1) A draft drawn on and accepted by a bank is called a banker’s acceptance.
2) Purely domestic firms are never affected by economic exposure.
3) Many MNCs simultaneously swap interest payments and currencies.
4) When a foreign currency has a greater impact on cash outflows than on cash inflows,
one possibility in restructuring operations is to reduce foreign sales.
5) Both call and put option premiums are affected by the level of the existing spot price
relative to the strike price; for example, a high spot price relative to the strike price will
result in a relatively high premium for a call option but a relatively low premium for a
put option.
6) If a parent’s perspective is used in analyzing a multinational project, the relevant cash
flows are the dollars ultimately received by the parent as a result of the project; the
relevant initial outlay is the investment by the parent.
7) To capitalize on high foreign interest rates using covered interest arbitrage, a U.S.
investor would convert dollars to the foreign currency, invest in the foreign country, and
simultaneously sell the foreign currency forward.
8) A microeconomic perspective focuses on external forces such as economic
conditions that can affect the value of an MNC.
9) The current account represents the investment in fixed assets in foreign countries that
can be used to conduct business operations.
10) A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S.
balance of payments account.
11) Research indicates that deviations from purchasing power parity (PPP) are reduced
over the long run.
12) Lagging refers to the delay of payment by a subsidiary if the currency denominating
the payable is expected to depreciate.
13) In general, translation exposure is larger with MNCs that have a larger proportion
of earnings generated by foreign subsidiaries.
14) Non-deliverable forward contracts (NDFs) are frequently used for currencies in
emerging markets.
15) Countries in eastern Europe are more appealing to MNCs that seek relatively low
costs of land and labor than countries in western Europe.
16) A currency portfolio’s variability depends on the standard deviations and paired
correlations of effective yields of the individual currencies within the portfolio.
17) The cost of capital incurred by U.S.-based MNCs is primarily driven by the global
stock market volatility.
18) Which of the following theories can be assessed using data that exists at one
specific point in time?
a.purchasing power parity (PPP)
b.international Fisher effect (IFE)
c.A and B
d.interest rate parity (IRP)
19) According to the text, currency variability levels ____ perfectly stable over time,
and currency correlations ____ perfectly stable over time.
a.are; are not
b.are; are
c.are not; are not
d.are not; are
20) Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the
nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the
international Fisher effect, the franc will ____ by about ____.
a.appreciate; 3%
b.appreciate; 1%
c.depreciate; 3%
d.depreciate; 2%
e.appreciate; 2%
21) Rockford Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells
all products to retail stores in the U.K.; the goods are denominated in pounds. It
finances a small portion of its business with pound-denominated loans from British
banks. Which of the following is true? (Assume that the amount of products to be sold
is guaranteed by contracts.)
a.The dollar value of sales is higher if the pound depreciates against the dollar
b.The dollar value of sales is unaffected by the pound’s exchange rate
c.A and B
d.None of the above
22) Assume that U.S. annual inflation equals 8%, while Japanese annual inflation
equals 5%. If purchasing power parity is used to forecast the future spot rate, the
forecast would reflect an expectation of:
a.appreciation of yen’s value over the next year
b.depreciation of yen’s value over the next year
c.no change in yen’s value over the next year
d.information about interest rates is needed to answer this question
23) Based on interest rate parity, the larger the degree by which the U.S. interest rate
exceeds the foreign 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
24) The Sarbanes-Oxley Act improves corporate governance of MNCs because it:
a.makes executives more accountable for verifying financial statements
b.eliminates stock options as a form of compensation
c.ties executive compensation to firm performance
d.places a limit on the amount of funds that managers can spend
25) Assume that Swiss investors have francs available to invest in securities, and they
initially view U.S. and British interest rates as equally attractive. Now assume that U.S.
interest rates increase while British interest rates stay the same. This would likely cause:
a.the Swiss demand for dollars to decrease and the dollar will depreciate against the
pound
b.the Swiss demand for dollars to increase and the dollar will depreciate against the
Swiss franc
c.the Swiss demand for dollars to increase and the dollar will appreciate against the
Swiss franc
d.the Swiss demand for dollars to decrease and the dollar will appreciate against the
pound
26) Which of the following is not a method of forecasting exchange rate volatility?
a.Using the absolute forecast error as a percentage of the realized value to improve your
forecast
b.Using the volatility of historical exchange rate movements as a forecast for the future
c.Using a time series of volatility patterns in previous periods
d.Deriving the exchange rate’s implied standard deviation from the currency option
pricing model
27) An MNC is considering establishing a two-year project in New Zealand with a $30
million initial investment. The firm’s cost of capital is 12%. The required rate of return
on this project is 18%. The project is expected to generate cash flows of NZ$12 million
in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes,
and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are
remitted to the parent. What is the break-even salvage value?
a.about NZ$11 million
b.about NZ$15 million
c.about NZ$31 million
d.about NZ$37 million
e.about NZ$25 million
28) When a currency call option is classified as “in the money,” this indicates that
a.the spot rate of the currency is less than the exercise price of the option
b.the spot rate of the currency is greater than the exercise price of the option
c.the buyer of the option would generate a profit; that is, the spot rate would exceed the
sum of the exercise price and the premium paid
d.the buyer of the option would generate a profit; that is, the exercise price would
exceed the sum of the spot rate and the premium paid
29) 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
30) The lower a project’s beta, the ____ is the project’s ____ risk.
