1) The weights assigned to factors when assessing country risk should always be higher
for the political risk factors than the financial factors.
2) A motivation for forecasting exchange rate volatility is to obtain a range surrounding
the forecast.
3) In general, exchange rate fluctuations cause cash flows to be more volatile and
uncertain.
4) Capital asset pricing theory would most likely suggest that the MNC’s cost of capital
is lower than that of domestic firms.
5) Under the Product Cycle Theory, foreign demand can be initially satisfied by
exporting.
6) A possible reason why China was less affected by the Asian crisis is that its
government exerts more influence on private enterprise than the governments of other
Asian countries.
7) Since the cost of funds can vary among markets, the MNC’s access to the
international capital markets may allow it to attract funds at a lower cost than that paid
by domestic firms.
8) A letter of credit does not guarantee that the goods purchased will be those invoiced
and shipped.
9) Since each subsidiary may be more concerned with its own operations than with the
overall operations of the MNC, a centralized management group may need to monitor
the parent-subsidiary and intersubsidiary cash flows.
10) Currency correlations are generally negative.
11) While a strong currency is a possible cure for high inflation, it may cause higher
unemployment due to the attractive foreign prices that result from a strong home
currency.
12) China’s yuan is presently:
a.allowed to fluctuate freely without any central bank intervention
b.allowed to fluctuate but with central bank intervention
c.pegged to the dollar
d.pegged to the euro
13) Exchange rates for purposes of multinational capital budgeting:
a.are very difficult to forecast
b.can be easily hedged with currency swaps
c.are unimportant, as they do not affect the cash flows of the multinational project
d.all of the above
14) If a country experiences an increase in interest rates relative to U.S. interest rates,
the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds
to purchase U.S. securities should ____, and there is ____ pressure on its currency’s
equilibrium value.
a.increase; decrease; downward
b.decrease; increase; upward
c.increase; decrease; upward
d.decrease; increase; downward
e.increase; increase; upward
15) Assume that a U.S. firm considers investing in British one-year Treasury securities.
The interest rate on these securities is 12%, while the interest rate on the same securities
in the U.S. is 10%. The firm believes that today’s spot rate is an appropriate forecast for
the spot rate of the pound in one year. Based on this information, the effective yield on
British securities from the U.S. firm’s perspective is:
a.equal to the U.S. interest rate
b.equal to the British interest rate
c.lower than the U.S. interest rate
d.higher than the British interest rate
e.lower than the British interest rate, but higher than the U.S. interest rate
16) The euro has not been adopted by:
a.Slovenia
b.the U.K
c.Germany
d.France
17) Assume that the dollar has been consistently appreciating over a long period. The
Fed decides to counteract this movement by intervening in the foreign exchange market
using nonsterilized intervention. The Fed would
a.buy dollars with foreign currency and simultaneously sell Treasury securities for
dollars
b.buy dollars with foreign currency and simultaneously buy Treasury securities with
dollars
c.sell dollars for foreign currency and simultaneously sell Treasury securities for dollars
d.sell dollars for foreign currency and simultaneously buy Treasury securities with
dollars
e.none of the above
18) If interest rate parity exists, then ____ is not feasible.
a.forward realignment arbitrage
b.triangular arbitrage
c.covered interest arbitrage
d.locational arbitrage
19) A ____ currency may ____ the volume of products imported by the country and
therefore reduce the country’s production and national income.
a.weak; increase
b.weak; reduce
c.strong; increase
d.strong; reduce
20) Which of the following is an example of triangular arbitrage initiation?
a.buying a currency at one bank’s ask and selling at another bank’s bid, which is higher
than the former bank’s ask
b.buying Singapore dollars from a bank (quoted at $.55) that has quoted the South
African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate
for the rand is $.20
c.buying Singapore dollars from a bank (quoted at $.55) that has quoted the South
African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand
is $.20
d.converting funds to a foreign currency and investing the funds overseas
21) Exhibit 11-1
U.S.Jordan
360-day borrowing rate6%5%
360-day deposit rate5%4%
Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360
days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is
$1.46. What is Pablo’s cost from implementing a money market hedge (assume Pablo
does not have any excess cash)?
a.$224,135
b.$226,269
c.$224,114
d.$223,212
22) An MNC that plans to acquire a target would prefer to make a bid at a time when
the local stock market prices are generally ____. Assume that economic conditions are
held constant when completing this statement.
a.low
b.high
c.volatile
d.none of the above
23) The primary component of the current account is the:
a.balance of trade
b.balance of money market flows
c.balance of capital market flows
d.unilateral transfers
24) Which of the following statements is incorrect?
a.Transaction exposure represents only the exchange rate risk when converting net
foreign cash inflows to U.S. dollars or when purchasing foreign currencies to send
payments
b.Economic exposure represents any impact of exchange rate fluctuations on a firm’s
future cash flows
c.Firms can simply focus on hedging their foreign currency payables and/or receivables
to hedge economic exposure
d.The management of economic exposure tends to serve as a long-term solution rather
than just a short-term solution
25) The international money market primarily concentrates on:
a.short-term lending (one year or less)
b.medium-term lending
c.long-term lending
d.placing bonds with investors
e.placing newly issued stock in foreign markets
26) Which of the following interactions will likely have the least effect on the dollar’s
value? Assume everything else is held constant.
