1) When comparing the forward hedge to the options hedge, the MNC can easily
determine which hedge is more desirable, because the cost of each hedge can be
determined with certainty.
2) With a bull spread, the spreader believes that the underlying currency will appreciate
substantially, even more so than with a strangle.
3) According to the international Fisher effect (IFE), the exchange rate percentage
change should be approximately equal to the differential in income levels between two
countries.
4) The closer graphical points are to the perfect forecast line, the better is the forecast.
5) The European countries conforming to the euro are completely insulated from
movements in the euro’s value with respect to other currencies.
6) Although forward contracts may reduce translation exposure at the expense of
increasing transaction exposure, they are sometimes used to hedge translation exposure.
7) MNCs commonly consider direct foreign investment because it can improve their
profitability and enhance shareholder wealth.
8) Assuming no credit risk, the interest rates among countries in the eurozone should be
similar.
9) If the cross exchange rate of two nondollar currencies implied by their individual
spot rates with respect to the dollar is less than the cross exchange rate quoted by a
bank, locational arbitrage is possible.
10) The VAR method assumes that the volatility (standard deviation) of exchange rate
movements changes over time.
11) To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract
for that currency.
a.receivable; purchase
b.payable; sell
c.payable; purchase
d.none of the above
12) Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which
are priced in yen. The demand for those cars declines when the yen is strong. The
manufacturer also produces some cars in the U.S. with U.S. materials and those cars are
priced in dollars. The manufacturer could reduce its economic exposure by:
a.closing down most of its plants in the U.S
b.producing more automobiles in the U.S
c.relying completely on Japanese suppliers for its parts
d.pricing its exports in dollars
13) Licensing obligates a firm to provide ____, while franchising obligates a firm to
provide ____.
a.a specialized sales or service strategy; its technology
b.its technology; a specialized sales or service strategy
c.its technology; its technology
d.a specialized sales or service strategy; a specialized sales or service strategy
e.its technology; an initial investment
14) Which of the following factors probably does not directly affect a country’s capital
account and its components?
a.Inflation
b.Interest rates
c.Withholding taxes on foreign income
d.Exchange rate movements
e.All of the above will directly affect a country’s capital account
15) Assume that the British government eliminates all controls on imports by British
companies. Other things being equal, the U.S. demand for pounds would ____, the
supply of pounds for sale would ____, and the equilibrium value of the pound would
____.
a.increase; increase; increase
b.decrease; increase; decrease
c.remain unchanged; increase; decrease
d.remain unchanged; increase; increase
16) U.S. based Majestic Co. sells products to U.S. consumers and purchases all of
materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co.
is subject to:
a.economic exposure
b.translation exposure
c.transaction exposure
d.no exposure to exchange rate fluctuations
17) Which of the following would result in a profit of a euro futures contract when the
euro depreciates?
a.buy a euro futures contract; sell a futures contract after the euro has depreciated
b.sell a euro futures contract; buy a futures contract after the euro has depreciated
c.buy a euro futures contract; buy an additional futures contract after the euro has
depreciated
d.none of the above would result in a profit when the euro depreciates
18) Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180
days. Today’s spot rate of the NZ$ is $.50, and the 180-day forward rate is $.51. A call
option on NZ$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day
expiration date. A put option on NZ$ exists with an exercise price of $.51, a premium of
$.02, and a 180-day expiration date. Patton Co. has developed the following probability
distribution for the spot rate in 180 days:
Possible Spot Rate
in 90 DaysProbability
$.4810%
$.4960%
$.5530%
The probability that the forward hedge will result in more U.S. dollars received than the
options hedge is ____ (deduct the amount paid for the premium when estimating the
U.S. dollars received on the options hedge).
a.10%
b.30%
c.40%
d.70%
e.none of the above
19) Assume the U.S. financing rate is 10 percent and that the financing rate in Germany
is 9 percent. An MNC would be indifferent between financing in dollars and financing
in euros next year if the euro is expected to ____.
a.appreciate by 0.92%
b.depreciate by 0.92%
c.appreciate by 1.00%
d.depreciate by 1.00%
20) Monson Co., based in the U.S., exports products to Japan denominated in yen. If the
forecasted value of the yen is substantially ____ than the forward rate, Monson Co. will
likely decide ____ the payments.
a.higher; to hedge
b.lower; not to hedge
c.higher; not to hedge
d.none of the above
21) Foreign financing costs in a single foreign currency ____ financing costs in dollars,
and the variance of foreign financing costs over time is ____ than the variance of
financing in dollars.
