Some of the world’s largest and most financially sound firms may borrow at variable
rates less than LIBOR.
For purposes of international capital budgeting, parent cash flows often depend on the
form of financing. Thus, we cannot clearly separate cash flows from financing
decisions, as we can in domestic capital budgeting.
The authors argue that financial inefficiency caused by influential insiders may prove to
be an increasingly troublesome barrier to international finance.
The empirical evidence strongly supports the proposition that contractual hedges can
effectively eliminate operating exposure.
A trader who is buying options of longer maturities will pay more, and proportionately
more, for the longer maturity options.
A firm’s risk tolerance is a combination of management’s philosophy toward transaction
exposure and the specific goals of treasury activities.
The Export-Import Bank (also called Eximbank) is an independent agency of the U.S.
government, established in 1934 to stimulate and facilitate the foreign trade of the
United States.
The only proper way to estimate the NPV of a foreign project is to discount the
appropriate cash flows first and then convert them to the domestic currency at the
current spot rate.
The balance of payments approach of exchange rate theory is largely dismissed by the
academic community today, while the practitioner public still rely on different
variations of the theory for their decision making.
MNEs must modify finance theories like cost of capital and capital budgeting because
of foreign complexities.
When attempting to manage an account payable denominated in a foreign currency, the
firm’s only choice is to remain unhedged.
Currency swaps are exclusively for periods of time under one year.
A recent study shows that privately held firms use less financial leverage and enjoy
lower costs of debt than publicly traded firms.
The immediate impact of a devaluation of the domestic currency is to decrease the
value of the spot exchange rate S$/fc.
If the forward exchange rate is an unbiased predictor of future spot rates, then future
spot rates will always be equal to current forward rates.
A spot transaction in the interbank market for foreign exchange would typically involve
a two-day delay in the actual delivery of the currencies, while such a transaction
between a bank and its commercial customer would not necessarily involve a two-day
wait.
One possible reason for a balance sheet hedge could be because the firm has debt
covenants or bank agreements that state the firm’s debt/equity ratios will be maintained
within specific limits.
Most option profits and losses are realized through taking actual delivery of the
currency rather than offsetting contracts.
The strategy management undertakes in response to unexpected changes in exchange
rates depends to a large measure on their opinion about the price elasticity of demand.
Finance ministers of the G20 in conjunction with the OECD created an action plan to
stop basis erosion and profit shifting (BEPS) in an effort to stop illegal activity.
The euro is an example of a rigidly fixed system, acting as a single currency for its
member countries. However, the euro itself is an independently floating currency
against all other currencies.
Most theories of technical analysis differentiate fair value from market value.
Portfolio diversification can eliminate 100% of risk.
The various hedging alternatives explored (the forward, money market, and purchase
option hedges) only work to protect the value of the exposed asset at the time of
maturity.
Exchange rate imbalances that are passed through the balance sheet affect a firm’s
reported income, but imbalances transferred to the income statement do not.
One of the reasons companies use interest rate swaps is because they are interested in
opportunities to lower the cost of their debt.
Transaction exposure could arise when borrowing or lending funds when repayment is
to be made in the firm’s domestic currency.
If the exchange rate’s volatility is rising, and therefore the risk of the option not being
exercised is decreasing, the option premium would be increasing.
Ownership, control, and governance changes radically across the world. The publicly
traded company is not the dominant global business organization—the privately held or
family-owned business is the prevalent structure—and their goals and measures of
performance differ dramatically.
Eurobonds offer tax anonymity.
The key factor attracting both depositors and borrowers to the Eurocurrency loan
market is the narrow interest rate spread within that market.
As economic conditions continued to deteriorate in Argentina by the end of 2001, banks
suffered increasing runs. The government, fearing that the increasing financial drain on
banks would cause their collapse, closed the banks for weeks.
To constitute a true letter of credit transaction, the issuing bank must receive a fee or
other valid business consideration for issuing the L/C.
The longer the time horizon of the technical analyst the more accurate the prediction of
foreign exchange rates is likely to be.
