1) The ____ an MNC, the ____ its cost of capital is likely to be.
a. larger; higher
b. larger; lower
c. smaller; lower
d. A and C
2) Eurobonds:
a. are usually issued in bearer form
b. typically carry several protective covenants
c. cannot contain call provisions
d. A and B
3) A previously undertaken project in a foreign country may no longer be feasible
because:
a. interest rates have declined
b. the MNC’s cost of capital has decreased
c. the host government has increased its tax rates substantially
d. exchange rate projections changed from a depreciation to an appreciation of the
foreign currency
4) Assume that Atlanta Co. is producing motorcycles and selling them to U.S.
customers. Atlanta Co. obtains all of its supplies from American firms and has no
competition in the U.S. It has one major competitor in Japan. Now assume that Phoenix
Co. is producing office furniture and obtains its supplies from a Canadian firm. Based
on this information, Atlanta Co. has ____ exposure and Phoenix Co. has ____ exposure.
a. transaction; translation
b. translation; transaction
c. economic; transaction
d. economic; translation
5) Dollarization refers to the replacement of local currency with U.S. dollars.
a. True
b. False
6) Portfolio investment represents transactions involving long-term financial assets
(such as stocks and bonds) between countries that do not affect the transfer of control.
a. True
b. False
7) A put option premium has a lower bound that is equal to the greater of zero and the
difference between the underlying ____ prices. The upper bound of a call option
premium is the ____ price.
a. spot and exercise; exercise
b. spot and exercise; spot
c. exercise and spot; exercise
d. exercise and spot; spot
8) You are the treasurer of Montana Corporation and must decide how to hedge (if at
all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are
available with a premium of $.01 per unit and an exercise price of $.01031 per Japanese
yen. The forecasted spot rate of the Japanese yen in 90 days is:
The 90-day forward rate of the Japanese yen is $.01033.
What is the probability that the call option will be exercised (assuming Montana
purchased it)?
a. 30%
b. 60%
c. 20%
d. 40%
9) Assume that an MNC has very stable cash flows and uses very little debt. Its cost of
debt should be:
a. lower than its cost of equity
b. higher than its cost of equity
c. lower than the country’s risk-free rate
d. lower than its credit risk premium
10) An exchange of goods between two parties under two distinct contracts expressed in
monetary terms is:
a. compensation
b. counterpurchase
c. factoring
d. accounts receivable financing
11) Potential targets in countries where economic conditions are ____ are more likely to
experience strong demand for their products in the future and may generate ____ cash
flows.
a. strong; lower
b. weak; higher
c. weak; lower
d. strong; higher
12) The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The
current exchange rate for the Japanese yen () is $0.0075. After supply and demand for
the Japanese yen has adjusted in the manner suggested by purchasing power parity, the
new exchange rate for the yen will be:
a. $0.0076
b. $0.0073
c. $0.0070
d. $0.0066
13) Which of the following would not enhance the value of a target from the acquirer’s
perspective?
a. Expected sales of the target have increased
b. The subsidiary’s currency is expected to strengthen after the acquisition
c. The required rate of return from investing in the target has increased
d. All of the above would enhance the value of the target
14) Since supply and demand for a currency are constant (primarily due to government
intervention), currency values seldom fluctuate.
a. True
b. False
15) Which of the following statements is false?
a. If interest rate parity exists, covered interest arbitrage is not worthwhile
b. If interest rate parity holds and the forward rate is an accurate forecast of the future
spot rate, an uncovered investment in a foreign security is not worthwhile
c. If interest rate parity exists and the forward rate is an unbiased forecast of the future
spot rate, an uncovered investment in a foreign security will on average earn an
effective yield similar to an investment in a domestic security
d. If interest rate parity exists and the forward rate is expected to underestimate the
future spot rate, an uncovered investment in a foreign security is expected to earn a
lower effective yield than an investment in a domestic security
16) Eurobonds are certificates representing bundles of stock.
