1) U.S. government officials would likely prefer that China devalue the yuan against the
dollar.
2) A forecast of a currency one year in advance is typically more accurate than a
forecast one week in advance since the currency reverts to equilibrium over a longer
term period.
3) A common way to reduce inflation is to weaken the value of the domestic currency.
4) An MNC frequently uses either forward or futures contracts to hedge its exposure to
foreign payables. To do so, the MNC can either sell the foreign currency forward or sell
futures.
5) An international acquisition will typically require that the acquirer pay a premium of
30 percent or more for a public target.
6) When MNCs pursue international projects that have a high potential for return, but
also increase their risk, this increases the return to the bondholders that provided credit
to the MNCs.
7) If the net inflow of one currency is about the same amount as a net outflow in
another currency, the firm will benefit if these two currencies are negatively correlated
because the transaction exposure is offset.
8) Non-deliverable forward contracts (NDFs) are frequently used for currencies in
emerging markets.
9) An option writer is the seller of a call or a put option.
10) It is always advantageous to use foreign debt to finance a foreign project,
particularly in developing countries.
11) A foreign subsidiary with more susceptible expenses than revenue to exchange rate
movements will be favorably affected by an appreciation of the foreign currency.
12) If a foreign country’s interest rate is similar to the U.S. rate, the forward rate
premium or discount will be close to zero, meaning that the forward rate and spot rate
will provide similar forecasts.
13) The lower bound of a put option premium is the greater of zero and the difference
between the exercise price and the spot rate; the upper bound of a currency put option is
the exercise price.
14) Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas
and Brazil.
15) Country differences, such as differences in the risk-free interest rate and differences
in risk premiums across countries, can cause the cost of capital to vary across countries.
16) If the currency denominating a foreign bond depreciates against the firm’s home
currency, the funds needed to make coupon payments will increase.
17) In assessing the risk of an individual project, the expected correlation of the new
project’s returns with those of the prevailing business should be considered.
18) The highest amount a buyer of a call or a put option can lose is the exercise price.
19) Which of the following theories suggests that firms seek to penetrate new markets
over time?
a.theory of comparative advantage
b.imperfect markets theory
c.product cycle theory
d.none of the above
20) New Hampshire Corp. has decided to issue three-year bonds denominated in
5,000,000 Russian rubles at par. The bonds have a coupon rate of 17%. If the ruble is
expected to appreciate from its current level of $.03 to $.032, $.034, and $.035 in years
1, 2,and 3, respectively, what is the financing cost of these bonds?
a.17%
b.23.18%
c.22.36%
d.23.39%
21) 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
22) According to the text, there is evidence that the debt ratios (debt/capital) of MNCs
based in:
a.the U.S. tend to be generally higher than MNCs headquartered in Japan and Germany
b.China tend to be generally higher than MNCs headquartered in other non-U.S.
countries
c.the U.S. tend to be generally lower than MNCs headquartered in Japan and Germany
d.A and B
23) Which of the following forecasting techniques would best represent sole use of
today’s spot exchange rate of the euro to forecast the euro’s future exchange rate?
a.fundamental forecasting
b.market-based forecasting
c.technical forecasting
d.mixed forecasting
24) 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
25) A country with high unemployment could best increase its employment by:
a.encouraging foreign firms to establish subsidiaries that produce the same products
local firms produce
b.encouraging foreign firms to establish licensing arrangements for products local firms
produce
c.encouraging foreign firms to establish subsidiaries that produce products local firms
do not produce
d.none of the above would reduce employment
26) “Dumping” is used in the text to represent the:
a.exporting of goods that do not meet quality standards
b.sales of junk bonds to foreign countries
c.removal of foreign subsidiaries by the host government
d.exporting of goods at prices below cost
27) Which of the following is not likely to represent a strategy by the government of
Country X to reduce its balance of trade deficit with Country Y?
a.The government of Country X eliminates environmental restrictions
b.The government of Country X subsidizes firms in its country to facilitate dumping
c.The government of Country X provides tax breaks to firms in specific industries
d.The government of Country X removes a tariff on goods imported from Country Y
28) A firm sells a currency futures contract, and then decides before the settlement date
that it no longer wants to maintain such a position. It can close out its position by:
a.buying an identical futures contract
b.selling an identical futures contract
c.buying a futures contract with a different settlement date
d.selling a futures contract for a different amount of currency
e.purchasing a put option contract in the same currency
29) National Bank quotes the following for the British pound and the New Zealand
dollar:
Quoted Bid PriceQuoted Ask Price
Value of a British pound (£) in $ $1.61 $1.62
Value of a New Zealand dollar (NZ$) in $ $.55 $.56
Value of a British pound in
New Zealand dollarsNZ$2.95NZ$2.96
Assume you have $10,000 to conduct triangular arbitrage. What is your profit from
implementing this strategy?