A currency board exists when a country’s central bank commits to back a fraction of its
money base with foreign reserves at all times.
The International Monetary Fund, as one of its basic principles (Article IV), encourages
members to pursue “currency manipulation” to gain competitive advantages over other
members as opposed to engaging in military action to achieve the same advantage.
With a perfect hedge, there is no uncovered exposure remaining.
Option volatility is defined as the square root of the standard deviation of daily
percentage changes in the underlying exchange rate.
Which of the following is NOT a major subaccount of the Balance of Payments?
A) the financial account
B) the accounts payable
C) the capital account
D) the current account
Which of the following high profile euroequity issue was NOT also a privatization?
A) British Telecommunications
B) Gucci
C) YPF Sociedad Annima
D) Telefonos de Mexico
Each of the following is another name for operating exposure EXCEPT:
A) economic exposure.
B) strategic exposure.
C) accounting exposure.
D) competitive exposure.
TABLE 15.1
Use the information to answer following question(s).
BayArea Designs Inc., located in Northern California, has two international
subsidiaries, one located in the Ukraine, the other in Korea. Consider the information
below to answer the next several questions.
Refer to Table 15.1. How much in additional U.S. taxes would be due if BayArea
averaged the tax credits and liabilities of the two foreign units, assuming a 50% payout
rate from each?
A) $3,750
B) $13,750
C) $2,500
D) $0
Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to
see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures.
If each pound futures contract is for an amount of £62,500, how much money did Jack
gain or lose from his speculation with pound futures?
A) $937.50 loss
B) $937.50 gain
C) £937.50 loss
D) £937.50 gain
Since 2009 the IMF’s exchange rate regime classification system uses a “de facto
classification” methodology. Under this system, currencies that are predominantly
market-driven are considered to be:
A) soft pegs.
B) hard pegs.
C) floating arrangements.
D) a residual agreement.
Which of the following is NOT a technique used by governments or central banks to
impact domestic currency valuation?
A) Indirect Intervention
B) Direct Intervention
C) Capital Controls
D) All of the above are techniques used to control currency valuation.
The optimal capital budget:
A) occurs where the marginal cost of capital equals the marginal rate of return of the
opportunity set of projects.
B) is typically larger for purely domestic firms than for MNEs.
C) is an illusion found only in international finance textbooks.
D) none of the above
Which of the following is NOT an attribute of the “ideal” currency?
A) monetary independence
B) full financial integration
C) exchange rate stability
D) All are attributes of an ideal currency.
________ is a type of political risk that OPIC does NOT cover.
A) Inconvertibility
B) Expropriation
C) War
D) OPIC covers all of the above.
Capital market imperfections leading to financial market segmentation include:
A) asymmetric information between domestic and foreign-based investors.
B) high securities transaction costs.
C) foreign exchange risks.
D) all of the above
Which of the following may be participants in the foreign exchange markets?
A) bank and nonbank foreign exchange dealers
B) central banks and treasuries
C) speculators and arbitrageurs
D) all of the above
The government just released international exchange rate statistics and reported that the
real effective exchange rate index for the U.S. dollar vs the Japanese yen decreased
from 105 last year to 95 currently and is expected to fall still further in the coming year.
Other things equal U.S. ________ to/from Japan think this is good news and U.S.
________ to/from Japan think this is bad news.
A) importers; exporters
B) importers; importers
C) exporters; exporters
D) exporters; importers
Which of the following is NOT a motivation identified by the authors as a function of
the foreign exchange market?
A) the transfer of purchasing power between countries
B) obtaining or providing credit for international trade transactions
C) minimizing the risks of exchange rate changes
D) All of the above were identified as functions of the foreign exchange market.
