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1) The lower bound of the call option premium is the greater of zero and the difference
between the spot rate and the exercise price; the upper bound of a currency call option
is the spot rate.
a. True
b. False
2) Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to
variable rate debt. Assume the following information for Good and Bad Companies:
Given this information:
a. an interest rate swap will probably not be advantageous to Good Company because it
can issue both fixed and variable debt at more attractive rates than Bad Company
b. an interest rate swap attractive to both parties could result if Good Company agreed
to provide Bad Company with variable rate payments at LIBOR + 1% in exchange for
fixed rate payments of 10.5%
c. an interest rate swap attractive to both parties could result if Bad Company agreed to
provide Good Company with variable rate payments at LIBOR + 1% in exchange for
fixed rate payments of 10.5%
d. none of the above
3) Blocked funds may penalize a project if the return on the forced reinvestment in the
foreign country is less than the required rate of return on the project.
a. True
b. False
4) Government controls can only affect the supply of a given currency for sale and not
the demand.
a. True
b. False
5) U.S. exporters may not necessarily benefit from weak-dollar periods if foreign
competitors are willing to reduce their profit margin.
a. True
b. False
6) Which of the following is not true regarding IRP, PPP, and the IFE?
a. IRP suggests that a currency's spot rate will change according to interest rate
differentials
b. PPP suggests that a currency's spot rate will change according to inflation
differentials
c. The IFE suggests that a currency's spot rate will change according to interest rate
differentials
d. All of the above are true
7) Lockboxes are post office box numbers assigned to employees for picking up their
paychecks.
a. True
b. False
8) Currency options are commonly traded through the ____ system.
a. robot
b. Euro
c. GLOBEX
d. Scope
9) Which of the following is not a payment method used for international trade?
a. consignment
b. open account
c. factoring
d. draft
e. letter of credit
10) Exhibit 15-1
Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic
and political considerations, only one eligible target remains in Malaysia. Klimewsky
would like you to value this target and has provided you with the following
information:
Refer to Exhibit 15-1. Based on the information provided above, the net present value
of the Malaysian target is $____ million.
a. 155.9
b. 111.5
c. 138.0
d. 143.0
e. none of the above
11) ____ may complicate cash flow optimization.
a. The use of a zero-balance account
b. Government restrictions
c. Leading and lagging
d. None of the above
12) 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 inflation. Which of the following is an
appropriate action given this scenario?
a. Sell dollars for foreign currency
b. Buy dollars with foreign currency
c. Lower interest rates
d. None of the above
13) Assume the parent of a U.S.-based MNC plans to completely finance the
establishment of its British subsidiary with existing funds from retained earnings in
U.S. operations. According to the text, the discount rate used in the capital budgeting
analysis on this project should be most affected by:
a. the cost of borrowing funds in the U.K
b. the economic conditions in the U.K
c. the parent's cost of capital
d. A and B
14) All MNCs are subject to translation exposure.
a. True
b. False
15) Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n)
____ in cash outflows.
a. reduction; reduction
b. increase; increase
c. increase; reduction
d. reduction; increase
16) Portfolio investments represent 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
17) Dollar cash flows associated with two foreign inflow currencies will normally be
less volatile if the standard deviations of the individual currencies are lower.
a. True
b. False
18) Which of the following tax-related factors need not be considered in assessing a
foreign target?
a. corporate tax rates in the host country
b. withholding tax rates in the host country
c. withholding tax rates in the home country
d. corporate tax rates in the home country
e. all of the above must be considered in assessing a foreign target
19) European currency options can be exercised ____; American currency options can
be exercised ____.
a. any time up to the expiration date; any time up to the expiration date
b. any time up to the expiration date; only on the expiration date
c. only on the expiration date; only on the expiration date
d. only on the expiration date; any time up to the expiration date
20) The premium of a currency put option will increase if:
a. the volatility of the underlying asset goes up
b. the time to maturity goes up
c. the spot rate declines
d. none of the above
21) The feasibility of a multinational project from the parent's perspective is dependent
not on the subsidiary cash flows but on the cash flows that it ultimately receives.
a. True
b. False
22) Frank is an option speculator. He anticipates the Danish kroner to appreciate from
its current level of $.19 to $.21. Currently, kroner call options are available with an
exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option?
