Chapter 19: Multinational True/False Page 633
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Note that there is some overlap between the T/F and the multiple choice questions, as some T/F
statements are used in the MC questions. See the preface for information on the AACSB letter
indicators (F, M, etc.) on the subject lines.
Multiple Choice: True/False
1. Multinational financial management requires that financial analysts
consider the effects of changing currency values.
a. True
b. False
2. Legal and economic differences among countries, although important, do
NOT pose significant problems for most multinational corporations when
they coordinate and control worldwide operations and subsidiaries.
a. True
b. False
3. When the value of the U.S. dollar appreciates against another country’s
currency, we may purchase more of the foreign currency with the U.S.
dollar.
a. True
b. False
4. The United States and most other major industrialized nations currently
operate under a system of floating exchange rates.
a. True
b. False
5. Exchange rate quotations consist solely of direct quotations.
a. True
b. False
6. Calculating a currency cross rate involves determining the exchange
rate for two currencies by using a third currency as a base.
CHAPTER 19
MULTINATIONAL FINANCIAL MANAGEMENT
Page 634 True/False Chapter 19: Multinational
a. True
b. False
7. A Eurodollar is a U.S. dollar deposited in a bank outside the United
States.
a. True
b. False
8. LIBOR is an acronym for London Interbank Offer Rate, which is an
average of interest rates offered by London banks to smaller U.S.
corporations on all deposits.
a. True
b. False
9. Exchange rate risk is the risk that the cash flows from a foreign
project, when converted to the parent company’s currency, will be worth
less than was originally projected because of exchange rate changes.
a. True
b. False
10. Because political risk is seldom negotiable, it cannot be explicitly
addressed in multinational corporate financial analysis.
a. True
b. False
11. Individuals and corporations can buy or sell forward currencies to
hedge their exchange rate exposure. Essentially, the process involves
simultaneously selling the currency expected to appreciate in value and
buying the currency expected to depreciate.
a. True
b. False
12. If an investor can obtain more of a foreign currency for a dollar in
the forward market than in the spot market, then the forward currency
is said to be selling at a discount to the spot rate.
a. True
b. False
13. If a dollar will buy fewer units of a foreign currency in the forward
market than in the spot market, then the forward currency is said to be
selling at a premium to the spot rate.
Chapter 19: Multinational True/False Page 635
a. True
b. False
Page 636 Conceptual M/C Chapter 19: Multinational
14. A foreign currency will, on average, depreciate against the U.S. dollar
at a percentage rate approximately equal to the amount by which its
inflation rate exceeds that of the United States.
a. True
b. False
15. The cash flows relevant for a foreign investment should, from the
parent company’s perspective, include the financial cash flows that the
subsidiary can legally send back to the parent company plus the cash
flows that must remain in the foreign country.
a. True
b. False
16. The cost of capital may be different for a foreign project than for an
equivalent domestic project because foreign projects may be more or
less risky.
a. True
b. False
17. When considering the risk of a foreign investment, a higher risk might
arise from exchange rate risk and political risk while lower risk might
result from international diversification.
a. True
b. False
Multiple Choice: Conceptual
18. Which of the following are reasons why companies move into
international operations?
a. To take advantage of lower production costs in regions where labor
costs are relatively low.
b. To develop new markets for the firm’s products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.
Chapter 19: Multinational Conceptual M/C Page 637
19. Multinational financial management requires that
a. the effects of changing currency values be included in financial
analyses.
b. legal and economic differences need not be considered in financial
decisions because these differences are insignificant.
c. political risk should be excluded from multinational corporate
financial analyses.
d. traditional U.S. and European financial models incorporating the
existence of a competitive marketplace not be recast when analyzing
projects in other parts of the world.
e. cultural differences need not be accounted for when considering firm
goals and employee management.
20. In Japan, 90-day securities have a 4% annualized return and 180-day
securities have a 5% annualized return. In the United States, 90-day
securities have a 4% annualized return and 180-day securities have an
annualized return of 4.5%. All securities are of equal risk, and
Japanese securities are denominated in terms of the Japanese yen.
Assuming that interest rate parity holds in all markets, which of the
following statements is most CORRECT?
a. The yen-dollar spot exchange rate equals the yen-dollar exchange
rate in the 90-day forward market.
b. The yen-dollar spot exchange rate equals the yen-dollar exchange
rate in the 180-day forward market.
c. The yen-dollar exchange rate in the 90-day forward market equals the
yen-dollar exchange rate in the 180-day forward market.
d. The yen-dollar exchange rate in the 180-day forward market equals
the yen-dollar exchange rate in the 90-day spot market.
e. The relationship between spot and forward interest rates cannot be
inferred.
21. If the inflation rate in the United States is greater than the
inflation rate in Britain, other things held constant, the British
pound will
a. appreciate against the U.S. dollar.
b. depreciate against the U.S. dollar.
c. remain unchanged against the U.S. dollar.
d. appreciate against other major currencies.
e. appreciate against the dollar and other major currencies.
22. Which of the following statements is NOT CORRECT?
a. Any bond sold outside the country of the borrower is called an
international bond.
b. Foreign bonds and Eurobonds are two important types of international
bonds.