a.lower; systematic
b.lower; unsystematic
c.higher; systematic
d.higher; unsystematic
31) Assume that an American firm wants to engage in international business without
major investment in the foreign country. Which method is least appropriate in this
situation?
a.International Trade
b.Licensing
c.Franchising
d.Direct foreign investment
32) If interest rate parity exists and transactions costs are zero, foreign financing with a
simultaneous forward purchase of the currency borrowed will result in an effective
financing rate that is:
a.less than the domestic interest rate
b.greater than the domestic interest rate
c.equal to the domestic interest rate
d.greater than the domestic interest rate if the forward rate exhibits a premium and less
than the domestic interest rate if the forward rate exhibits a discount
33) A U.S. firm is bidding for a project needed by the Swiss government. The firm will
not know if the bid is accepted until three months from now. The firm will need Swiss
francs to cover expenses but will be paid by the Swiss government in dollars if it is
hired for the project. The firm can best insulate itself against exchange rate exposure
by:
a.selling futures in francs
b.buying futures in francs
c.buying franc put options
d.buying franc call options
34) Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in U.S. $=$.60
Exchange rate of pound in U.S. $=$1.50
Exchange rate of pound in Singapore dollars=S$2.6
Based on the information given, as you and others perform triangular arbitrage, what
should logically happen to the spot exchange rates?
a.The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.
dollars should appreciate, and the pound value in Singapore dollars should depreciate
b.The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.
dollars should appreciate, and the pound value in Singapore dollars should depreciate
c.The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.
dollars should appreciate, and the pound value in Singapore dollars should appreciate
d.The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.
dollars should depreciate, and the pound value in Singapore dollars should appreciate
35) The U.S. typically has a balance of trade surplus in its trade with ____.
a.China
b.Japan
c.A and B
d.none of the above
36) With regard to hedging translation exposure, translation losses ____, and gains on
forward contracts used to hedge translation exposure ____.
a.are not tax deductible; are taxed
b.are tax deductible; are taxed
c.are not tax deductible; are not taxed
d.are tax deductible; are not taxed
37) The shorter the time to the expiration date for a currency, the ____ will be the
premium of a call option, and the ____ will be the premium of a put option, other things
equal.
a.greater; greater
b.greater; lower
c.lower; lower
d.lower; greater
38) The international Fisher effect suggests that:
a.the effective yield on short-term foreign securities should, on average, equal the yield
on short-term domestic securities
b.the effective yield on short-term securities of high inflation countries is greater than
the yield on short-term domestic securities
c.if domestic income grows faster than foreign income, the effective yield on short-term
foreign securities is higher than short-term domestic securities
d.if foreign tax rates equal domestic tax rates, the exchange rates of different currencies
will change by the same degree
39) Firms based in ____ tend to acquire more U.S. target firms than the other countries
listed here.
a.Canada
b.Japan
c.Germany
d.Mexico
40) If your firm expects the euro to substantially depreciate, it could speculate by ____
euro call options or ____ euros forward in the forward exchange market.
a.selling; selling
b.selling; purchasing
c.purchasing; purchasing
d.purchasing; selling
41) Assume that interest rate parity holds. The Mexican interest rate is 50%, and the
U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According
to interest rate parity, the peso’s forward ____ will ____.
a.premium; increase
b.discount; decrease
c.discount; increase
d.premium; decrease
42) Other things being equal, a foreign subsidiary in China would more likely be
divested by the U.S. parent if new information caused the parent to suddenly anticipate
that:
a.the Chinese yuan would depreciate in the future
b.the Chinese yuan would appreciate in the future
c.the Chinese yuan would remain somewhat stable in the future
d.none of the above; the value of the Chinese yuan has no impact on the feasibility of a
divestiture
43) As mentioned in the text, the most common maturities for forward rates are:
a.one, three, six, and twelve months
b.one, three, six, and twelve years
c.two, three, and five years
d.two, three, and five weeks
44) ____ are most commonly classified as a direct foreign investment.
a.Foreign acquisitions
b.Purchases of international stocks
c.Licensing agreements
d.Exporting transactions
45) If an MNC expects cash inflows of equal amounts in two currencies, and the two
currencies are ____ correlated, the MNC’s transaction exposure is relatively ____.
a.negatively; high
b.negatively; low
c.positively; low
d.none of the above
46) If the Fed desires to weaken the dollar without affecting the dollar money supply, it
should:
a.exchange dollars for foreign currencies, and sell some of its existing Treasury security
holdings for dollars
b.exchange foreign currencies for dollars, and sell some of its existing Treasury security
holdings for dollars
c.exchange dollars for foreign currencies, and buy existing Treasury securities with
dollars
d.exchange foreign currencies for dollars, and buy existing Treasury securities with
dollars
47) Andrea is an option speculator. She anticipates the Canadian dollar to depreciate
from its current level of $0.90 to $0.85. Currently, Canadian dollar call options are
available with an exercise price of $0.91 and a premium of $0.02. Also, Canadian dollar
put options are available with an exercise price of $0.88 and a premium of $0.02. If the
future spot rate of the Canadian dollar is $0.85, what is Andrea’s profit or loss per unit?
a.$0.03
b.$0.05
c.$0.01
d.$0.04