If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per
unit?
a. no; -$0.01
b. yes; $0.01
c. yes; -$0.01
d. yes; $0.03
23) A firm will likely benefit most from diversifying if:
a. the correlations between country economies are high
b. the correlations between country economies are low
c. the variability of all country economy levels is high
d. B and C
24) If U.S. experiences a sudden surge in inflation and surge in interest rates while
Japanese inflation and interest rates remain unchanged, the value of Japanese yen will
____ against the U.S. dollar.
a. appreciate
b. depreciate
c. remain unchanged
d. cannot be determined from the information provided
25) The value of an MNC (from the parent's perspective) is independent of the MNC's
desired scheduling of remitted funds from the target.
a. True
b. False
26) The European Central Bank is located in:
a. London
b. Denmark
c. Luxembourg
d. Frankfurt
27) Direct foreign investment into the U.S. represents a ____.
a. capital inflow
b. trade inflow
c. capital outflow
d. trade outflow
28) Exhibit 21-1
To benefit from the low correlation between the Trinidad dollar and the Japanese yen (),
Sciorra Corporation decides to invest 50% of total funds invested in Trinidad dollars
and the remainder in yen. The domestic yield on a one-year deposit is 8%. The Trinidad
one-year interest rate is 10% and the Japanese one-year interest rate is 7%. Sciorra has
determined the following possible percentage changes in the two individual currencies
as follows:
Refer to Exhibit 21-1. What is the expected effective yield of the portfolio Sciorra is
contemplating (assume the two currencies move independently from one another)?
a. 6.47%
b. 8.84%
c. 8.50%
d. none of the above
29) Under a fixed exchange rate system, U.S. inflation would have a greater impact on
inflation in other countries than it would under a freely floating exchange rate system.
a. True
b. False
30) Shareholders in some countries may have more power to effectively sue
publicly-traded firms if their executives or directors commit financial fraud.
a. True
b. False
31) Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the
euro will depreciate substantially over time. Assuming that the firm is correct, the ideal
strategy is to:
a. sell euros forward
b. purchase euro currency put options
c. purchase euro currency call options
d. purchase euros forward
e. remain unhedged
32) The international Fisher effect (IFE) suggests that:
a. a home currency will depreciate if the current home interest rate exceeds the current
foreign interest rate
b. a home currency will appreciate if the current home interest rate exceeds the current
foreign interest rate
c. a home currency will appreciate if the current home inflation rate exceeds the current
foreign inflation rate
d. a home currency will depreciate if the current home inflation rate exceeds the current
foreign inflation rate
33) The Working Capital Guarantee Program of the Private Export Funding Corporation
(PEFCO) encourages commercial banks to extend short-term export financing to
eligible exporters by providing a comprehensive guarantee that covers 100 percent of
the loan's principal and interest.
a. True
b. False
34) If the forward rate is used as an indicator of the future spot rate, the spot rate is
expected to appreciate or depreciate by the same amount as the forward premium or
discount, respectively.
a. True
b. False
35) Other things being equal, the financial leverage of MNCs will be higher if the
governments of their home countries are ____ likely to rescue them (in the event of
failure), and if their home countries are ____ likely to experience a recession.
a. more; more
b. less; more
c. less; less
d. more; less
36) If a subsidiary project is assessed from the subsidiary's perspective, then an
expected appreciation in the foreign currency will affect the feasibility of the project
____.
a. positively
b. negatively
c. either positively or negatively, depending on the percentage appreciation
d. none of the above
37) Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to
Mexican customers and remit earnings back to the U.S. parent. The value of this project
will be favorably affected if the value of the peso ____ while it establishes the new
subsidiary and ____ when the subsidiary starts operations.
a. depreciates; appreciates
b. appreciates; appreciates
c. appreciates; depreciates
d. depreciates; depreciates
38) When an MNC assesses targets among countries, it would prefer a country in which
the growth potential for its respective industry is high and the competition within the
industry is not excessive.
a. True
b. False
