1) An MNC must assess country risk not only in countries where it currently does
business but also in those where it expects to export or establish subsidiaries.
2) If interest rate parity exists, and transaction costs do not exist, the option hedge will
yield the same results as no hedge.
3) The exact cost of hedging with call options (as measured in the text) is not known
with certainty at the time that the options are purchased.
4) Market-based forecasting involves the use of historical exchange rate data to predict
future values.
5) When measuring forecast performance of different currencies, it is often useful to
adjust for their relative sizes. Thus, percentages, rather than nominal amounts, are often
used to compute forecast errors.
6) For locational arbitrage to be possible, one bank’s ask rate must be higher than
another bank’s bid rate for a currency.
7) To hedge a receivable position with a currency option hedge, an MNC would buy a
put option.
8) The IFE theory suggests that foreign currencies with relatively high interest rates will
appreciate because the high nominal interest rates reflect expected inflation.
9) If a multinational project is assessed from the subsidiary’s perspective, withholding
taxes are ignored for project assessment.
10) The objective of sensitivity analysis in capital budgeting is to determine how
sensitive the NPV is to alternative values of the input variables.
11) MNCs can forecast exchange rate volatility to determine the potential range
surrounding their exchange rate forecast.
12) The term counterpurchase denotes the exchange of goods between two parties under
two distinct contracts expressed in monetary terms.
13) When managers use NPV analysis, agency costs are eliminated, and governance is
not needed to monitor MNC decisions regarding projects.
14) A firm produces goods for which substitute goods are produced in all countries.
Depreciation of the firm’s local currency should:
a.decrease local sales as foreign competition in local markets is reduced
b.decrease the firm’s exports denominated in the local currency
c.decrease the returns earned on the firm’s foreign bank deposits
d.decrease the firm’s cash outflow required to pay for imported supplies denominated in
a foreign currency
e.none of the above
15) You purchase a put option on Swiss francs for a premium of $.02, with an exercise
price of $.61. The option will not be exercised until the expiration date, if at all. If the
spot rate on the expiration date is $.58, your net profit per unit is:
a.-$.03
b.-$.02
c.-$.01
d.$.02
e.none of the above
16) FAI Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days.
Currently, a 90-day call option with an exercise price of $0.75 and a premium of $0.01
is available. Also, a 90-day put option with an exercise price of $0.73 and a premium of
$0.01 is available. FAI plans to purchase options to hedge its receivable position.
Assuming that the spot rate in 90 days is $0.71, what is the net amount received from
the currency option hedge?
a.$219,000
b.$222,000
c.$216,000
d.$213,000
17) Jensen Co. expects to pay 50,000 in one month for its imports from France. It also
expects to receive 200,000 for its exports to Belgium in one month. Jensen estimates
the standard deviation of monthly percentage changes of the euro to be 2.5 percent over
the last 50 months. Assume that these percentage changes are normally distributed.
Using the value-at-risk (VAR) method based on a 97.5% confidence level, what is the
maximum one month loss in dollars if the expected percentage change of the euro
during next month is 2%? Assume that current spot rate of the euro (before considering
the maximum one-month loss) is $1.35.
a.-$4,303
b.-$7,830
c.-$5,873
d.-$1,958
18) Assume that in recent months, most currencies of industrialized countries
depreciated substantially against the dollar. Assume that their interest rates were similar
to the U.S. interest rate. If non-U.S. firms invested in U.S. Treasury securities during
this period, their effective yield would have been:
a.negative
b.zero
c.positive, but less than the interest rate of their respective countries
d.more than the interest rate of their respective countries
19) Which of the following is true of options?
a.The writer decides whether the option will be exercised
b.The writer pays the buyer the option premium
c.The buyer decides if the option will be exercised
d.More than one of these
20) The currency of Country X is pegged to the currency of Country Y. Assume that
Country Y’s currency appreciates against the currency of Country Z. It is likely that
Country X will export ____ to Country Z and import ____ from Country Z.
a.more; more
b.more; less
c.less; less
d.less; more
21) Based on interest rate parity, the larger the degree by which the foreign interest rate
exceeds the U.S. interest rate, the:
a.larger will be the forward discount of the foreign currency
b.larger will be the forward premium of the foreign currency
c.smaller will be the forward premium of the foreign currency
d.smaller will be the forward discount of the foreign currency
22) Which of the following is not mentioned in the text as a theory of international
business?
a.Theory of Comparative Advantage
b.Imperfect Markets Theory
c.Product Cycle Theory
d.Globalization of Business Theory
e.All of the above are mentioned in the text as theories of international business
23) The largest global exchange is:
a.NASDAQ
b.Tokyo Stock Exchange
c.NYSE Euronext
d.London Stock Exchange
24) Euronotes are underwritten by:
a.European central banks
b.commercial banks
c.the International Monetary Fund
d.the Federal Reserve System
25) The forward market:
a.for euros is very illiquid
b.for Eastern European countries is very liquid
c.does not exist for some currencies
d.none of the above
26) The “J curve” effect describes:
a.the continuous long-term inverse relationship between a country’s current account
balance and the country’s growth in gross national product
b.the short-run tendency for a country’s balance of trade to deteriorate even while its
currency is depreciating
c.the tendency for exporters to initially reduce the price of goods when their own
currency appreciates
d.the reaction of a country’s currency to initially depreciate after the country’s inflation
rate declines
27) Exhibit 20-3
Cameron Corporation would like to simultaneously borrow Japanese yen () and
Sudanese dinar (SDD) for a six-month period. Cameron would like to determine the
expected financing rate and the variance of a portfolio consisting of 30% yen and 70%
dinar. Cameron has gathered the following information:
Mean effective financing rate of Japanese yen for six months4%
Mean effective financing rate of Sudanese dinar for six months1%
Standard deviation of Japanese yen’s effective financing rate.10
Standard deviation of Sudanese dinar’s effective financing rate.20
Correlation coefficient of effective financing rates of these two currencies.23
Refer to Exhibit 20-3. What is the expected financing rate of the portfolio contemplated
by Cameron Corporation?
