Chapter 21 – International Financial Management
1. The North American Free Trade Association (NAFTA) continues to generate more foreign
trade despite some negative political views.
2. During the global financial crisis that began in late 2008, the dollar fell in value relative to
the British pound and the euro.
3. When a country has a weak currency relative to other countries, visiting that country is
much more expensive for residents of other countries.
4. An exporter is able to satisfy foreign demand for a product while avoiding long-term
investment although this method is riskier than other alternatives.
Chapter 21 – International Financial Management
5. Companies such as Coca-Cola and IBM generate more than 50 percent of their sales and
earnings from foreign activities.
6. A joint venture with a private entrepreneur in a host country exposes the multinational
corporation to the least amount of political risk.
7. In recent years, fully owned foreign subsidiaries are experiencing increased political
pressure from foreign governments.
8. A foreign affiliate may be an exporter, a joint venture or a fully owned foreign subsidiary.
9. A foreign affiliate lowers the portfolio risk of its parent company because the foreign and
domestic economies tend to be fairly similar.
10. Multinational firms tend to have a lower level of portfolio risk than comparable U.S.
firms.
11. Investors and firms who diversify their U.S. portfolios by buying foreign stocks or
investing in foreign subsidiaries take on a much higher level of portfolio risk than if they had
invested in domestic stocks or companies.
12. There is no guarantee that any currency will stay strong relative to other currencies, but
the dollar is an exception.
13. A forward exchange rate is used to help determine the value of a currency at a future point
in time.
Chapter 21 – International Financial Management
14. Currency exchange rates may be either floating or fixed.
15. In a free market, the exchange rate between two currencies is determined by the supply of
and demand for those currencies with the influence of the central bank.
16. A foreign exchange rate specifies how much a currency is worth in terms of another
currency.
17. The purchasing power parity theory of exchange rates suggests that exchange rates will
adjust until the cost of equivalent goods is approximately equal in each country.
Chapter 21 – International Financial Management
18. The Purchasing Power Parity Theory states that currency exchange rates tend to vary
inversely with their respective purchasing powers in order to provide similar purchasing
powers.
19. Balance of payments is a method of keeping the foreign exchange market in equilibrium.
20. A bear market (declining stock prices) will tend to exert a depressing effect on the value
of a country’s currency.
21. According to the interest rate parity theory, interest rates and exchange rates adjust until
the foreign exchange market and the money market are in equilibrium.
Chapter 21 – International Financial Management
22. The term balance of payments refers to the flow of economic transactions between the
residents of one country and the residents of another.
23. Political risk and labor unrest will tend to strengthen a countries currency.
24. Expected future value of a currency is reflected in its spot rate.
25. The future rates of currency tend to increase for dates further in the future because of the
increasing uncertainty over time.
Chapter 21 – International Financial Management
26. Forward contracts tend to be created on organized exchanges like the International Money
Market of the Chicago Mercantile Exchange.
27. Foreign exchange risk is the risk that a person or business will not be able to exchange
currencies.
28. Translation exposure occurs because of changes in foreign exchange rates.
29. Transaction exposure results in foreign exchange gains and losses.
Chapter 21 – International Financial Management
30. Transaction Exposure associated with changes in the exchange rate between countries can
be hedged with a currency futures contract.
31. A money market hedge does not require the use of a futures exchange.
32. A firm which might suffer a loss as a result of a decline in the value of the Japanese yen
could offset part of that risk by selling Japanese yen futures.
33. Political risks include the possibility that a government may expropriate a firm’s profits, or
worse, repatriate all of the firm’s assets.
Chapter 21 – International Financial Management
34. In Germany, restrictions limiting labor layoffs have encouraged companies to reduce
investment there. Thus, in the long-run, these labor protection laws actually can be expected
to result in higher unemployment in Germany.
35. When a bank issues a letter of credit, the bank absorbs ALL of the credit risk to the
exporter.
36. In the financing of a foreign affiliate, the simplest and most common arrangement is a
direct loan from the parent company to the subsidiary.
37. In a fronting loan arrangement, the intermediary bank extends a risk-free loan to the
foreign affiliate.
Chapter 21 – International Financial Management
38. A fronting loan disguises the identity of a parent multinational corporation that infuses
money into a foreign subsidiary. This technique is intended to reduce the political risk of
operating a subsidiary in a foreign country.
39. The lending rate for borrowers in the Eurodollar market is based on the prime lending
rate.
40. The most widely used currency in the Eurobond market is the euro.
41. Eurobond issues are sold simultaneously in several national capital markets, but
denominated in a currency different from that of the nation in which the bonds are issued.
Chapter 21 – International Financial Management
42. Selling common stock to residents of foreign countries is illegal in most countries,
although it minimizes risk for any multinational corporation.
43. Because of political risk, it is generally disadvantageous for U.S. firms to list their stocks
on the world stock exchanges.
44. When the euro rises and the dollar falls, foreign travel to Europe will become cheaper for
Americans.
45. A rising euro and falling dollar will increase U.S. exports to Europe.
Chapter 21 – International Financial Management
46. A licensing agreement provides a U.S. MNC with a guarantee that they will be able to
export product to the foreign market.
47. As inflation in France increases and stays the same in the U.S., the exchange rate of the
euro to the dollar will increase.
48. The increase in supply of short-term investments in the U.S. by Chinese investors when
rates are higher in the U.S. is an example of purchasing power parity.
49. A multinational corporation may be defined as
Chapter 21 – International Financial Management
50. Multinational corporations may take several forms. An exporter could be described as
51. In a licensing agreement, the multinational corporation will very likely
52. A form of MNC which exposes the firm to the least amount political risk, and is therefore
the preferred arrangement by both business and foreign governments is called a (an)
Chapter 21 – International Financial Management
53. Legal, political, and economic factors are most conducive to which form of multinational
corporation (MNC) organization?
54. For a U.S. company, foreign business operations are more complex because the
55. A fully owned foreign subsidiary is a form of MNC in which
Chapter 21 – International Financial Management
56. A particular country’s pattern of importing more than is being exported is likely to
57. Which of the following is NOT an accusation made against MNCs by foreign countries?
58. If a Czech crown is equal to $.05, the U.S. dollar is equal to how many Czech crowns?
Chapter 21 – International Financial Management
59. As Exchange rates change, they
60. If prices double in New York while the prices in Frankfort remain the same, the
purchasing power of the dollar relative to the mark
61. When Country A’s currency strengthens against Country B’s, citizens of Country A will
Chapter 21 – International Financial Management
62. You travel to Cancun Mexico for spring break. The current exchange rate is 13 pesos to
the dollar. When you arrive, you convert $1,000 into how many pesos?
63. You are leaving Mexico and have 290 pesos to change into dollars. The exchange rate is
now 12 pesos to the dollar. How many dollars will you receive?
Chapter 21 – International Financial Management
64. Three years ago, the U.S. dollar’s exchange rate with the Iceland krona was .0008 dollars
per krona. Today, the exchange rate was .0006 dollars per krona. These figures indicate that
over this three-year period, the dollar
65. While shopping in the Mexican market, you find that limes cost 11 pesos each. You
remember that back home, they cost 80 cents each. If the Purchasing Power Parity Theory
holds, the rate of exchange is
Chapter 21 – International Financial Management
66. Which of the following factors will not increase the value of a currency in foreign
markets?
67. The interplay between interest rate differentials and exchange rates such that each adjusts
until the foreign exchange market and the money market reach equilibrium is called the
68. The value of a country’s currency may increase by