Foundations of Financial Management, 17e (Block)
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) All of the countries that joined the “Eurozone” have experienced economic success for various
reasons.
4) One benefit in joining the “Eurozone” was to have easy access to borrowing.
5) When a country has a weak currency relative to other countries, visiting that country is much
more expensive for people that don’t live in that country.
6) An exporter is able to satisfy foreign demand for a product while avoiding long-term
investment in that foreign country, although this method is considered riskier than all other
alternatives.
7) A Multinational corporation can take the form of an exporter, licensing agreement, joint
venture and a fully owned foreign subsidiary.
8) Companies such as Coca-Cola and McDonald’s generate more than 50% of their sales
revenues from foreign activities.
9) A joint venture with a private entrepreneur in a host country exposes the multinational
corporation to the least amount of political risk.
10) In recent years, fully owned foreign subsidiaries are experiencing increased political pressure
from foreign governments.
11) A foreign affiliate may be an exporter, a joint venture, or a fully owned foreign subsidiary.
12) A foreign affiliate lowers the portfolio risk of its parent company because the foreign and
domestic economies tend to be fairly similar.
13) Multinational firms tend to have a lower level of portfolio risk than comparable U.S. firms.
14) 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 only.
15) There is no guarantee that any currency will stay strong relative to other currencies, but the
dollar is an exception.
16) A forward exchange rate can be used to help establish the value of a currency at a future
point in time.
17) Currency exchange rates may be either floating or fixed.
18) 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.
19) Fundamental factors, such as inflation, interest rates, balance of payments and government
policies do not play much of a role in explaining short and long term fluctuations of a currency
value.
20) A foreign exchange rate specifies how much a currency is worth in terms of another
currency.
21) 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.
22) 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.
23) “Balance of payments” is a method of keeping the foreign exchange market in equilibrium.
24) A “bear market” (declining stock prices) will tend to exert a depressing effect on the value of
a country’s currency.
25) According to the interest rate parity theory, interest rates along with exchange rates adjust
until the foreign exchange market and the money market are in equilibrium.
26) The term balance of payments refers to the flow of economic transactions between the
residents of one country and the residents of another.
27) Political risk and labor unrest will tend to strengthen a country’s currency.
28) The expected future value of a currency is reflected in its spot rate.
29) The future rates of currency tend to increase for dates further in the future because of the
increasing uncertainty over time.
30) A tactic a country can use to promote cheap exports may be to deliberately pursue a policy of
maintaining an undervalued currency.
31) Forward contracts tend to be created on organized exchanges like the International Money
Market of the Chicago Mercantile Exchange.
32) Foreign exchange risk is the risk that a person or business will not be able to exchange
currencies.
33) Translation exposure occurs because of changes in foreign exchange rates.
34) Transaction exposure results in foreign exchange gains and losses.
35) Transaction exposure associated with changes in the exchange rate between countries can be
hedged with a currency futures contract.
36) A money market hedge does not require the use of a futures exchange.
37) A firm that perhaps suffers 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.
38) Political risks include the possibility that a government may expropriate a firm’s profits, or
worse, repatriate all of the firm’s assets.
39) In Germany, restrictions limiting labor layoffs have encouraged companies to reduce
investment there. Thus, in the long run, these labor protection laws actually could result in higher
unemployment in Germany.
40) When a bank issues a “letter of credit,” the bank absorbs ALL of the credit risk of the
exporter.
41) In the financing of a foreign affiliate, the simplest and most common arrangement is a direct
loan from the parent company to the subsidiary.
42) In a fronting loan arrangement, the intermediary bank extends a risk-free loan to the foreign
affiliate.
43) 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.
44) The lending rate for borrowers in the Eurodollar market is based on the prime lending rate.
45) The most widely used currency in the Eurobond market is the euro.
46) 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.
47) Selling common stock to residents of foreign countries is illegal in most countries, although
it minimizes risk for any multinational corporation.
48) Because of political risk, it is generally disadvantageous for U.S. firms to list their stocks on
the world stock exchanges.
49) When the euro rises and the dollar falls, foreign travel to Europe becomes cheaper for
Americans.
50) When a multinational corporation’s foreign assets and liabilities are exposed to losses and
gains due to changing exchange rates, this is called accounting or translation exposure.
51) A rising euro and a falling dollar will cause an increase in U.S. exports to Europe.
52) A licensing agreement provides a U.S. multinational corporation with a guarantee that it will
be able to export the product to the foreign market.
53) As inflation in any “Eurozone” country increases, while the U.S. experiences no change in
inflation, the exchange rate of the euro to the dollar will increase.
54) The possibility of political risk may be excluded when an investor considers maximizing
expected returns.
55) An example of comparing cross rates for countries is like comparing the U.S. dollar to the
Japanese yen.
56) A multinational corporation may be defined as
A) a company that owns property in a foreign country.
B) a company that hires foreign laborers.
C) a company that carries on some business activity outside of its own national borders.
D) all of the options are true.
57) Multinational corporations (MNC) may take several forms. An exporter could be described
as
A) a MNC that produces a product within its own borders, but sells in a foreign market.
B) the least risky political arrangement.
C) a MNC willing to commit itself to long-term foreign investment.
D) More than one of the options is correct.
58) In a licensing agreement, the multinational corporation will very likely
A) be able to compete with the local domestic manufacturers.
B) experience lower tariffs by the foreign government.
C) allow a foreign firm to use its technology in exchange for a fee.
D) none of these options are true.
59) A form of multinational corporation (MNC) that exposes the firm to the least amount of
political risk, and is therefore the preferred arrangement by both business and foreign
governments, is called
A) an exporter.
B) a licensing agreement.
C) a joint venture.
D) a fully owned foreign subsidiary.
60) Legal, political, and economic factors are most conducive to which form of multinational
corporation (MNC) organization?
A) Exporter/importer
B) Licensing agreements
C) Joint ventures
D) Fully owned foreign subsidiaries
61) For a U.S. company, foreign business operations are more complex because the
A) host country’s economy may be different from the domestic economy.
B) rules of taxation are different.
C) structure and operations of financial markets vary.
D) all of these options are true.
62) A fully owned foreign subsidiary is a form of MNC (multinational corporation) in which
A) a local entrepreneur buys the firm in its own foreign country.
B) the MNC owns and operates the firm by itself.
C) the foreign government gives its full cooperation.
D) none of these options are true.
63) A particular country’s pattern of importing more than is being exported is likely to
A) depress that country’s currency.
B) depress other countries’ currencies.
C) increase the value of that country’s currency.
D) more than one of the options is correct.
64) Which of the following is NOT an accusation made against multinational corporations
(MNCs) by foreign countries?
A) MNCs cause instability in their currencies in international money and foreign exchange
markets.
B) MNCs contribute to unemployment and avoid taxes.
C) MNCs exploit local labor with low wages.
D) All of these options are accusations made by critics of MNCs.
65) If one Czech crown is equal to $0.05 U.S. dollar, the U.S. dollar is equal to how many Czech
crowns?
A) 25.00
B) 4.00
C) 20.00
D) 400.00
66) As exchange rates change, the rates
A) change the relative purchasing power between countries.
B) can affect imports and exports between those two countries.
C) will affect the flow of funds between the countries.
D) all of these options are true.
67) If prices double in New York while the prices in Germany remain the same, the purchasing
power of the dollar relative to the euro
A) should increase by 50%.
B) should increase by 100%.
C) should decrease by 50%.
D) should decrease by 100%.