18) Which of the following is considered to be a major or hard currency?
A) the Algerian dinar
B) the Barbadian dollar
C) the Mexican peso
D) the Japanese yen
19) When fewer units of a foreign currency are required to buy one dollar, the currency is said to have
________.
A) appreciated with respect to the dollar
B) depreciated with respect to the dollar
C) appreciated with respect to the home currency
D) appreciated with respect to the average rate of the home currency
20) The risk resulting from the effects of changes in foreign exchange rates on the translated value of a
firm’s accounts denominated in a given foreign currency is ________.
A) economic exposure
B) macro political risk
C) accounting exposure
D) micro political risk
21) The risk resulting from the effects of changes in foreign exchange rates on the firm’s value is ________.
A) economic exposure
B) macro political risk
C) accounting exposure
D) micro political risk
22) The potential risk of a host government’s implementation of specific rules and regulations that can
result in the discontinuity or seizure of the operations of a foreign company is called ________.
A) exchange rate risk
B) financial risk
C) political risk
D) business risk
23) Macro political risk and micro political risk in international business refer to the risk ________.
A) that will affect all foreign firms and the risk that will affect an individual firm or specific industry,
respectively
B) of the devaluation of the host country’s currency and the risk of sudden taxes on exporting the
manufactured goods of a particular industry, respectively
C) that will affect an individual firm or specific industry and the risk that will affect all foreign firms,
respectively
D) of sudden taxes on exporting the manufactured goods of a particular industry and the risk of the
devaluation of the host country’s currency, respectively
24) A political risk that might affect all foreign firms in a host country is termed a ________ risk; a
political risk that might affect only an individual firm or specific industry in a host country is termed a
________ risk.
A) macro political; micro political
B) micro political; macro political
C) micro political; foreign exchange
D) foreign exchange; micro political
25) Which of the following is a positive approach of coping with political risk?
A) control of transportation to external markets
B) control of downstream processing
C) license or patent restrictions under international agreement
D) joint venture with government or local private sector
26) Fixed relationship among currencies refers to ________.
A) the relationship in which the value of any one currency with respect to all other currencies is allowed
to fluctuate on a yearly basis
B) the relationship in which the value of any two currencies with respect to each other is allowed to
fluctuate on a monthly basis
C) the constant relationship of a currency to one of the major currencies, a combination of major
currencies, or some type of international foreign exchange standard
D) the constant relationship of a currency to one of the major foreign exchange market or a combination
of markets
27) Between two major currencies, the spot exchange rate is the rate ________ and the forward exchange
rate is the rate ________.
A) on that date; today
B) at some specified future date; on that date
C) today; on that date
D) on that date; at some specified future date
28) Foreign exchange risk refers to the risk created by ________.
A) the potential seizure of an MNC’s operations in a host country
B) the varying exchange rate between two currencies
C) the fixed exchange rate between two currencies
D) the potential nationalization of the MNC’s operations by a host government
29) If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the exchange rate
between the U.S. dollar and the Japanese yen is 120 Yen per dollar, then what is the Euro per Yen
exchange rate?
A) 0.0100
B) 144.00
C) 0.0069
D) 100.00
30) If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of
inflation is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per Euro
exchange rate in one year?
A) 1.050
B) 0.8730
C) 1.257
D) 0.7955
19.4 Long-term investment and financing decisions
1) A foreign bond is an international bond that is sold primarily in countries other than the country of the
currency in which the issue is denominated.
2) In general, an international bond is one that is initially sold in the country of the borrower and, then,
often distributed in home country.
3) Because of their access to the international bond and equity markets, MNCs may have lower long-term
financing costs, thus resulting in differences between the capital structures of these firms and those of
purely domestic companies.
4) The foreign direct investment (FDI) is a multi-national corporation’s transfer of capital, managerial,
and technical assets from a foreign country to its home country.
5) A multi-national corporation (MNC) can give some protection to international cash flows by reducing
its liabilities if the currency is appreciating, or by reducing its financial assets if the currency is
depreciating.
6) For foreign bonds, interest rates are usually not directly correlated with the domestic rates prevailing
in the respective countries.
7) For a Eurodollar bond, the interest rate will reflect several different rates, most notably the U.S. long–
term rate, the Eurodollar rate, and long-term rates in other countries.
8) Comprehensive rules, regulations, and incentives aimed at regulating the inflow of direct foreign
investments involving MNCs and at extracting more benefits from their presence are termed as ________.
A) unitary tax laws
B) foreign direct investments
C) Eurocurrency markets
D) national entry control systems
9) The transfer of capital, managerial, and technical assets by a multinational firm from its home country
to a foreign country is termed ________.
A) an MNC
B) an SDI
C) an FDI
D) a CAPM
10) An international bond that is sold primarily in countries other than the country of the currency in
which the issue is denominated is called ________.
A) sovereign bond
B) foreign bond
C) Eurobond
D) global bond
11) In capital budgeting for a multinational company, the starting discount rate to which risks stemming
from foreign exchange and political factors can be added, and from which benefits reflecting the parent’s
lower capital costs may be subtracted is ________.