a.$77.64
b.$197.53
c.$15.43
d.$111.80
30) Yomance Co. is a U.S. company that has exposure to Japanese yen and British
pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The
present exchange rate of the Japanese yen is $.012 while the present exchange rate of
the British pound is $1.50. Yomance Co. has not hedged its positions. The yen and
pound movements against the dollar are highly and positively correlated. If the dollar
strengthens, then Yomance Co. will:
a.benefit, because the dollar value of its pound position exceeds the dollar value of its
yen position
b.benefit, because the dollar value of its yen position exceeds the dollar value of its
pound position
c.be adversely affected, because the dollar value of its pound position exceeds the dollar
value of its yen position
d.be adversely affected, because the dollar value of its yen position exceeds the dollar
value of its pound position
31) 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:
CurrencyPercentage ChangeProbability
Trinidad dollar-1.0%35%
Trinidad dollar 2.0%65%
Japanese yen-2.0%45%
Japanese yen 1.0%55%
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
32) Which of the following is not true regarding letters of credit?
a.They are issued by banks on behalf of the importer promising to pay the exporter
b.A revocable letter of credit can be cancelled or revoked at any time without prior
notification to the beneficiary
c.They guarantee that the goods shipped are the goods purchased
d.All of the above are true
33) 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
34) 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
35) Assume a forecasting model uses inflation differentials and interest rate differentials
to forecast the exchange rate. Assume the regression coefficient of the interest rate
differential variable is -.5, and the coefficient of the inflation differential variable is .4.
Which of the following is true?
a.The interest rate variable is inversely related to the exchange rate, and the inflation
variable is directly (positively) related to the interest rate variable
b.The interest rate variable is inversely related to the exchange rate, and the inflation
variable is directly related to the exchange rate
c.The interest rate variable is directly related to the exchange rate, and the inflation
variable is directly related to the exchange rate
d.The interest rate variable is directly related to the exchange rate, and the inflation
variable is directly related to the interest rate variable
36) 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
37) A(n) ____ swap is entered into today, but the swap payments start at a specific
future point in time.
a.accretion
b.amortizing
c.forward
d.zero-coupon
e.putable
38) Which of the following is not an instrument used by U.S.-based MNCs to cover
their foreign currency positions?
a.forward contracts
b.futures contracts
c.non-deliverable forward contracts
d.options
e.all of the above are instruments used to cover foreign currency positions
39) Which of the following is not mentioned in the text as a factor affecting exchange
rates?
a.relative interest rates
b.relative inflation rates
c.government controls
d.expectations
e.all of the above are mentioned in the text as factors affecting exchange rates.
40) The ____ was established in 1934 with the intention to facilitate Soviet-American
trade.
a.Domestic International Sales Corporation (DISC)
b.Private Export Funding Corporation (PEFCO)
c.Export-Import Bank
d.Foreign Credit Insurance Association (FCIA)
41) ____ are commonly used to hedge interest rate risk.
a.Currency swaps
b.Parallel loans
c.Interest rate swaps
d.Forward contracts
e.None of the above
42) A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the
plant was built, the MNC determines that its exchange rate forecasts, which had
previously indicated a slight appreciation in the Algerian dinar, were probably false.
Instead of a slight appreciation, the MNC now expects that the dinar will depreciate
substantially due to political turmoil in Algeria. This new development would likely
cause the MNC to ____ its estimate of the previously computed net present value.
a.lower
b.increase
c.lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease
in NPV
d.increase, but not necessarily if the MNC reduces its investment in Algeria by an
offsetting amount
e.none of the above
43) Futures contracts are sold on exchanges and are consequently ____ than forward
contracts, which can be ____ to satisfy an MNC’s needs.
a.more standardized; standardized
b.more standardized; custom-tailored
c.more custom-tailored; standardized
d.more custom-tailored; custom-tailored
e.less standardized; custom-tailored
44) Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate
estimate of 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