premium
e. today's forward rate of the British pound will equal today's spot rate
5) The real interest rate adjusts the nominal interest rate for:
a. exchange rate movements
b. income growth
c. inflation
d. government controls
e. none of the above
6) 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
7) If all currencies in a financing portfolio are not correlated with each other, financing
with such a portfolio would not be very different from financing with a single foreign
currency.
a. True
b. False
8) When using factoring to finance international trade, a bank will provide a loan to the
exporter secured by an assignment of the account receivable.
a. True
b. False
9) ____ typically have maturities of less than one year.
a. Eurobonds
b. Euro-commercial paper
c. Euronotes
d. ADRs
10) If the spot rate of the British pound is $1.50, and the one-year forward rate has a
discount of 3 percent, the one-year forward rate is $____.
a. 1.50
b. 1.47
c. 1.55
d. 1.46
e. None of the above
11) If a currency put option is out of the money, then the present exchange rate is less
than the strike price.
a. True
b. False
12) The main effect of interest rate movements on exchange rates is through their effect
on international trade.
a. True
b. False
13) An MNC's parent or subsidiary in need for funds commonly determines whether
there are any available internal funds before searching for outside funding.
a. True
b. False
14) As a result of the Smithsonian Agreement, the U.S. dollar was:
a. the currency to be used by all countries as a medium of exchange for international
trade
b. forced to be freely floating relative to all currencies without any boundaries
c. devalued relative to major currencies
d. revalued (upward) relative to major currencies
15) 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
16) The establishment of the euro allows for more consistent economic conditions
across countries but eliminates the power of any individual European country to solve
local economic problems with its own unique monetary policy.
a. True
b. False
17) Exhibit 21-2
Moore Corporation would like to simultaneously invest in Malaysian ringgit (MYR)
and Romanian leu (ROL) for a three-month period. Moore would like to determine the
expected yield and the variance of a portfolio consisting of 40% ringgit and 60% leu.
Moore has identified the following information:
Refer to Exhibit 21-2. What is the standard deviation of the portfolio contemplated by
Moore Corporation?
a. .624%
b. 7.950%
c. 1.040%
d. 10.200%
e. none of the above
18) If a particular currency is consistently declining substantially over time, then a
market-based forecast will usually have:
a. underestimated the future exchange rates over time
b. overestimated the future exchange rates over time
c. forecasted future exchange rates accurately
d. forecasted future exchange rates inaccurately but without any bias toward consistent
underestimating or overestimating
19) 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
20) Assume that interest rate parity holds between the U.S. and Cyprus. The U.S.
one-year interest rate is 7% and the Cyprus one-year interest rate is 6%. What is the
approximate effective financing rate of a one-year loan denominated in Cyprus pounds
assuming that the MNC covered its exposure by purchasing pounds one year forward?
a. 6%
b. 7%
c. 1%
d. cannot answer without more information
21) One argument for exchange rate irrelevance is that:
a. MNCs can hedge exchange rate exposure much more effectively than individual
investors
b. investors can invest in a diversified stock portfolio of MNCs that have different
exposures to exchange rates
c. purchasing power parity does not hold very well
d. MNCs are typically not diversified across numerous countries
22) If interest rate parity exists, and transaction costs do not exist, the option hedge will
yield the same results as no hedge.
a. True
b. False
23) The international credit market primarily concentrates on:
a. short-term lending (less than one year)
b. medium-term lending
c. long-term lending
d. providing an exchange of foreign currencies for firms who need them
e. placing newly issued stock in foreign markets
24) The Sarbanes-Oxley Act requires more accountability by executives and the board
of directors when assessing acquisitions.
a. True
b. False
25) The J curve effect is the initial worsening of the U.S. trade balance due to a
weakening dollar because of established trade relationships that are not easily changed;
as the dollar weakens, the dollar value of imports initially rises before the U.S. trade
balance is improved.
a. True
b. False
26) Assume that the U.S. places a strict quota on goods imported from Chile and that
Chile does not retaliate. Holding other factors constant, this event should immediately
cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____.
a. increase; increase
b. increase; decline
c. decline; decline
d. decline; increase
27) The bid/ask spread for small retail transactions is commonly in the range of ____
percent.
a. 3 to 7
b. .01 to .03
c. 10 to 15
d. .5 to 1
28) Which of the following firms is not exposed to translation exposure?
a. Firm X, with a fully owned subsidiary that periodically remits earnings generated in
Great Britain to the U.S.-based parent
b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses in
Sweden. The parent covers at least some of these losses
c. Firm Z, with a fully owned subsidiary that generates substantial earnings in Germany.
The subsidiary never remits earnings but reinvests them in Germany
d. All of the above firms are exposed to translation exposure
29) The ____, an accord among 117 nations, called for lower tariffs around the world.
a. General Agreement on Tariffs and Trade (GATT)
b. North American Free Trade Agreement (NAFTA)
c. Single European Act of 1987
d. European Union Accord
e. None of the above
30) If a country experiences high inflation relative to the U.S., its exports to the U.S.
should ____, its imports should ____, and there is ____ pressure on its currency's
equilibrium value.
a. decrease; increase; upward
b. decrease; decrease; upward
c. increase; decrease; downward
d. decrease; increase; downward
e. increase; decrease; upward
31) A ____ is an unconditional promise drawn by one party, instructing the buyer to pay
the face amount upon presentation.
a. draft
b. bill of lading
c. trade acceptance
d. letter of credit
32) 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
33) The relative form of purchasing power parity (PPP) accounts for the possibility of
market imperfections such as transportation costs, tariffs, and quotas in establishing a
relationship between inflation rates and exchange rate changes.
a. True
b. False
34) In the U.S., the typical currency futures contract is based on a currency value in
terms of:
a. euros
b. U.S. dollars
c. British pounds
d. Canadian dollars
35) A currency portfolio's variability depends on the standard deviations and paired
correlations of effective yields of the individual currencies within the portfolio.
a. True
b. False
36) Institutional investors such as commercial banks, mutual funds, insurance
companies, and pension funds from many countries are major participants in the
international bond market.
a. True
b. False
37) 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
