A trader who is purchasing a call option on foreign currency should do so before the
domestic interest rate rises.
Historical volatility is the correct method for the calculation of the option volatility.
Consider the price elasticity of demand. If a product has price elasticity less than one it
is considered to have relatively elastic demand.
A time draft is payable on presentation to the drawee; the drawee must pay at once or
dishonor the draft. A sight draft, allows a delay in payment.
The current rate method is the most prevalent method today for the translation of
financial statements.
Recourse means that the factor assumes the credit, political, and foreign exchange risk
for the receivables it purchases.
Leading up to the Russian currency collapse of 1998, Russia followed a currency policy
of managed float that allowed their currency to slide daily at a 1.5% per month rate.
If a market basket of goods cost $100 is the US and €70 in France, then the PPP
exchange rate would be $.70/€.
Members of the International Monetary Fund may settle transactions among themselves
by transferring Special Drawing Rights (SDRs).
Eurocurrencies are domestic currencies of one country on deposit in a second country.
In project finance, retained earnings and the reinvestment of earnings are the most
important decisions to guarantee the long term growth of the project’s value.
When the world went to a system of floating exchange rates, the Balance of Payments
became a relic of a system of fixed exchange rates and is no longer watched by serious
economic groups.
The goal of all international corporations is to maximize shareholder wealth.
Since the 1980s and 1990s, segmentation in global financial markets has been reduced.
As a result of this, the correlation among securities markets has increased, thereby
reducing, but not eliminating, the benefits of international portfolio diversification.
Financial theory has at last provided us with a single optimal capital structure for
domestic firms.
The low level of interest rates around the globe in recent years, combined with slowing
economic growth and new debt issuances, has had a dampening impact on the swap
market.
A national securities market is segmented if the required rate of return on securities in
that market differs from comparable securities traded in other, unsegmented markets.
Reactive financial strategies can be formulated in advance by the MNE’s financial
managers.
Surprisingly, empirical studies find that MNEs have a higher level of systematic risk
than their domestic counterparts.
MNEs typically used licensing with independent firms rather than with their own
foreign subsidiaries.
Slow economic growth and continued unemployment problems are common reasons for
central banks to hold currency values down.
When a firm is organized with decentralized profit centers, transfer pricing between
centers can help in the evaluation of each subsidiary performance.
The European and American terms for foreign currency exchange are square roots of
one another.
If the addition of a foreign security to the portfolio of the investor aids in the reduction
of risk for a given level of return, then the security adds value to the portfolio.
Your authors suggest that one way to characterize the global financial marketplace is
through its assets, institutions, and linkages.
When a multinational firm invests abroad, it is common to develop two capital budgets:
one from the project viewpoint, and one from the parent viewpoint.
Tax credits are less valuable on a dollar-for-dollar basis than are tax-deductible
expenses.
Most swap dealers arrange swaps so that each firm that is a party to the transaction does
not know who the counterparty is.
There is considerable question among investors and managers about whether hedging is
a good and necessary tool.
Project financing is the arrangement of financing for very large individual long-term
capital projects.
The value of any option that is currently in-the-money (ITM) is made up entirely of
time value.
As long as the option has time remaining before expiration, the option will possess time
the time value element.
About ________ of all futures contracts are settled by physical delivery of foreign
exchange between buyer and seller.
A) 0%
B) 5%
C) 50%
D) 95%
When disequilibria in international markets occur, management can take advantage by:
A) doing nothing if they are already diversified and able to realize beneficial portfolio
effects.
B) recognizing disequilibria faster than purely domestic competitors.
C) shifting operational of financing activities to take advantage of the disequilibria.
D) all of the above
Which of the following is NOT a characteristic of international long-term capital
project financing?
A) The projects are large in scale.
B) The projects are long in life.
C) The projects are generally high in risk.
D) The projects may be all of the above.
Reasons that firms may find themselves with relatively high costs of capital include:
A) The firms reside in emerging countries with undeveloped capital markets.
B) The firms are too small to easily gain access to their own national securities market.
C) The firms are family owned and they choose not to access public markets and lose
control of the firm.
D) all of the above
Which of the following will NOT affect a firm’s beta?
A) the choice of the market portfolio against which to compare the variability of a
firm’s returns
B) the choice of the risk-free security
C) the choice of the time period used to calculate the firm’s beta
D) None of the above, because each of them affects the calculation of a firm’s beta.
State Owned Enterprises (SOEs):
A) are a form of public ownership.
B) are created for commercial activities rather than civil or social activities.
C) are the dominant form of business organization in some countries.
D) are all of the above.
If an imbalance results from the accounting method used for translation, the imbalance
is taken either to ________ or ________.
A) the bank; the post office
B) depreciation; the market for foreign exchange swaps
C) current income; equity reserves
D) current liabilities; equity reserves
Consider the following: A foreign automobile company builds a manufacturing plant in
Tennessee and European investors buy U.S. Treasury Bonds.
A) Both activities would be considered direct investment.
B) Both activities would be considered portfolio investment.
C) The auto manufacturer in engaging in portfolio investment, and the European
investors are engaged in direct investing.
D) The auto manufacturer in engaging in direct investment, and the European investors
are engaged in portfolio investing.
A speculator that has ________ a futures contract has taken a ________ position.
A) sold; long
B) purchased; short
C) sold; short
D) purchased; sold
Which of the following is NOT a financial instrument that may be included in an
international trade transaction?
A) Letter of Credit
B) Sight Draft
C) Order bill of lading
D) Federal funds transaction
A call option on euros is written with a strike price of $1.30/euro. Which spot price
maximizes your profit if you choose to exercise the option before maturity?
