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1) A set of currency cash inflows is more volatile if the correlations are low.
a. True
b. False
2) ____ purchases more U.S. exports than the other countries listed here.
a. Italy
b. Spain
c. Mexico
d. Canada
3) The required rate of return of a project is ____ the MNC's cost of capital.
a. greater than
b. less than
c. the same as
d. any of the above, depending on the specific project
4) If shipment is made under a forfaiting draft, the exporter is paid once shipment has
been made and the draft is presented to the buyer for payments.
a. True
b. False
5) Forward markets for currencies of developing countries are:
a. prohibited
b. less liquid than markets for developed countries
c. more liquid than markets for developed countries
d. only available for use by government agencies
6) Exhibit 20-2
To benefit from the low correlation between the Canadian dollar (C$) and the Japanese
yen (), Luzar Corporation decides to borrow 50% of funds needed in Canadian dollars
and the remainder in yen. The domestic financing rate for a one-year loan is 7%. The
Canadian one-year interest rate is 6% and the Japanese one-year interest rate is 10%.
Luzar has determined the following possible percentage changes in the two individual
currencies as follows:
Refer to Exhibit 20-2. What is the probability that the financing rate of the
two-currency portfolio is less than the domestic financing rate?
a. 12%
b. 30%
c. 100%
d. 0%
e. none of the above
7) 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
8) ____ is not a method of incorporating an adjustment for risk into the capital
budgeting analysis.
a. Discriminant analysis
b. Risk-adjusted discount rate
c. Sensitivity analysis
d. Simulation
9) Higher interest rates in a foreign country tend to ____ the growth of an economy and
____ demand for the MNC's product.
a. increase; increase
b. reduce; reduce
c. increase; reduce
d. reduce; increase
10) Many MNCs simultaneously swap interest payments and currencies.
a. True
b. False
11) When assuming that investors in the U.S. are most concerned with their exposure to
the U.S. stock market, it is acceptable to use the U.S. market when measuring a
U.S.-based MNC's project's beta.
a. True
b. False
12) Generally, MNCs with less foreign costs than foreign revenues will be ____
affected by a ____ foreign currency.
a. favorably; stronger
b. not; stronger
c. favorably; weaker
d. not; weaker
e. B and D
13) Due to the risks involved in international business, firms should:
a. only consider international business in major countries
b. maintain international business to no more than 20% of total business
c. maintain international business to no more than 35% of total business
d. none of the above
14) Consider two countries that trade with each other, called X and Y. According to the
text, inflation in Country X will have a greater impact on inflation in Country Y under
the ____ system. Now, consider two other countries that trade with each other, called A
and B. Unemployment in Country A will have a greater impact on unemployment in
Country B under the ____ system.
a. floating rate; fixed rate
b. floating rate; floating rate
c. fixed rate; fixed rate
d. fixed rate; floating rate
15) Capital asset pricing theory suggests that ____ risk of projects can be ignored and
that ____ is relevant.
a. unsystematic; unsystematic
b. unsystematic; systematic
c. systematic; unsystematic
d. systematic; systematic
16) As part of Ex-Imbank's export credit insurance programs, a(an) ____ policy is
generally issued to an administrator, such as a bank, trading company, insurance broker,
or government agency, who then administers the policy for multiple exporters.
a. multiple-buyer
b. single-buyer
c. small business
d. umbrella
17) 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
18) Zanada Corporation invests 1,500,000 South African rand (ZAR) at a nominal
interest rate of 10%. At the time the investment is made, the spot rate of the rand is
$0.205. If the spot rate of the rand at maturity of the investment is $0.203, what is the
effective yield of investing in rand?
a. 11.08%
b. 8.93%
c. 10.00%
d. None of the above
19) During the period 1944-1971, the U.S. used a ____ system.
a. euro exchange rate
b. fixed
c. dirty float
d. flexible
20) Exhibit 11-1
Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360
days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is
$1.50. How much will Perkins receive in 360 days from implementing a money market
hedge (assume any receipts before the date of the receivable are invested)?
a. $377,115
b. $373,558
c. $363,019
d. $370,000
21) The ____ a project's variability in cash flows, and the ____ the positive correlation
between the project's cash flow and the MNC's cash flow, the lower the risk of the
project.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher
22) Imperfect markets represent conditions under which factors of production are
immobile.
a. True
b. False
23) Silicon Co. has forecasted the Canadian dollar for the most recent period to be
$0.73. The realized value of the Canadian dollar in the most recent period was $0.80.
Thus, the absolute forecast error as a percentage of the realized value was ____%.
a. 9.6
b. -9.6
c. 8.8
d. -8.8
24) According to the text, the forward rate is commonly used for:
a. hedging
b. immediate transactions
c. previous transactions
d. bond transactions
25) If interest rate parity holds, then the international Fisher effect must hold.
a. True
b. False
26) Consider a bank that acknowledges that it will make payments on behalf of a
computer importer after the computers are delivered to the importer. This reflects:
a. accounts receivable financing
b. forfaiting
c. factoring
d. a letter of credit
27) The World Bank extends loans only to developed nations, while the International
Development Association (IDA) extends loans only to developing nations.
a. True
b. False
28) A regression analysis of the Australian dollar value on the inflation differential
between the U.S. and Australia produced a coefficient of .8. Thus, for every 1%
increase in the inflation differential, the Australian dollar is expected to depreciate by .
8%.
a. True
b. False
29) From a financial management perspective, which of the following is true regarding
the introduction of the Euro?
a. U.S.-based MNCs are not subject to exchange rate risk when they have transactions
in euros
b. The euro is pegged to all other European currencies
c. Transactions costs decline for MNCs that conduct transactions within Europe
d. The euro replaced the British pound
30) If the international Fisher effect (IFE) did not hold based on historical data, then
this suggests that:
a. some corporations with excess cash can lock in a guaranteed higher return on future
foreign short-term investments
b. some corporations with excess cash could have generated profits on average from
covered interest arbitrage
c. some corporations with excess cash could have generated higher profits on average
from foreign short-term investments than from domestic short-term investments
d. most corporations that consistently invest in foreign short-term investments would
have generated the same profits (on average) as from domestic short-term investments
31) Assume that U.S. inflation is expected to surge in the near future. The expectation
of surge in inflation will most likely place ____ pressure on U.S. dollar immediately.
a. upward
b. downward
c. no
d. cannot be determined
32) Assume a regression model in which the dependent variable is the firm's stock price
percentage change, and the independent variable is percentage change in the foreign
currency. The coefficient is negative. This implies that the company's stock price
increases if the foreign currency appreciates.
a. True
b. False