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars
from a manufacturer in Germany for euro 3,000,000. The purchase was made in June
with payment due six months later in December. Because this is a sizable contract for
the firm and because the contract is in euros rather than dollars, CVT is considering
several hedging alternatives to reduce the exchange rate risk arising from the sale. To
help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.250/euro
∙ The six month forward rate is $1.22/euro
∙ CVT’s cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December call options for euro 750,000; strike price $1.28, premium price is 1.5%
∙ CVT’s forecast for 6-month spot rates is $1.27/euro
∙ The budget rate, or the highest acceptable purchase price for this project, is $3,900,000
or $1.30/euro
Refer to Instruction 10.1. If CVT locks in the forward hedge at $1.22/euro, and the spot
rate when the transaction was recorded on the books was $1.25/euro, this will result in a
“foreign exchange accounting transaction ________ of ________.
A) loss; $90,000.
B) loss; €90,000.
C) gain; $90,000.
D) gain; €90,000.
Which of the following is NOT a contract specification for currency futures trading on
an organized exchange?
A) size of the contract
B) maturity date
C) last trading day
D) All of the above are specified.
The Export-Import Bank is an independent agency of the U.S. government established
in 1934 to:
A) ship money abroad.
B) import agricultural products during the recession.
C) facilitate and stimulate foreign trade of the United States.
D) none of the above
The number of foreign firms traded on the London exchange is ________ than the
number traded on the NYSE, and the costs of listing and disclosure in London are
________ those for the NYSE.
A) less than; less than
B) less than; greater than
C) greater than; less than
D) greater than; greater than
Eurocredits are:
A) bank loans to MNEs and others denominated in a currency other than that of the
country where the bank is located.
B) typically variable rate and tied to the LIBOR.
C) usually for maturities of six months or less.
D) All of the above are true.
The MNE can ________ its ________ by gaining access to markets that are more liquid
and/or less segmented than its own.
A) increase; MCC.
B) decrease; MCC.
C) maintain; MRR.
D) none of the above
Simpson Sign Company based in Frostbite Falls, Minnesota has a 6-month C$100,000
contract to complete sign work in Winnipeg, Manitoba, Canada. The current spot rate is
$1.02/C$ and the forward rate is $1.01/C$. Under conditions of equilibrium,
management would use ________ today when preparing operating budgets.
A) $102,000
B) $101,000
C) $100,000
D) none of the above
Rogue Spices Inc. has a Canadian receivables contract for $200,000 due in 270 days.
The firm has been approached by a factoring firm that offers to purchase the receivables
at a 12% per annum discount plus a 1% charge for a nonrecourse clause. What is the
annualized percentage all-in-cost of this factoring alternative?
A) 14.82%
B) 13.00%
C) 12.00%
D) 9.09%
A/an ________ quote in the United States would be foreign units per dollar, while a/an
________ quote would be in dollars per foreign currency unit.
A) direct; direct
B) direct; indirect
C) indirect; indirect
D) indirect; direct
Long-term capital flows reflect the following factors EXCEPT:
A) short term interest rate differentials
B) fundamental economic expectations
C) growth prospects
D) perceptions of political stability
________ investments are designed to promote and enhance the growth and
profitability of the firm. ________ investments are designed to deny those same
opportunities to the firm’s competitors.
A) Conservative; Aggressive
B) Defensive; Proactive
C) Proactive; Defensive
D) Aggressive; Proactive
Assume that a call option has an exercise price of $1.50/£. At a spot price of $1.45/£,
the call option has:
A) a time value of $0.04.
B) a time value of $0.00.
C) an intrinsic value of $0.00.
D) an intrinsic value of -$0.04.
China is currently experiencing a surplus in its current account and its capital/financial
accounts. Which of the following is NOT a contributing factor for this unusual
situation?
A) The exceptional growth in the Chinese economy contributes to the current account
surplus.
B) The positive prospects for China’s continued growth contribute to the
capital/financial account surplus.
C) China’s inevitable acquisition of Taiwan is driving the market for Chinese
investment.
D) All of the above are contributing factors for China’s twins surpluses.
When assessing the additional risk that can occur from investing abroad firms may
choose to account for risk via:
A) adjusting the cash flows.
B) adjusting the discount rates.
C) adjusting both cash flows and discount rates.
D) adjusting all of the above.
A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is
the break-even price for the option?
A) $2.03/£
B) $2.07/£
C) $2.05/£
D) The answer depends upon if this is a long or a short call option.