a.A reduction in U.S. inflation accompanied by an increase in real U.S. interest rates
b.A reduction in U.S. inflation accompanied by an increase in nominal U.S. interest
rates
c.An increase in U.S. inflation accompanied by an increase in nominal, but not real,
U.S. interest rates
d.An increase in Singapore’s inflation accompanied by an increase in real U.S. interest
rates
e.An increase in Singapore’s interest rates accompanied by an increase in U.S. inflation
27) Magent Co. is a U.S. company that has exposure to the Swiss francs (SF) and
Danish kroner (DK). It has net inflows of SF200 million and net outflows of DK500
million. The present exchange rate of the SF is about $.40 while the present exchange
rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are
highly correlated in their movements against the dollar. If the dollar weakens, then
Magent Co. will:
a.benefit, because the dollar value of its SF position exceeds the dollar value of its DK
position
b.benefit, because the dollar value of its DK position exceeds the dollar value of its SF
position
c.be adversely affected, because the dollar value of its SF position exceeds the dollar
value of its DK position
d.be adversely affected, because the dollar value of its DK position exceeds the dollar
value of its SF position
28) You observe a quotation of the Japanese yen () of $0.007. You are, however,
interested in the number of yen per dollar. Thus, you calculate the ____ quotation of
____ /$.
a.direct; 142.86
b.indirect; 142.86
c.indirect; 150
d.direct; 150
e.indirect; 0
29) ____ refers to the purchase of financial obligations, such as bills of exchange or
promissory notes, without recourse to the original holder, usually the exporter.
a.Factoring
b.Accounts receivable financing
c.Forfaiting
d.None of the above
30) Assume zero transaction costs. If the 90-day forward rate of the euro underestimates
the spot rate 90 days from now, then the real cost of hedging payables will be:
a.positive
b.negative
c.positive if the forward rate exhibits a premium, and negative if the forward rate
exhibits a discount
d.zero
31) 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
32) 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.An international acquisition typically generates quicker cash flows than the
establishment of a new subsidiary
c.International acquisitions are generally cheaper than the establishment of a new
subsidiary
d.An international acquisition typically generates larger cash flows than the
establishment of a new subsidiary
e.All of the above are advantages of international acquisitions
33) Country risk assessment should be used when:
a.determining whether to establish a subsidiary in a foreign country
b.determining whether to continue business in a foreign country
c.A and B
d.none of the above
34) 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
35) The following regression model was run by a U.S.-based MNC to determine its
degree of economic exposure as it relates to the Australian dollar and Sudanese dinar
(SDD):
PCFt = a0 + a1et + mt
where the term on the left-hand side is the percentage change in inflation-adjusted cash
flows measured in the firm’s home currency over period t, and et is the percentage
change in the exchange rate of the currency over period t. The regression was run over
two subperiods for each of the two currencies, with the following results:
Regression Coefficient (a1)Regression Coefficient (a1)
CurrencyEarlier SubperiodRecent Subperiod
Australian dollar (A$)-.80.10
Sudanese dinar (SDD) .20.25
Based on these results, which of the following statements is probably not true?
a.The MNC was more sensitive to movements in the Australian dollar than in the dinar
in the earlier subperiod
b.The MNC was more sensitive to movements in the dinar than in the Australian dollar
in the more recent subperiod
c.The MNC probably had more outflows than inflows in Australian dollars in the earlier
subperiod
d.The MNC probably had more inflows than outflows denominated in dinar in the more
recent subperiod
e.All of the above are true
36) Like the International Monetary Fund (IMF), the ____ is composed of a collection
of nations as members. However, unlike the IMF, it uses the private rather than the
government sector to achieve its objectives.
a.World Bank
b.International Financial Corporation (IFC)
c.World Trade Organization (WTO)
d.International Development Association (IDA)
e.Bank for International Settlements (BIS)
37) Assume a central bank exchanges its currency for other foreign currencies in the
foreign exchange market, but does not adjust for the resulting change in the money
supply. This is an example of:
a.pegged intervention
b.indirect intervention
c.nonsterilized intervention
d.sterilized intervention
e.A and D
38) Which of the following is not a reason why the valuation of a foreign target may
vary among MNCs?
a.Differences in estimated cash flows to be generated by the foreign target
b.Differences in estimated exchange rates
c.Differences in required rates of return
d.All of the above are possible reasons why the valuation of a foreign target may vary
among MNCs
39) Assume the following information:
U.S. investors have $1,000,000 to invest:
1-year deposit rate offered on U.S. dollars=12%
1-year deposit rate offered on Singapore dollars=10%
1-year forward rate of Singapore dollars=$.412
Spot rate of Singapore dollar=$.400
Given this information:
a.interest rate parity exists and covered interest arbitrage by U.S. investors results in the
same yield as investing domestically
b.interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results
in a yield above what is possible domestically
c.interest rate parity exists and covered interest arbitrage by U.S. investors results in a
yield above what is possible domestically
d.interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results
in a yield below what is possible domestically