a.are higher than; higher than
b.can be lower or higher than; higher than
c.can be lower or higher than; lower than
d.are lower than; higher than
22) Lazer Co. is a U.S. firm that exports computers to Belgium invoiced in euros and to
Italy invoiced in dollars. Additionally, Lazer Co. has a subsidiary in Korea that
produces computers in South Korea and sells them there. Lazer also has competitors in
different countries. Lazer Co. is subject to:
a.transaction exposure
b.economic exposure
c.translation exposure
d.all of the above
23) The ____ the MNC’s cost of capital, the ____ will be a project’s net present value
for its proposed project with a given set of expected cash flows.
a.lower; higher
b.higher; higher
c.lower; lower
d.none of the above
24) Which of the following theories suggests the percentage change in spot exchange
rate of a currency should be equal to the interest rate differential between two
countries?
a.absolute form of PPP
b.relative form of PPP
c.international Fisher effect (IFE)
d.interest rate parity (IRP)
25) The spot rate of euro is quoted at $1.29. The annualized forward premium on the
euro is 10%. What is the 30-day forward rate of the euro?
a.$1.28
b.$1.30
c.$1.42
d.$1.16
26) Which currency is used the most to denominate Eurobonds?
a.the British pound
b.the Japanese yen
c.the U.S. dollar
d.the Swiss franc
27) Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be
received in the future from this subsidiary have not changed since last month, but the
valuation of Saller Co. has declined since last month. What could’ve caused this decline
in value?
a.A weaker Mexican economy
b.Lower Mexican interest rates
c.Depreciation of the Mexican peso
d.Appreciation of the Mexican peso
28) Which of the following factors is not expected to generally have a favorable impact
on the firm’s cost of capital according to the text?
a.easy access to international capital markets
b.high degree of international diversification
c.high exposure to exchange rate fluctuations
d.all of the above
29) Which of the following is not a payment method used for international trade?
a.Supplier credit
b.Bill of exchange
c.Bill of lading
d.Letter of credit
e.All of the above are payment methods used
30) Graylon, Inc., based in Washington, exports products to a German firm and will
receive payment of 200,000 in three months. On June 1, the spot rate of the euro was
$1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a
forward contract with a bank to sell 200,000 forward in three months. The spot rate of
the euro on September 1 is $1.15. Graylon will receive $____ for the euros.
a.224,000
b.220,000
c.200,000
d.230,000
31) Which of the following is true?
a.The futures market is primarily used by speculators while the forward market is
primarily used for hedging
b.The futures market is primarily used for hedging while the forward market is
primarily used for speculating
c.The futures market and the forward market are primarily used for speculating
d.The futures market and the forward market are primarily used for hedging
32) If a firm does not have foreign subsidiaries, it is not subject to ____.
a.transaction exposure
b.economic exposure
c.A and B
d.translation exposure
33) 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
34) A share of the ADR of a Dutch firm represents one share of that firm’s stock that is
traded on a Dutch stock exchange. The share price of the firm was 15 euros when the
Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price
of the ADR should be ____.
a.$13.64
b.$15.00
c.$16.50
d.16.50 euros
e.none of the above
35) Consider an exporter that sells its accounts receivables off to another firm that
becomes responsible for obtaining cash from the various importers. This reflects:
a.accounts receivable financing
b.consignment
c.factoring
d.a letter of credit
36) The absolute forecast error of a currency is ____, on average, in periods when the
currency is more ____.
a.lower; volatile
b.higher; stable
c.lower; stable
d.none of the above
37) Which of the following is not true regarding economic exposure?
a.Even purely domestic firms can be affected by economic exposure
b.In general, depreciation of the firm’s local currency causes a decrease in both cash
inflows and outflows
c.The degree of economic exposure will likely be much greater for a firm involved in
international business than for a purely domestic firm
d.The impact of a change in the local currency on inflow and outflow variables can
sometimes be indirect and therefore different from what is expected
e.All of the above are true
38) 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
39) During the period 1944-1971, the U.S. used a ____ system.
a.euro exchange rate
b.fixed
c.dirty float
d.flexible
40) If the U.S. and Japan engage in substantial financial flows but little trade, ____
directly influences their exchange rate the most. If the U.S. and Switzerland engage in
much trade but little financial flows, ____ directly influences their exchange rate the
most.
a.interest rate differentials; interest rate differentials
b.inflation and interest rate differentials; interest rate differentials
c.income and interest rate differentials; inflation differentials
d.interest rate differentials; inflation and income differentials
e.inflation and income differentials; interest rate differentials
41) Which of the following would increase the current account of Country X? Country
Y is Country X’s sole trading partner.
a.Inflation increases in countries X and Y by comparable amounts
b.Country X’s and Country Y’s currencies depreciate by the same amount
c.Country X imposes tariffs on imports from Country Y, and Country Y retaliates by
imposing an identical tax on X’s exports
d.The central banks of Country X and Country Y reduce the money supply to increase
interest rates
e.Country X imposes a quota on imports, and Country Y retaliates by imposing an
identical quota on X’s exports