CHAPTER 27—MULTINATIONAL FINANCIAL MANAGEMENT
1. Multinational financial management requires that financial analysts consider the effects of changing currency values.
a.
True
b.
False
True
Difficulty: Easy
INTE.GENE.16.176 – LO: 27-3
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Multinational financial management
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 of subsidiaries.
a.
True
b.
False
False
Difficulty: Easy
INTE.GENE.16.176 – LO: 27-3
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Multinational financial management
3. Exchange rate quotations consist solely of direct quotations.
a.
True
b.
False
False
Difficulty: Easy
INTE.GENE.16.176 – LO: 27-3
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Exchange rates
4. Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as
a base.
CHAPTER 27—MULTINATIONAL FINANCIAL MANAGEMENT
a.
True
b.
False
True
5. When the value of the U.S. dollar appreciates against another country’s currency, we may purchase more of the foreign
currency with a dollar.
a.
True
b.
False
True
6. If the United States is running a deficit trade balance with China, then in a free market we would expect the value of the
Chinese yuan to depreciate against the U.S. dollar.
a.
True
b.
False
False
7. The United States and most other major industrialized nations currently operate under a system of floating exchange
rates.
CHAPTER 27—MULTINATIONAL FINANCIAL MANAGEMENT
a.
True
b.
False
True
8. 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
True
9. A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
a.
True
b.
False
True
management
Eurodollars
10. The Eurodollar market is essentially a long-term market; most loans and deposits in this market have maturities longer
than one year.
a.
True
CHAPTER 27—MULTINATIONAL FINANCIAL MANAGEMENT
b.
False
False
11. 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.
a.
True
b.
False
False
LIBOR
12. Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial
analysis.
a.
True
b.
False
False
management
13. Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange
rates and also due to uncertainty regarding the credit worthiness of many foreign customers.
a.
True
CHAPTER 27—MULTINATIONAL FINANCIAL MANAGEMENT
b.
False
True
14. Due to advanced communications technology and the standardization of general procedures, working capital
management for multinational firms is no more complex than it is for large domestic firms.
a.
True
b.
False
False
15. Exchange rates influence a multinational firm’s inventory policy because changing currency values can affect the
value of inventory.
a.
True
b.
False
True
management
16. The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain
countries and to bring in goods only as needed.
a.
True
CHAPTER 27—MULTINATIONAL FINANCIAL MANAGEMENT
b.
False
True
Difficulty: Easy
INTE.GENE.16.181 – LO: 27–13
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Expropriation and inventory
17. 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
False
Difficulty: Moderate
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United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Forward market hedging transactions
18. 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
True
Difficulty: Moderate
INTE.GENE.16.182 – LO: 27-6
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Discount on forward rate
19. 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 27—MULTINATIONAL FINANCIAL MANAGEMENT
a.
True
b.
False
True
20. 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
True
21. The interest rate paid on Eurodollar deposits depends on the particular bank’s lending rate and on rates available on
U.S. money market instruments.
a.
True
b.
False
True
22. 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
CHAPTER 27—MULTINATIONAL FINANCIAL MANAGEMENT
foreign country.
a.
True
b.
False
False
23. 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
True
24. 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
True
25. Which of the following is NOT a reason why companies move into international operations?
CHAPTER 27—MULTINATIONAL FINANCIAL MANAGEMENT
a.
To develop new markets for the firm’s products.
b.
To better serve their primary customers.
c.
Because important raw materials are located abroad.
d.
To increase their inventory levels.
e.
To take advantage of lower production costs in regions where labor costs are relatively low.
d
1
Difficulty: Easy
INTE.GENE.16.179 – LO: 27-1
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Motivation for going global
TYPE: Multiple Choice: Conceptual
26. 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.
b.
c.
d.
e.
1
Difficulty: Easy
INTE.GENE.16.178 – LO: 27-5
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Currency depreciation
TYPE: Multiple Choice: Conceptual
27. 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 180-day forward market.
b.
The yen-dollar exchange rate in the 90-day forward market equals the yen-dollar exchange rate in the 180-day
forward market.
c.
The spot rate equals the 90-day forward rate.
d.
The spot rate equals the 180-day forward rate.
CHAPTER 27—MULTINATIONAL FINANCIAL MANAGEMENT
e.
The yen-dollar spot exchange rate equals the yen-dollar exchange rate in the 90-day forward market.
e
Difficulty: Moderate
INTE.GENE.16.184 – LO: 27-7
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Interest rate parity
TYPE: Multiple Choice: Conceptual
28. Which of the following statements is NOT CORRECT?
a.
Foreign bonds and Eurobonds are two important types of international bonds.
b.
Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which
the issue is sold.
c.
The term Eurobond applies only to foreign bonds denominated in U.S. currency.
d.
A foreign bond might pay a higher nominal interest rate than a U.S. bond.
e.
Any bond sold outside the country of the borrower is called an international bond.
c
Difficulty: Moderate
INTE.GENE.16.179 – LO: 27-1
United States – BUSPROG: Analytic
United States – AK – DISC: International financial ma – DISC: International financial
management
United States – OH – Default City – TBA
International bond markets
TYPE: Multiple Choice: Conceptual
29. If it takes $0.71 U.S. dollars to purchase one Swiss franc, how many Swiss francs can one U.S. dollar buy?
a.
0.50
b.
0.71
c.
1.00
d.
1.41
e.
2.81
Dollars should sell for 1/0.71, or 1.41 Swiss francs per dollar.
Difficulty: Easy
INTE.GENE.16.176 – LO: 27-3
United States – BUSPROG: Analytic
CHAPTER 27—MULTINATIONAL FINANCIAL MANAGEMENT
30. If 1.64 Canadian dollars can purchase one U.S. dollar, how many U.S. dollars can you purchase for one Canadian
dollar?
a.
0.37
b.
0.61
c.
1.00
d.
1.64
e.
3.28
You can get 1/1.64, or 0.61 U.S. dollars for one Canadian dollar.
Difficulty: Easy
INTE.GENE.16.176 – LO: 27-3
United States – BUSPROG: Analytic
management
United States – OH – Default City – TBA
TYPE: Multiple Choice: Problem
31. Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0%
tomorrow, how many yen could one U.S. dollar buy tomorrow?
a.
155.5 yen
b.
144.0 yen
c.
133.5 yen
d.
78.0 yen
e.
72.0 yen
a
Difficulty: Easy
INTE.GENE.16.177 – LO: 27-4
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Currency appreciation
United States – OH – Default City – TBA
Exchange rates
TYPE: Multiple Choice: Problem