A) the cost of capital of the parent (multinational) company
B) the risk-free rate of the parent company, adjusted for risk relevant to the foreign subsidiary
C) the local cost of equity capital applicable to the local business and financial environments within
which a subsidiary operates
D) the weighted average cost of capital applicable to all foreign subsidiaries combined
12) Theory and empirical evidence indicate that the capital structures of multinational companies
________.
A) are basically the same as those of domestic firms
B) differ, but all multinationals are similar no matter the domicile country
C) not only differ from domestic firms, but also differ based upon the country in which they are
domiciled
D) differ only because of their operating structure and the country in which they are domiciled has no
impact on capital structure
13) Relative to cash flows of domestic firms, by diversifying internationally, multinationals ________.
A) will have higher cash flows
B) can achieve further risk reduction
C) are unable to change the risk
D) pay higher dividends
14) The capital structures of MNCs are influenced by ________.
A) domestic futures markets
B) international diversification
C) the overall relationship between the public and private sectors in home country
D) dividends paid by corporations
15) MNCs have lower long-term financing costs in international capital markets than in domestic markets
because ________.
A) the cost of equity is less than the cost of debt in international capital markets
B) they have access to the international bond and equity markets
C) the cost of equity is more than the cost of debt in international capital markets
D) the international capital markets have less volatility and hence low risk
16) A multinational company has two subsidiaries, one in U.K (local currency, Pound Sterling) and the
other in Germany (local currency, Euro). Proforma statements of operations indicate the following short–
term financial needs for each subsidiary (in equivalent U.S. dollars): U.K: $25 million excess cash to be
invested (lent); Germany: $10 million funds to be raised (borrowed)
The following financial data is also available:
(a) Determine the effective rates of interest for Irish pound and Deutsche mark in both the Euromarket
and the domestic market.
(b) Where should the funds be invested?
(c) Where should the funds be raised?
19.5 Short-term financial decisions
1) In the international context, the nominal interest rate is the stated interest rate charged on financing
when only the MNC parent’s currency is involved.
2) In the case of short-term financing, the forces of supply and demand are among the main factors
determining exchange rates in Eurocurrency markets.
3) Hedging strategies are techniques used to offset or protect against risk and include borrowing or
lending in different currencies.
4) The interest rates offered in the Euromarket on the U.S. dollar are greatly affected by the prime rate
inside the United States.
5) In the international context, the effective interest rate equals to the nominal rate plus (or minus) any
forecast appreciation (or depreciation) of a foreign currency relative to the currency of the MNC parent.
6) Exchange rate risk hedging tools include forward contracts, options, interest rate swaps, currency
swaps, and hybrid securities.
7) Exchange rate risk hedging tools include Monte Carlo swaps, synthetic insurance contracts, and
inventory swaps.
8) International short-term financing opportunities are available in ________.
A) future markets
B) bond markets
C) forward markets
D) Eurocurrency markets
9) The usual capital markets used by U.S.-based MNCs that desire international ownership of their equity
are ________.
A) Western Europe and Japan
B) Mexico and Canada
C) Saudi Arabia and South Africa
D) Liechtenstein and Panama
10) A Eurobond is ________.
A) a bond sold primarily to Europeans
B) a bond sold primarily in countries other than the country of the currency in which the issue is
denominated
C) a debt instrument sold exclusively in Europe
D) a bond issued by European Union
11) The existence of ________ allows multinationals to take advantage of unregulated financial markets to
invest and raise short-term funds in a variety of countries and to protect themselves from foreign
exchange exposure.
A) a strong U.S. dollar
B) the International Monetary Fund
C) Eurocurrency markets
D) European Economic Council
12) In the international context, the ________ interest rate involves only the MNC parent’s currency, while
the ________ interest rate includes any forecast appreciation or depreciation of a foreign currency relative
to that of the MNC parent.
A) effective; nominal
B) macro; nominal
C) nominal; effective
D) nominal; micro
13) A short-term financial decision based on an MNC management’s expectation that the local foreign
currency will appreciate may be ________.
A) increasing local customers’ accounts receivable and increasing local notes payable
B) decreasing local notes receivable and decreasing accruals
C) increasing local inventories and increasing local notes payable
D) increasing local accounts receivable and decreasing local accounts payable
14) As a foreign exchange hedging tool, options ________.
A) provide the right to buy or sell an amount of foreign currency
B) allow the trading of one interest rate stream for another
C) permit firms to change the interest rate structure of their assets/liabilities
D) represent an obligation to buy or sell an amount of foreign currency
15) As a foreign exchange hedging tool, currency swaps ________.
A) provide the right to buy or sell an amount of foreign currency
B) allow each party to pay the other’s interest payments
C) represent an obligation to buy or sell
D) are a variety of combinations of the other hedging tools
16) In terms of inventory management, multinational firms ________.
A) have only economic factors to consider, since this is a fixed asset and is minimally affected by political
factors
B) must deal with a wide number of factors, including exchange rate fluctuations, tariffs, nontariff
barriers, integration schemes such as the EU, and other rules and regulations
C) have only economic factors to consider, since this is a current asset and is minimally affected by
political factors
D) have only political factors to consider, since inventory is minimally affected by foreign economic
factors
19.6 Mergers and joint ventures
1) The creation of international joint ventures has increased significantly beginning in the 1980s.
2) In the U.S. over the past 30 years, foreign direct investment (FDI) came overwhelmingly in the form of
mergers and acquisitions rather than through establishments.
3) In the most emerging/developing countries (including China) over the past 30 years, foreign direct
investment (FDI) came overwhelmingly in the form or mergers and acquisitions rather than through
establishments.