Page 638 Conceptual M/C Chapter 19: Multinational
c. Foreign bonds are bonds sold by a foreign borrower but denominated
in the currency of the country in which the issue is sold.
d. The term Eurobond applies only to foreign bonds denominated in U.S.
currency.
e. A Eurodollar is a U.S. dollar deposited in a bank outside the U.S.
Chapter 19: Multinational M/C Problems Page 639
23. Currently, a U.S. trader notes that in the 6-month forward market, the
Japanese yen is selling at a premium (that is, you receive more dollars
per yen in the forward market than you do in the spot market), while
the British pound is selling at a discount. Which of the following
statements is CORRECT?
a. If interest rate parity holds, 6–month interest rates should be the
same in the U.S., Britain, and Japan.
b. If interest rate parity holds among the three countries, the United
States should have the highest 6–month interest rates and Japan
should have the lowest rates.
c. If interest rate parity holds among the three countries, Britain
should have the highest 6-month interest rates and Japan should have
the lowest rates.
d. If interest rate parity holds among the three countries, Japan
should have the highest 6-month interest rates and Britain should
have the lowest rates.
e. If interest rate parity holds among the three countries, the United
States should have the highest 6–month interest rates and Britain
should have the lowest rates.
24. Today in the spot market $1 = 1.82 Swiss francs and $1 = 130 Japanese
yen. In the 90-day forward market, $1 = 1.84 Swiss francs and $1 = 127
Japanese yen. Assume that interest rate parity holds worldwide. Which
of the following statements is most CORRECT?
a. Interest rates on 90-day risk-free U.S. securities are higher than
the interest rates on 90-day risk-free Swiss securities.
b. Interest rates on 90-day risk-free U.S. securities are higher than
the interest rates on 90-day risk-free Japanese securities.
c. Interest rates on 90-day risk-free U.S. securities equal the
interest rates on 90-day risk-free Japanese securities.
d. Since interest rate parity holds interest rates should be the same
in all three countries.
e. Interest rates on 90-day risk-free U.S. securities equal the
interest rates on 90-day risk-free Swiss securities.
Multiple Choice: Problems
Problems with * in the topic line are nonalgorithmic.
25. If one Swiss franc can purchase $0.76 U.S. dollars, how many Swiss
francs can one U.S. dollar buy?
a. 0.9592
b. 1.0658
c. 1.1842
d. 1.3158
e. 1.4474
Page 640 M/C Problems Chapter 19: Multinational
26. If one U.S. dollar buys 1.64 Canadian dollars, how many U.S. dollars
can you purchase for one Canadian dollar?
a. 0.5488
b. 0.6098
c. 0.6707
d. 0.7378
e. 0.8116
27. If one British pound can purchase $1.98 U.S. dollars, how many British
pounds can one U.S. dollar buy?
a. 0.5051
b. 0.5556
c. 0.6111
d. 0.6722
e. 0.7394
28. If one U.S. dollar buys 0.63 euro, how many dollars can you purchase
for one euro?
a. 1.0414
b. 1.1571
c. 1.2857
d. 1.4286
e. 1.5873
29. If one U.S. dollar sells for 0.60 British pound, how many dollars
should one British pound sell for?
a. 1.0935
b. 1.2150
c. 1.3500
d. 1.5000
e. 1.6667
30. Suppose 144 yen could be purchased in the foreign exchange market for
one U.S. dollar today. If the yen depreciates by 8.0% tomorrow, how
many yen could one U.S. dollar buy tomorrow?
a. 155.5200
b. 163.2960
c. 171.4608
d. 180.0338
e. 189.0355
Chapter 19: Multinational M/C Problems Page 641
31. Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is
considering investing in an equivalent-risk domestic bond in a country
with a 28% withholding tax on interest paid to foreigners. If 9%
after-tax is the investor’s required return, what before-tax rate would
the domestic bond need to pay to provide the required after-tax return?
a. 9.11%
b. 10.13%
c. 11.25%
d. 12.50%
e. 13.75%
32. Suppose DeGraw Corporation, a U.S. exporter, sold a solar heating
station to a Japanese customer at a price of 143.5 million yen, when
the exchange rate was 140 yen per dollar. In order to close the sale,
DeGraw agreed to make the bill payable in yen, thus agreeing to take
some exchange rate risk for the transaction. The terms were net 6
months. If the yen fell against the dollar such that one dollar would
buy 154.4 yen when the invoice was paid, what dollar amount would
DeGraw actually receive after it exchanged yen for U.S. dollars?
a. $757,005.48
b. $796,847.88
c. $838,787.24
d. $882,933.94
e. $929,404.15
33. Suppose the exchange rate between U.S. dollars and Swiss francs is SF
1.41 = $1.00, and the exchange rate between the U.S. dollar and the
euro is $1.00 = 0.64 euro. What is the cross rate of Swiss francs to
euros? (In other words, how many Swiss francs are needed to purchase
one euro?)
a. 1.9828
b. 2.2031
c. 2.4234
d. 2.6658
e. 2.9324
34. Suppose that currently, 1 British pound equals 1.98 U.S. dollars and 1
U.S. dollar equals 1.02 Swiss francs. How many Swiss francs are needed
to purchase 1 pound?
