1) The ____ is the difference between exports and imports.
a. balance of trade
b. balance on goods and services
c. balance of payments
d. current account
e. capital account
2) The U.S. inflation rate is expected to be 4 percent over the next year, while the
European inflation rate is expected to be 3 percent. The current spot rate of the euro is
$1.03. Using purchasing power parity, the expected spot rate at the end of one year is
$____.
a. 1.02
b. 1.03
c. 1.04
d. none of the above
3) From the concept of an “efficient frontier,” the point on a frontier that is optimal for
all firms:
a. is the top point
b. is the point closest to the vertical axis
c. is the point half way between the two end points
d. cannot be determined since firms vary in their willingness to accept risk
4) A speculator in futures contracts expecting the value of a foreign currency to
depreciate would likely sell futures contracts.
a. True
b. False
5) It has been argued that the exchange rate can be used as a policy tool. Assume that
the U.S. government would like to reduce unemployment. Which of the following is an
appropriate action given this scenario?
a. Weaken the dollar
b. Strengthen the dollar
c. Buy dollars with foreign currency in the foreign exchange market
d. Implement a tight monetary policy
6) If you have a position where you might be obligated to sell pounds, you are:
a. a call writer
b. a call buyer
c. a put writer
d. a put buyer
7) Which of the following is mentioned in the text as a possible means by which the
government may attempt to improve its balance of trade position (increase its exports or
reduce its imports).
a. It could attempt to reduce its home currency’s value
b. The government could require firms to engage in outsourcing
c. The government could require that its local firms pursue outsourcing
d. All of the above are mentioned
8) In ____, the exporter sells accounts receivable without recourse.
a. accounts receivable financing
b. factoring
c. working capital financing
d. countertrade
9) A put option essentially represents two swaps of currencies, one swap at the
inception of the loan contract and another swap at a specified date in the future.
a. True
b. False
10) The Basel II accord is focused on eliminating inconsistencies in ____ across
countries.
a. capital requirements
b. deposit rates
c. deposit insurance
d. bank failure policies
11) In a(n) ____ swap, two parties agree to exchange payments associated with bonds;
in a(n) ____ swap, two parties agree to periodically exchange foreign currencies.
a. interest rate; currency
b. currency; interest rate
c. interest rate; interest rate
d. currency; currency
12) A negative effective financing rate for a U.S. firm implies that the firm:
a. will incur a loss on the project financed with the funds
b. paid more interest on the funds than what it would have paid if it had borrowed
dollars
c. will be unable to repay the loan
d. none of the above
13) MNCs can purchase insurance to cover the risk of expropriation. Which of the
following is not a source of this type of insurance?
a. the World Bank
b. the Overseas Private Investment Corporation (OPIC)
c. the International Monetary Fund (IMF)
d. all of the above are sources for insurance against expropriation
14) Floating-rate bonds are often issued with a floating coupon rate that is tied to
LIBOR.
a. True
b. False
15) 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)
16) The largest global exchange is:
a. NASDAQ
b. Tokyo Stock Exchange
c. NYSE Euronext
d. London Stock Exchange
17) A ____ allows customers to send payments to a post office box number.
a. bilateral netting system
b. multilateral netting system
c. lockbox
d. preauthorized payment
18) The actual financing cost of a U.S. corporation issuing a bond denominated in euros
is affected by the euro’s value relative to the U.S. dollar during the financing period.
a. True
b. False
19) Forward contracts are usually negotiated with a commercial bank, while futures
contracts are traded on an organized exchange.
a. True
b. False
20) The valuation of newly privatized businesses is generally more difficult than the
valuation of a foreign target that has operated privately for several years.
a. True
b. False
21) Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million
Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.
a. appreciates; decreases
b. depreciates; is unaffected
c. appreciates; is unaffected
d. depreciates; decreases
e. B and C
22) If a host government restricts the remittances from a foreign subsidiary, a possible
solution is to let the subsidiary obtain partial financing for the project.
a. True
b. False
23) Laketown Co. has some expenses and revenue in euros. If its expenses are more
sensitive to exchange rate movements than revenue, it could reduce economic exposure
by ____. If its revenues are more sensitive than expenses, it could reduce economic
exposure by ____.
a. decreasing foreign revenues; decreasing foreign expenses
b. decreasing foreign revenues; increasing foreign expenses
c. increasing foreign revenues; decreasing foreign revenues
d. decreasing foreign expenses; increasing foreign revenues
24) If a U.S. firm has much more revenue than expenses denominated in euros, the firm
will likely ____ if the euro ____.
a. benefit; weakens
b. be unaffected; weakens
c. be unaffected; strengthens
d. benefit; strengthens
25) In a(n) ____ swap, the notional value is increased over time.
a. amortizing
b. basis
c. zero-coupon
d. accretion
26) Country X frequently engages in trade flows with the U.S. (such as imports and
exports). Country Y frequently engages in financial flows with the U.S. (such as
financial investments). Everything else held constant, an increase in U.S. interest rates
would affect the exchange rate of Country X’s currency more than the exchange rate of
Country Y’s currency.
a. True
b. False
27) Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S.
is 8%. According to PPP, the Singapore dollar should ____ by ____%.
a. appreciate; 4.85
b. depreciate; 3,11
c. appreciate; 3.11
d. depreciate; 4.85
28) Assume that the total value of investment transactions between U.S. and Mexico is
minimal. Also assume that total dollar value of trade transactions between these two
countries is very large. Now assume that Mexico’s inflation has suddenly increased, and
Mexican interest rates have suddenly increased. Overall, this would put ____ pressure
on the value of Mexican peso. The inflation effect should be ____ pronounced than the
interest rate effect.
a. downward; more
b. upward; more
c. downward; less
d. upward; less
29) The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per
pound:
a. U.S. demand for pounds would exceed the supply of pounds for sale and there would
be a shortage of pounds in the foreign exchange market
b. U.S. demand for pounds would be less than the supply of pounds for sale and there
would be a shortage of pounds in the foreign exchange market
c. U.S. demand for pounds would exceed the supply of pounds for sale and there would
be a surplus of pounds in the foreign exchange market
d. U.S. demand for pounds would be less than the supply of pounds for sale and there
would be a surplus of pounds in the foreign exchange market
e. U.S. demand for pounds would be equal to the supply of pounds for sale and there
would be a shortage of pounds in the foreign exchange market
30) Which of the following is not a form of exposure to exchange rate fluctuations?
a. transaction exposure
b. credit exposure
c. economic exposure
d. translation exposure
31) If a currency’s spot market is ____, its exchange rate is likely to be ____ to a single
large purchase or sale transaction.
a. liquid; highly sensitive
b. illiquid; insensitive
c. liquid; insensitive
d. none of the above