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1) A letter of credit does not guarantee that the goods purchased will be those invoiced
and shipped.
a. True
b. False
2) Assume the U.S. one-year interest rate is 11% and the French one-year interest rate is
18%. The break-even level of depreciation in the euro at which the U.S. and French
investments would exhibit the same return to a U.S. investor is:
a. about 5.1%
b. about 6.8%
c. about 6.3%
d. about 5.9%
3) Like the International Monetary Fund (IMF), the ____ is composed of a collection of
nations as members. However, unlike the IMF, it uses the private rather than the
government sector to achieve its objectives.
a. World Bank
b. International Financial Corporation (IFC)
c. World Trade Organization (WTO)
d. International Development Association (IDA)
e. Bank for International Settlements (BIS)
4) An MNC's parent would consider investing in a target only if the estimated present
value of the cash flows it would ultimately receive from the target over time ____ the
initial outlay necessary to purchase the target.
a. is less than
b. is the same as
c. is greater than
d. none of the above
5) U.S. government officials would likely prefer that China devalue the yuan against the
dollar.
a. True
b. False
6) If you purchase a straddle on euros, this implies that you:
a. finance the purchase of a call option by selling a put option in the euros
b. finance the purchase of a call option by selling a call option in the euros
c. finance the purchase of a put option by selling a put option in the euros
d. finance the purchase of a put option by selling a call option in the euros
e. none of the above
7) When a U.S.-based MNC wants to determine whether to establish a subsidiary in a
foreign country, it will always accept that project if the foreign currency is expected to
appreciate.
a. True
b. False
8) A country with a currency board does not have control over its local interest rates.
a. True
b. False
9) A ____ involves an exchange of currencies between two parties, with a promise to
re-exchange currencies at a specified exchange rate and future date.
a. long-term forward contract
b. currency option contract
c. parallel loan
d. money market hedge
10) The main participants in the international money market are:
a. consumers
b. small firms
c. large corporations
d. small European firms needing European currencies for international trade
11) Which of the following is not a factor that favorably affects an MNC's cost of
capital, according to your text?
a. exchange rate risk
b. size
c. access to international capital markets
d. international diversification
12) Gamma Corporation has incurred large losses over the last ten years due to
exchange rate fluctuations of the Egyptian pound (EGP), even though the company has
used a market-based forecast based on the forward rate. Consequently, management
believes its forecasts to be biased. The following regression model was estimated to
determine if the forecasts over the last ten years were biased:
St = a0 + a1Ft - 1 + mt,
where St is the spot rate of the pound in year t and Ft - 1 is the forward rate of the
pound in year t-1. Regression results reveal coefficients of a0 = 0 and a1 = 1.3. Thus,
Gamma has reason to believe that its past forecasts have ____ the realized spot rate.
a. overestimated
b. underestimated
c. correctly estimated
d. none of the above
13) Which of the following is not true regarding the Mexican peso crisis?
a. Mexico encouraged firms and consumers to buy an excessive amount of imports
because the peso was stronger than it should have been
b. Many speculators based in the U.S. speculated on the potential decline in the peso by
investing their funds in Mexico
c. In December of 1994, the central bank of Mexico allowed the peso to float freely
d. The central bank of Mexico increased interest rates after the peso declined in value in
order to prevent investors from withdrawing their investments in Mexico's debt
securities
e. All of the above are true
14) 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
15) Which of the following types of international corporate control transaction is
probably the most difficult to value by an MNC?
a. international acquisition
b. newly privatized foreign business
c. international alliance
d. international divestiture
16) The World Bank frequently enters into cofinancing agreements. Under these
agreements, financing is provided by the World Bank and/or official aid agencies,
export credit agencies, or commercial banks.
a. True
b. False
17) According to the international Fisher effect (IFE), the exchange rate percentage
change should be approximately equal to the differential in income levels between two
countries.
a. True
b. False
18) If positions in a specific currency among an MNC's subsidiaries offset each other,
the decision by one subsidiary to hedge its position in that currency would increase the
MNC's overall exposure.
a. True
b. False
19) Both call and put option premiums are affected by the level of the existing spot rate
relative to the strike price, the length of time before the expiration date, and the
potential variability of the currency.
a. True
b. False
20) 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
21) 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.
a. True
b. False
22) The international Fisher effect (IFE) suggests that the currencies with relatively
high interest rates will appreciate because those high rates will attract investment and
increase the demand for that currency.
a. True
b. False
23) The value of the Canadian dollar, Japanese yen, and Australian dollar with respect
to the U.S. dollar are part of a:
a. pegged system
b. fixed system
c. managed float system
d. crawling peg system
24) ____ is (are) a limitation of hedging translation exposure.
a. Inaccurate earnings forecasts
b. Inadequate forward contracts for some currencies
c. Accounting distortions
d. Increased transaction exposure
e. All of the above
25) If revenues and costs are equally sensitive to exchange rate movements, MNCs may
reduce their economic exposure by restructuring their operations to shift the sources of
costs or revenues to other locations so that:
a. cash inflows exceed cash outflows in each foreign currency
b. cash outflows exceed cash inflows in each foreign currency
c. cash inflows match cash outflows in each foreign currency
d. none of the above
26) The exchange rates of smaller countries are very stable because the market for their
currency is very liquid.
a. True
b. False
27) Assume that an MNC has a subsidiary in Italy, which exports its products to various
countries in Europe. Since all of the countries where it exports use Euro as their
currency, this MNC is not subject to the exchange rate risk.
a. True
b. False
28) In an open account transaction, the exporter ships the goods to the importer but
retains title to the goods until they have been sold.
a. True
b. False
29) A call option exists on British pounds with an exercise price of $1.60, a 90-day
expiration date, and a premium of $.03 per unit. A put option exists on British pounds
with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per
unit. You plan to purchase options to cover your future receivables of 700,000 pounds
in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of
the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after
deducting payment for the option premium.
a. $1,169,000
b. $1,099,000
c. $1,106,000
d. $1,143,100
e. $1,134,000
30) 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
31) When a firm perceives that a foreign currency is ____, the firm may attempt direct
foreign investment in that country, as the initial outlay should be relatively ____.
a. overvalued; high
b. overvalued; low
c. undervalued; high
d. undervalued; low