a. 1.9691
b. 2.0196
c. 2.0701
d. 2.1218
e. 2.1749
Page 642 M/C Problems Chapter 19: Multinational
35. A currency trader observes the following quotes in the spot market:
1 U.S. dollar = 122 Japanese yen
1 British pound = 2.25 Swiss francs
1 British pound = 1.65 U.S. dollars
Given this information, how many yen can be purchased for 1 Swiss
franc?
a. 0.8505
b. 0.8723
c. 0.8947
d. 0.9170
e. 0.9400
36. A currency trader observes the following quotes in the spot market:
1 U.S. dollar = 10.875 Mexican pesos
1 British pound = 6.205 Danish krone
1 British pound = 1.65 U.S. dollars
Given this information, how many Mexican pesos can be purchased for 1
Danish krone?
a. 2.7490
b. 2.8195
c. 2.8918
d. 2.9641
e. 3.0382
37. In 1985, a given Japanese imported automobile sold for 1,476,000 yen,
or $8,200. If the car still sold for the same amount of yen today but
the current exchange rate is 144 yen per dollar, what would the car be
selling for today in U.S. dollars?
a. $ 8,303
b. $ 9,225
c. $10,250
d. $11,275
e. $12,403
38. Suppose one year ago, Hein Company had inventory in Britain valued at
240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2
U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars.
The inventory in Britain is still valued at 240,000 pounds. What is
the U.S. dollar gain or loss in inventory value as a result of the
change in exchange rates?
a. –$38,880.00
b. –$43,200.00
Chapter 19: Multinational M/C Problems Page 643
c. –$47,520.00
d. –$52,272.00
e. –$57,499.20
Page 644 M/C Problems Chapter 19: Multinational
39. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and
the 180-day forward rate is 5.97 shekels per dollar, then the forward
rate for the Israeli shekel is selling at a ______________ to the spot
rate.
a. 6.09% premium
b. 6.76% premium
c. 7.51% discount
d. 8.35% discount
e. 9.18% discount
40. Suppose one British pound can purchase 1.82 U.S. dollars today in the
foreign exchange market, and currency forecasters predict that the U.S.
dollar will depreciate by 12.0% against the pound over the next 30
days. How many dollars will a pound buy in 30 days?
a. $1.4860
b. $1.6511
c. $1.8346
d. $2.0384
e. $2.2422
41. Stover Corporation, a U.S. based importer, makes a purchase of crystal
glassware from a firm in Switzerland for 39,960 Swiss francs, or
$24,000, at the spot rate of 1.665 Swiss francs per dollar. The terms
of the purchase are net 90 days, and the U.S. firm wants to cover this
trade payable with a forward market hedge to eliminate its exchange
rate risk. Suppose the firm completes a forward hedge at the 90-day
forward rate of 1.682 Swiss francs. If the spot rate in 90 days is
actually 1.64 Swiss francs, how much in U.S. dollars will the U.S. firm
have saved or lost by hedging its exchange rate exposure?
a. $399
b. $444
c. $493
d. $548
e. $608
Chapter 19: Multinational M/C Problems Page 645
42. Suppose a U.S. firm buys $200,000 worth of television tubes from a
Mexican manufacturer for delivery in 60 days with payment to be made in
90 days (30 days after the goods are received). The rising U.S.
deficit has caused the dollar to depreciate against the peso recently.
The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day
forward rate is 5.45 pesos/dollar. The firm goes into the forward
market today and buys enough Mexican pesos at the 90-day forward rate
to completely cover its trade obligation. Assume the spot rate in 90
days is 5.30 Mexican pesos per U.S. dollar. How much in U.S. dollars
did the firm save by eliminating its foreign exchange currency risk
with its forward market hedge?
a. $4,897.59
b. $5,155.36
c. $5,426.69
d. $5,712.31
e. $5,997.92
43. Suppose 90-day investments in Britain have a 6% annualized return and a
1.5% quarterly (90-day) return. In the U.S., 90-day investments of
similar risk have a 4% annualized return and a 1% quarterly (90-day)
return. In the 90-day forward market, 1 British pound equals $1.65.
If interest rate parity holds, what is the spot exchange rate ($/£)?
a. $1.4924
b. $1.6582
c. $1.8240
d. $2.0064
e. $2.2070
44. Suppose hockey skates sell in Canada for 105 Canadian dollars, and 1
Canadian dollar equals 0.71 U.S. dollar. If purchasing power parity
(PPP) holds, what is the price of hockey skates in the United States?
a. $60.39
b. $67.10
c. $74.55
d. $82.01
e. $90.21
45. Suppose 6 months ago a Swiss investor bought a 6-month U.S. Treasury
bill at a price of $9,708.74, with a maturity value of $10,000. The
exchange rate at that time was 1.420 Swiss francs per dollar. Today,
at maturity, the exchange rate is 1.324 Swiss francs per dollar. What
is the annualized rate of return to the Swiss investor?
a. –7.93%
b. –7.13%
c. –6.42%
d. –5.78%