a.3.10%
b.1.90%
c.17.00%
d.13.00%
e.none of the above
28) Points above the IRP line represent situations where:
a.covered interest arbitrage is feasible from the perspective of domestic investors and
results in the same yield as investing domestically
b.covered interest arbitrage is feasible from the perspective of domestic investors and
results in a yield above what is possible domestically
c.covered interest arbitrage is feasible from the perspective of foreign investors and
results in a yield above what is possible in their local markets
d.covered interest arbitrage is not feasible for neither domestic nor foreign investors
29) A firm may incorporate a country risk rating into the capital budgeting analysis by:
a.adjusting the NPV upward if the country risk rating has fallen (implying increased
risk) below a benchmark level
b.adjusting the discount rate upward as the country risk rating decreases (implying
increased risk)
c.A and B
d.none of the above
30) If an MNC exports to a country, then establishes a subsidiary to produce and sell the
same product in the country, then cash flows from prevailing operations would likely be
____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary
that buys components from the parent, the cash flows from prevailing operations would
likely be ____ affected by the project.
a.adversely; adversely
b.favorably; adversely
c.favorably; favorably
d.adversely; favorably
31) Assume the following information:
U.S. investors have $1,000,000 to invest:
1-year deposit rate offered by U.S. banks=10%
1-year deposit rate offered on British pounds=13.5%
1-year forward rate of Swiss francs=$1.26
Spot rate of Swiss franc=$1.30
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
32) 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
33) The ____ for a given country represents the annualized yield offered on debt for
various maturities.
a.LIBOR
b.yield curve
c.parallel loan
d.interest rate swap
34) A regression model was applied to explain movements in the Canadian dollar’s
value over time. The coefficient for the inflation differential between the U.S. and
Canada was -0.2. The coefficient of the interest rate differential between the U.S. and
Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the
inflation differential ____ and the interest rate differential ____.
a.increases; increases
b.decreases; increases
c.increases; decreases
d.increases; decreases
35) Which of the following is not a technique to assess country risk?
a.Gamma technique
b.Delphi technique
c.checklist approach
d.inspection visits
36) An MNC considers direct foreign investment in Germany. It is mainly concerned
with the subsidiary’s ability to generate sufficient sales there. The country risk
characteristic that would best address this concern is:
a.the host government’s tax rates charged on remitted earnings
b.the possibility of blocked funds
c.the state of the economy in Germany
d.the possibility of a withholding tax imposed by the German government
37) Which of the following is not true regarding simulation?
a.It can be used to generate a probability distribution of NPVs
b.It generates a probability distribution of NPVs by randomly drawing values for the
input variable(s)
c.It can only be used for one variable at a time
d.It can be used to develop probability distributions of all variables with uncertain
future values
38) Which of the following is an example of economic exposure but not an example of
transaction exposure?
a.An increase in the dollar’s value hurts a U.S. firm’s domestic sales because foreign
competitors are able to increase their sales to U.S. customers
b.An increase in the pound’s value increases the U.S. firm’s cost of British pound
payables
c.A decrease in the peso’s value decreases a U.S. firm’s dollar value of peso receivables
d.A decrease in the Swiss franc’s value decreases the dollar value of interest payments
on a Swiss deposit sent to a U.S. firm by a Swiss bank
39) A large increase in the income level in Mexico along with no growth in the U.S.
income level is normally expected to cause (assuming no change in interest rates or
other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso
should ____.
a.increase; appreciate
b.increase; depreciate
c.decrease; depreciate
d.decrease; appreciate
40) When the existing spot rate exceeds the exercise price, a call option is ____, and a
put option is ____.
a.out of the money; in the money
b.out of the money; out of the money
c.in the money; in the money
d.in the money; out of the money
41) ____ is not a political risk factor.
a.High interest rates in a foreign country
b.Currency inconvertibility
c.War
d.Corruption
42) If the spot rate of the British pound is $1.50, and the one-year forward rate has a
discount of 3 percent, the one-year forward rate is $____.
a.1.50
b.1.47
c.1.55
d.1.46
e.None of the above
43) The interest rate in developing countries is usually very low.
44) Shareholders can have influence on a wider variety of management issues in some
countries.
45) A currency put option provides the right, but not the obligation, to buy a specific
currency at a specific price within a specific period of time.
46) Institutional investors such as commercial banks, mutual funds, insurance
companies, and pension funds from many countries are major participants in the
international bond market.
47) A futures contract is a contract specifying a standard volume of a particular
currency to be exchanged on a specific settlement date.
48) The preferences of corporations and governments to borrow in foreign currencies
and of investors to make short-term investments in foreign currencies resulted in the
creation of the international bond market.