a. True
b. False
17) The interest rate on the syndicated loan depends on the:
a. currency denominating the loan
b. maturity of the loan
c. creditworthiness of the borrower
d. interbank lending rate
e. all of the above
18) Exhibit 14-1
Assume that Baps Corporation is considering the establishment of a subsidiary in
Norway. The initial investment required by the parent is $5,000,000. If the project is
undertaken, Baps would terminate the project after four years. Baps’ cost of capital is
13%, and the project is of the same risk as Baps’ existing projects. All cash flows
generated from the project will be remitted to the parent at the end of each year. Listed
below are the estimated cash flows the Norwegian subsidiary will generate over the
project’s lifetime in Norwegian kroner (NOK):
The current exchange rate of the Norwegian kroner is $.135. Baps’ exchange rate
forecast for the Norwegian kroner over the project’s lifetime is listed below:
Refer to Exhibit 14-1. Baps is also uncertain regarding the cost of capital. Recently,
Norway has been involved in some political turmoil. What is the net present value
(NPV) of this project if a 16% cost of capital is used instead of 13%?
a. -$17,602.62
b. $8,000,000
c. $1,048,829
d. $645,147
19) The break-even salvage value of a particular project is the salvage value necessary
to:
a. offset any losses incurred by the subsidiary in a given year
b. offset any losses incurred by the MNC overall in a given year
c. make the project have zero profits
d. make the project’s return equal the required rate of return
20) Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese
subsidiary to support local operations. Thornton would like its subsidiary to repay the
rupees in one year. Thornton would like to engage in a swap transaction. Thus,
Thornton would:
a. convert the rupees to dollars in the spot market today and convert rupees to dollars in
one year at today’s forward rate
b. convert the dollars to rupees in the spot market today and convert dollars to rupees in
one year at the prevailing spot rate
c. convert the dollars to rupees in the spot market today and convert rupees to dollars in
one year at today’s forward rate
d. convert the dollars to rupees in the spot market today and convert rupees to dollars in
one year at the prevailing spot rate
21) Assume that Canada places a strict quota on goods imported from the U.S. and that
the U.S. does not retaliate. Holding other factors constant, this event should
immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to
____ and the value of the Canadian dollar to ____.
a. increase; increase
b. increase; decline
c. decline; decline
d. decline; increase
22) Assume that a speculator purchases a put option on British pounds (with a strike
price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at
the time of the purchase, the spot rate of the pound is $1.51 and continually rises to
$1.62 by the expiration date. The highest net profit possible for the speculator based on
the information above is:
a. $1,562.50
b. -$1,562.50
c. -$1,250.00
d. -$625.00
23) A currency swap between two firms of different countries enables the exchange of
____ for ____ at periodic intervals.
a. stock; one currency
b. stock; a portfolio of foreign currencies
c. one currency; stock options
d. one currency; another currency
24) The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate
$.83:
a. U.S. demand for Swiss francs would exceed the supply of francs for sale and there
would be a shortage of francs in the foreign exchange market
b. U.S. demand for Swiss francs would be less than the supply of francs for sale and
there would be a shortage of francs in the foreign exchange market
c. U.S. demand for Swiss francs would exceed the supply of francs for sale and there
would be a surplus of francs in the foreign exchange market
d. U.S. demand for Swiss francs would be less than the supply of francs for sale and
there would be a surplus of Swiss francs in the foreign exchange market
25) Assume a U.S. firm initiates direct foreign investment in the U.K. If the British
pound is expected to appreciate against the dollar, the dollar value of earnings remitted
to the parent should ____. The parent may request that the subsidiary ____ in order to
benefit from the expectation about the pound.
a. increase; postpone remitting earnings until the pound strengthens
b. decrease; postpone remitting earnings until the pound strengthens
c. decrease; remit earnings immediately before the pound strengthens
d. increase; remit earnings immediately before the pound strengthens
26) Based on the factors that influence a country’s cost of capital, the cost of capital in
less developed countries is likely to be ____ than that of the U.S. and ____ than that of
Japan.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher
27) When evaluating international project cash flows, which of the following factors is
relevant?
a. future inflation
b. blocked funds
c. exchange rates
d. all of the above
28) A money market hedge on payables would involve, among others, borrowing ____
and investing in the ____.
a. the foreign currency; U.S.
b. the foreign currency; foreign country
c. dollars; foreign country
d. dollars; U.S.
29) A central bank may attempt to stimulate a stagnant economy by weakening the
value of the currency.
a. True
b. False