1) A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss
interest rate is 9%. It uses today’s spot rate as a forecast for the franc’s spot rate in one
year. The U.S. one-year interest rate is 10%. The expected effective financing rate on
Swiss francs is:
a. equal to the U.S. interest rate
b. less than the U.S. interest rate, but more than the Swiss interest rate
c. equal to the Swiss interest rate
d. less than the Swiss interest rate
e. more than the U.S. interest rate
2) Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries.
a. True
b. False
3) Even if production costs are higher in a foreign country, a U.S. firm may establish a
manufacturing plant in the foreign country now if:
a. the host government of that country eliminates all quotas
b. the host government of that country reduces all quotas
c. the host government of that country increases all quotas
d. the host government of that country eliminates all tariffs
4) Which of the following is not true regarding a target’s previous cash flows?
a. They may serve as an initial base from which future cash flows may be estimated
after accounting for other factors
b. It may be easier to estimate the cash flows to be generated by a target than to
estimate the cash flows to be generated from a new foreign subsidiary
c. They are always good indicators of future cash flows
d. All of the above are true
5) Unlike project risk, country risk cannot be incorporated into the capital budgeting
analysis of a proposed project by adjustment of the discount rate or by adjustment of the
estimated cash flows.
a. True
b. False
6) A tariff is a maximum limit on imports.
a. True
b. False
7) As foreign exchange activity has grown, a given degree of central bank intervention
has become:
a. more effective
b. more frequent
c. less effective
d. none of the above
8) Hedging the position of individual subsidiaries is generally necessary, even if the
overall performance of the MNC is already insulated by the offsetting positions
between subsidiaries.
a. True
b. False
9) Direct foreign investment (DFI) represents investment in real assets (such as land,
buildings, or even existing plants) in foreign countries.
a. True
b. False
10) A reduction in hedging will probably reduce transaction exposure.
a. True
b. False
11) A currency peg is insulated from economic or political conditions, such that the
exchange rate in the market will only change if the country’s government breaks the peg
and sets a new exchange rate.
a. True
b. False
12) The effective financing rate:
a. adjusts the nominal interest rate for inflation over the period of concern
b. adjusts the nominal interest rate for the change in the spot exchange rate over the
period of concern
c. adjusts the nominal rate for a change in foreign interest rates over the period of
concern
d. adjusts the nominal rate for the forward discount (or premium) over the period of
concern
13) Bullock Corporation invests 1,500,000 South African rand at a nominal interest rate
of 10%. At the time the investment is made, the spot rate of the rand is $.205. If the spot
rate of the rand at maturity of the investment is $.203, what is the effective yield of
investing in rand?
a. 11.08%
b. 8.92%
c. 10.00%
d. none of the above
14) If interest rate parity holds, then the one-year forward rate of a currency will be
____ the predicted spot rate of the currency in one year according to the international
Fisher effect.
a. greater than
b. less than
c. equal to
d. answer is dependent on whether the forward rate has a discount or premium
15) Which of the following industries would most likely take advantage of lower costs
in some less developed foreign countries?
a. assembly line production
b. specialized professional services
c. nuclear missile planning
d. planning for more sophisticated computer technology
16) If an MNC is extremely risk-averse, it may decide to hedge even though its hedging
analysis indicates that remaining unhedged will probably be less costly than hedging.
a. True
b. False
17) When the dollar strengthens, the reported consolidated earnings of U.S.-based
MNCs are ____ affected by translation exposure. When the dollar weakens, the
reported consolidated earnings are ____ affected.
a. favorably; favorably affected but by a smaller degree
b. favorably; favorably affected by a higher degree
c. unfavorably; favorably affected
d. favorably; unfavorably affected
18) The Delphi technique:
a. is a method of purchasing information about inspections of the country being
evaluated
b. requires the use of discriminant analysis to assess country risk
c. involves the collection of independent opinions on country risk
d. none of the above
19) Based on the CAPM, the ____ the beta of a project, the ____ the required rate of
return on that project.
a. higher; higher
b. lower; higher
c. higher; lower
d. B and C
e. none of the above
20) One of the best-known pegged exchange rate arrangements that was established by
several European countries in April 1972 and was difficult to maintain is called the:
a. European Monetary System (EMS)
b. snake agreement
c. Maastricht Treaty
d. European Union
21) U.S.-based MNCs invoicing in Asian currencies and incurring expenses in Asian
currencies were probably less affected by the weakness of Asian currencies than
U.S.-based MNCs that invoice in Asian currencies but do not incur expenses in those
currencies.
a. True
b. False
22) If a target is privately held, general stock market conditions will not affect the
amount that an acquirer has to pay for a foreign target.
a. True
b. False
23) Assume a U.S. firm initiates direct foreign investment in Italy. If the euro is
expected to depreciate against the dollar, the dollar value of earnings remitted to the
parent should ____. The parent may request that the subsidiary ____.
a. increase; postpone remitting earnings until the euro weakens
b. decrease; postpone remitting earnings until the euro weakens
c. decrease; remit earnings immediately before the euro weakens
d. increase; remit earnings immediately before the euro weakens
24) If a speculator expects that the Fed will intervene by exchanging dollars for
Japanese yen, she would most likely ____ to capitalize on this intervention.
a. purchase yen put options
b. sell yen futures contracts
c. purchase yen call options
d. buy U.S. Treasury bonds
25) Which of the following is indicated by research regarding purchasing power parity
(PPP)?
a. PPP clearly holds in the short run
b. Deviations from PPP are reduced in the long run
c. PPP clearly holds in the long run
d. There is no relationship between inflation differentials and exchange rate movements
in the short run or long run
26) Licensing allows firms to use their technology in foreign markets without a major
investment in foreign countries.
a. True
b. False
27) In general, exchange rate fluctuations cause cash flows to be more volatile and
uncertain.
a. True
b. False
28) Preauthorized payment is an arrangement that allows a corporation to charge a
customer’s bank account up to some limit.
a. True
b. False
29) In general, common law countries such as the U.S., Canada, and the United
Kingdom allow for more legal protection than French civil law countries such as France
or Italy.
a. True
b. False
30) Purely domestic firms are never affected by economic exposure.
a. True
b. False