A) $1.20/euro
B) $1.25/euro
C) $1.30/euro
D) $1.35/euro
Systematic risk can be defined as:
A) the total risk to the firm.
B) the risk of the individual security.
C) the risk of the market in general.
D) the risk that can be systematically diversified away.
Which of the following factors make it difficult for emerging market economies to
choose a specific currency regime?
A) weak fiscal, financial, and monetary institutions
B) the tendency for commerce to allow currency substitution and the denomination of
liabilities in dollars
C) the emerging market’s vulnerability to sudden stoppages of outside capital flows
D) all of the above
The primary operational goal for the firm is to:
A) maximize after-tax profits in each country where the firm is operating.
B) minimize the total financial risk to the firm.
C) maximize the consolidated after-tax profits of the firm.
D) maximize the total risk to the firm.
Assume the current U.S. dollar-yen spot rate is 90 ¥/$. Further, the current nominal
180-day rate of return in Japan is 1% and 2% in the United States. What is the
approximate forward exchange rate for 180 days?
A) ¥89.12/$
B) ¥89.55/$
C) ¥90.89/$
D) ¥90.45/$
A major cost avoided in the eurocurrency markets is the payment of deposit insurance
fees, such as:
A) Federal Deposit Insurance Corporation – FDIC
B) Office of the Comptroller of the Currency – OCC
C) International Monetary Fund – IMF
D) World Bank – WB
Which of the following is NOT a source of new stock exchange listing additions?
A) initial public offerings
B) movements of share listings from one exchange to another
C) spinouts from larger firms
D) all of the above are sources
What type of international risk exposure measures the change in present value of a firm
resulting from changes in future operating cash flows caused by any unexpected change
in exchange rates?
A) transaction exposure
B) accounting exposure
C) operating exposure
D) translation exposure
A typical forfaiting transaction involves the following parties EXCEPT:
A) importer
B) exporter
C) carrier
D) importer’s Bank
The ________ includes all international economic transactions with income or payment
flows occurring within the year.
A) capital account
B) current account
C) financial account
D) IMF account
If the forward rate is an unbiased predictor of the expected spot rate, which of the
following is NOT true?
A) The expected value of the future spot rate at time 2 equals the present forward rate
for time 2 delivery, available now.
B) The distribution of possible actual spot rates in the future is centered on the forward
rate.
C) The future spot rate will actually be equal to what the forward rate predicts.
D) All of the above are true.
As a result of the terrorist attacks of September 11, 2001, many firms have employed a
wide range of tactics to ensure continued flow of inventory in the face of government
steps to curb terrorism. Which of the following is an inventory sourcing strategy
response (as opposed to an inventory management response, or a transportation
response)?
A) carrying more inventory on-hand
B) minimizing cross-border exposure from suppliers
C) shifting to air cargo shipments instead of co-habitation of products and passengers
on commercial air flights
D) increasing the on-hand supply of critical parts
Which of the following is NOT typically associated with the private ownership of
business organizations?
A) the government
B) families
C) individuals
D) publicly traded, widely-held organizations
All of the following may be justification for a strategic alliance EXCEPT:
A) takeover defense
B) a joint venture to pool resources for research and development
C) joint marketing and serving agreements
D) All of the above are legitimate reasons for strategic alliances
Assume a nominal interest rate on one-year U.S. Treasury Bills of 3.80% and a real rate
of interest of 2.00%. Using the Fisher Effect Equation, what is the exact expected rate
of inflation in the U.S. over the next year?
A) 1.84%
B) 1.80%
C) 1.76%
D) 1.72%
________ is NOT a commonly used contractual hedge against foreign exchange
transaction exposure.
A) Forward market hedge
B) Money market hedge
C) Options market hedge
D) All of the above are contractual hedges.
Transfer pricing is a strategy that may be used by MNEs to:
A) reduce consolidated corporate income taxes.
B) partially finance a subsidiary in another country.
C) transfer funds from a subsidiary to the parent corporation.
D) all of the above
What is the Official Reserves Account (ORA), and why is it more important for
countries under a fixed exchange rate regime than for ones under a floating exchange
rate regime?
The largest single component of the United States current account is:
A) current transfers.
B) income payments and receipts.
C) goods (merchandise) imports and exports.
D) services imports and exports.
Which of the following is NOT a required convergence criteria to become a full
member of the European Economic and Monetary Union (EMU)?
A) National birthrates must be at 2.0 or lower per person.
B) The fiscal deficit should be no more than 3% of GDP.
C) Nominal inflation should be no more than 1.5% above the average inflation rate for
the three members with the lowest inflation rates in the previous year.
D) Government debt should be no more than 60% of GDP.
If the direct quote for a U.S. investor for British pounds is $1.43/£, then the indirect
quote for the U.S. investor would be ________ and the direct quote for the British
investor would be ________.
A) £0.699/$; £0.699/$
B) $0.699/£; £0.699/$
C) £1.43/£; £0.699/$
D) £0.699/$; $1.43/£
The following parties are usually guarantors in forfaiting EXCEPT:
A) commercial banks
B) government ministries of finance
C) large commercial enterprises
D) government banks
The Theta of an option is defined as:
A) expected change in the option premium for a small change in time to expiration.
B) expected change in the option premium for a small change in volatility.
C) expected change in the option premium for a small change in the spot rate.
D) expected change in the option premium for a small change in the domestic interest
rate.
The primary goal of both domestic and international portfolio managers is:
A) to maximize return for a given level of risk, or to minimize risk for a given level of
return.
B) to minimize the number of unique securities held in their portfolio.
C) to maximize their WACC.
D) all of the above
Which of the following relationships between importing and exporting parties would
require the least detailed contract to conduct business?
A) affiliated party
B) unaffiliated unknown party
C) known unaffiliated party
D) domestic supplier