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1) Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest
rate of 6%. At the time the loan is extended, the spot rate of the yen is $.005. If the spot
rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of
borrowing yen?
a. 37.8%
b. 51.43%
c. -25.8%
d. -6%
e. none of the above
2) Options can be traded on an exchange or over the counter.
a. True
b. False
3) Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is
a. .01
b. 118
c. 1.18
d. .0087
4) Under the system known as the "dirty" float, official boundaries for the exchange
rate exist, but they are wider than they are under a fixed exchange rate system.
a. True
b. False
5) Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen.
If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those
exports.
a. sell yen put options
b. buy yen call options
c. buy futures contracts on yen
d. sell futures contracts on yen
6) Which of the following is not a reason provided in the text regarding why the cost of
debt can vary across countries?
a. differences in the risk-free rate
b. a high price-earnings multiple
c. differences in the credit risk premium
d. differences in demographics
7) According to purchasing power parity (PPP), if a foreign country's inflation rate is
below the inflation rate at home, home country consumers will increase their imports
from the foreign country and foreign consumers will lower their demand for home
country products. These market forces cause the foreign currency to appreciate.
a. True
b. False
8) Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican
customers amounting to MXP98 million, while its peso-denominated expenses amount
to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S.
suppliers, it could reduce peso-denominated expenses by MXP12 million and increase
dollar-denominated expenses by $800,000. This strategy would ____ the Sycamore's
exposure to changes in the peso's movements against the U.S. dollar. Regardless of
whether the firm shifts expenses, it is likely to perform better when the peso is valued
____ relative to the dollar.
a. reduce; high
b. reduce; low
c. increase; low
d. increase; high
9) The supply curve for a currency is downward sloping since U.S. corporations would
be encouraged to purchase more foreign goods when the foreign currency is worth less.
a. True
b. False
10) 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:
Refer to Exhibit 20-3. What is the expected standard deviation of the portfolio
contemplated by Cameron?
a. 2.24%
b. 14.98%
c. 2.89%
d. 17.00%
e. none of the above
11) Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its
bid-ask percentage spread is:
a. about 4.44%
b. about 4.26%
c. about 4.03%
d. about 4.17%
12) The Sarbanes-Oxley Act (SOX) was enacted in 2002 required MNCs and other
firms to implement an internal reporting process that could be easily monitored by
executives and the board of directors.
a. True
b. False
13) According to the text, in order to develop a distribution of possible net present
values from international projects, a firm should use:
a. a risk-adjusted discount rate
b. a payback period
c. certainty equivalents
d. simulation
14) 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.
a. True
b. False
15) Economic exposure refers to:
a. the exposure of a firm's international contractual transactions to exchange rate
fluctuations
b. the exposure of a firm's local currency value to transactions between foreign
exchange traders
c. the exposure of a firm's financial statements to exchange rate fluctuations
d. the exposure of a firm's cash flows to exchange rate fluctuations
e. the exposure of a country's economy (specifically GNP) to exchange rate fluctuations
16) Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest
rate is 13%. If the Chilean peso ____ by ____%, a U.S.-based MNC would incur the
same financing cost in dollars versus Chilean pesos over a one year period.
a. depreciates; 3.54
b. appreciates; 3.54
c. depreciates; 3.67
d. appreciates; 3.67
17) An irrevocable letter of credit can be cancelled or amended if the beneficiary
consents to it.
a. True
b. False
18) The Canadian dollar consistently appears to move almost independently of other
currencies. That is it exhibits low correlations with the other currencies.
a. True
b. False
19) The MNC's cost of equity is unrelated to the local risk-free rate.
a. True
b. False
20) Signals regarding future actions of market participants in the foreign exchange
market sometimes result in overreactions.
a. True
b. False
21) The Single European Act prevented a trend toward increased globalization in the
banking industry.
a. True
b. False
22) Because increased external financing by a foreign subsidiary reduces the external
financing needed by the parent, such an action will not affect the overall MNC's cost of
capital.
a. True
b. False
23) A firm wants to use an option to hedge 12.5 million in receivables from New
Zealand firms. The premium is $.03. The exercise price is $.55. If the option is
exercised, what is the total amount of dollars received (after accounting for the
premium paid)?
a. $6,875,000
b. $7,250,000
c. $7,000,000
d. $6,500,000
e. none of the above
24) Assume that the U.S. interest rate is 11% while the interest rate on the euro is 7%. If
euros are borrowed by a U.S. firm, they would have to ____ against the dollar by ____
in order to have the same effective financing rate from borrowing dollars.
a. depreciate; about 3.74%
b. appreciate; about 3.74%
c. appreciate; about 4.53%
d. depreciate; about 4.53%
25) Assume the U.S. one-year interest rate is 15%, while the South African one-year
interest rate is 13%. If the South African rand ____ by ____%, a U.S.-based MNC is
indifferent between investing in dollars and investing in rand.
a. depreciates; 1.77
b. appreciates; 1.74
c. appreciates; 1.77
d. depreciates; 1.74
26) An MNC that plans to acquire a target would prefer to time its bid for the target
when the local stock market prices in the target's country are generally high.
a. True
b. False
27) Fixed-rate loans have interest rates that are fixed for each year but adjust at the end
of each year in response to prevailing interest rates.
a. True
b. False
28) An advantage of a short straddle is that it provides the option writer with income
from two separate sources.
a. True
b. False
29) Banks charge larger bid/ask spreads than they would on less liquid, less traded
currencies.
a. True
b. False
30) Interest rate parity can only hold if purchasing power parity holds.
a. True
b. False
31) Under FASB 52:
a. translation gains and losses are included in the reported net income
b. translation gains and losses are included in stockholder's equity
c. A and B
d. none of the above
32) Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro
is going to appreciate substantially over time. Assuming 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
33) 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.
a. True
b. False
34) A U.S. corporation has purchased currency put options to hedge a 100,000
Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the
option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount
received by the corporation if it acts rationally?
a. $74,000
b. $84,000
c. $75,000
d. $85,000
35) Consider an importer that issues a promissory note to pay for the imported capital
goods over a period of five years. The notes are extended to an exporter who sells them
at a discount to a bank. This reflects:
a. accounts receivable financing
b. forfaiting
c. factoring
d. a letter of credit
36) The following is not a limitation of technical forecasting:
a. It's not suitable for long-term forecasts of exchange rates
b. It doesn't provide point estimates or a range of possible future values
c. It cannot be applied to currencies that exhibit random movements
d. It cannot be applied to currencies that exhibit a continuous trend for short-term
forecast
37) Baylor Bank believes the New Zealand dollar will appreciate over the next five
days from $.48 to $.50. The following annual interest rates apply:
Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor
Bank's forecast is correct, what will its dollar profit be from speculation over the
five-day period (assuming it does not use any of its existing consumer deposits to
capitalize on its expectations)?
a. $521,325
b. $500,520
c. $104,262
d. $413,419
e. $208,044
38) If a publicly-traded MNC's managers make poor decisions that reduce its value, it
may encourage other firms to acquire it.
a. True
b. False
39) A forward rate for a currency is said to exhibit a discount if
a. the forward rate exceeds the existing spot rate
b. the forward rate is less than the existing spot rate
c. the forward rate exceeds the expected future spot rate
d. the forward rate is less than the expected future spot rate
e. none of the above
40) Among the reasons for government intervention are:
a. to smooth exchange rate movement
b. to establish implicit exchange rate boundaries
c. to respond to temporary disturbances
d. all of the above