A well-established, large, Brazil-based MNE will probably be most adversely affected
by which of the following elements of firm value?
A) an open marketplace
B) high-quality strategic management
C) access to capital
D) access to qualified labor pool
If your company were to import and export textiles, the transactions would be recorded
in the current account subcategory of:
A) services trade.
B) income trade.
C) goods trade.
D) current transfers.
Refer to Instruction 16.1. ________ is an unsecured promissory note.
A) A banker’s acceptance
B) An overdraft
C) A securitized loan
D) Commercial paper
The I in OLI refers to an advantage in a firm’s home market that is an:
A) internalization.
B) industry-specific advantage.
C) international abnormality.
D) none of the above
The issue of ethics in the reporting of income and the payment of taxes is a
considerable one. The authors state that most MNEs operating in foreign countries tend
to follow the general principle of:
A) “when in Rome, do as the Romans do.”
B) full disclosure to the tax authorities.
C) maintain a competitive playing field by cheating as much as the local competition,
no more, no less.
D) none of the above
Two general conclusions can be made from the empirical tests of purchasing power
parity (PPP):
A) PPP holds up well over the short run but poorly for the long run, and the theory
holds better for countries with relatively low rates of inflation.
B) PPP holds up well over the short run but poorly for the long run, and the theory
holds better for countries with relatively high rates of inflation.
C) PPP holds up well over the long run but poorly for the short run, and the theory
holds better for countries with relatively low rates of inflation.
D) PPP holds up well over the long run but poorly for the short run, and the theory
holds better for countries with relatively high rates of inflation.
Describe the management objectives of a firm governed by the shareholder wealth
maximization model and one governed by the stakeholder wealth maximization model.
Give an example of how these two models may lead to different decision-making by
executive management.
In theory multinational firms are in a better position than domestic firms to support
higher debt ratios. Provide an argument as to why this could be true and discuss the
empirical research findings about US based MNEs.
ADRs are a popular investment tool for many U.S. investors. In recent years several
alternatives for investing in foreign equity securities have become available for U.S.
investors, yet ADRs remain popular. Define what an ADR is and provide at least three
examples of the advantages they may hold over alternative foreign investment vehicles
for U.S. investors.
List and explain three strategic motives why firms become multinationals and give an
example of each.
Most countries specify the translation method to be used by a foreign subsidiary based
on its business operations or the functional currency. Explain both subsidiary
characterization criteria and the one adopted in the United States.
What is a transfer price, and can a government regulate it? What difficulties and
motives does a parent multinational firm face in setting transfer prices?
Why is core to Google’s tax planning to fix a tax base (also known as permanent
establishment) in Ireland?
The objectives and responsibilities of the modern multinational have grown
significantly more complex in the twenty-first century. Develop and argument as to why
this is the case.
Sourcing capital abroad usually follows a logic path. List in sequencial order three
corporate strategies in internationalizing the cost of capital.
What are blocked funds? List and explain two of the three methods the authors list in
this chapter for dealing with blocked funds.
Describe the asset market approach to exchange rate determination. How is this
consistent with economic theory of (say, security) prices in general?
There are as many different approaches to exposure management as there are firms and
no real consensus exists regarding the best approach. Discuss the following theoretical
dimensions to currency hedging: optimal hedge ratio, hedge symmetry, hedge
effectiveness and hedge timing.
Countries occasionally intentionally devalue their currencies. So what is the logic and
likely results of intentionally devaluing their domestic currency? International
economic analysis characterizes the trade balance adjustment process as occurring in
three stages. List and explain the three stages too.
The authors state that empirical tests of purchasing power parity “have, for the most
part, not proved PPP to be accurate in predicting future exchange rates.” The authors
then state that PPP does hold up reasonably well in two situations. What are some
reasons why PPP does not accurately predict future exchange rates, and under what
conditions might we reasonably expect PPP to hold?
What are the two schools of thought regarding the worldwide trend toward increased
financial disclosure by publicly traded firms. Explain which school of thought you hold
to and why.