The effectiveness of a hedge is determined to what degree the change in spot asset’s
value is correlated with the equal change in the hedge asset’s value to a change in the
underlying spot exchange rate.
From the time of its creation through July 2012, the euro peaked versus the USD in
April 2008 at around $1.60/€.
Defensive measures are designed to enhance growth and profitability of the firm itself.
The basis point spreads between credit ratings dramatically rise for borrowers of credit
qualities less than BBB.
A forward hedge involves a put or call option contract and a source of funds to fulfill
that contract.
Domestic firms tend to make GREATER use of financial derivatives than MNEs
because they can bear the greater risk presented by these financial instruments.
The European Union recommends maximum credit terms for many items including, for
example, heavy capital goods (five years), light capital goods (three years), and
consumer durable goods (one year).
According to recent research, family-owned firms in some highly-developed economies
typically outperform publicly-owned firms.
An excess of merchandise exports over merchandise imports results in a balance of
trade deficit.
Tax treaties generally have the effect of increasing the withholding taxes between the
countries that are negotiating the treaties.
A foreign subsidiary’s functional currency is the currency of the primary economic
environment in which the subsidiary operates and in which it generates cash flows.
Economists have observed that firms tend to invest first in countries that are too far
distant in psychic distance (similar cultural, legal, and institutional environment).
The most commonly quoted currency exchange is that between the U.S. dollar and the
European euro. For example, a quotation of EUR/USD 1.2174. The euro is the base
currency and the dollar the price currency.
Unlike the situation with exchange rate risk, there is no uncertainty on the part of
management for shareholder preferences regarding interest rate risk. Shareholders
prefer that managers hedge interest rate risk rather than having shareholders diversify
away such risk through portfolio diversification.
If the rho of the specific option is known, it is easy to determine how the option’s value
will change as the spot rate changes.
Export credit insurance provides assurance to the exporter or the exporter’s bank that,
should the foreign customer default on payment, the insurance company will pay for a
major portion of the loss.
The geometric mean will, in all but a few extreme circumstances, yield a larger return
than the arithmetic mean return.
Internationally diversified portfolios often have a lower rate of return and almost
always have a higher level of portfolio risk than their domestic counterparts.
If management expects a foreign currency to depreciate, it could minimize translation
exposure by increasing net exposed assets.
If management anticipates an appreciation of the foreign currency, it should decrease
net exposed assets to benefit from a gain.
The ultimate step sourcing capital abroad would be to place a directed equity issue in a
prestigious target market or a euroequity issue in global equity markets.
The London Interbank Offered Rate (LIBOR) is published under the auspices of the
British Bankers Association. A panel of 16 major multinational banks self-report their
actual borrowing rate.
Comparative advantage is one of the underlying principles driving the growth of global
business.
The authors were unable to identify in lesser developed countries specific firms that are
nearing the status of global MNE.
With the use of forwards, a perfect hedge is possible.
A hedge constructed using puts foreign currency options would be symmetric.
Most firms raise their initial capital in foreign markets.
The most visible roots of the crisis were in the excesses of capital inflows into Thailand
extending credit to a variety of domestic investments and enterprises beyond what the
Thai economy could support and creating an investment “bubble.”
Expected changes in foreign exchange rates should already be factored into anticipated
operating results by management and investors.
The firm selling the recourse receivables avoids the cost of determining the
creditworthiness of its customers.
Other things equal, an increase in the firm’s tax rate will increase the WACC for a firm
that has both debt and equity financing.
Banks are very hesitant to engage in fronting loans because of the low probability of
repayment and thus their risk exposure up to a 100% loss.
The least liquid stock markets as identified by the authors offer little liquidity for their
own domestic firms, and are of little value to foreign firms.
When discussing comparative advantage, it is apparent that today at least two of the
factors of production, capital and technology, now flow directly and easily between
countries, rather than only indirectly through traded goods and services.
The large and liquid capital and currency markets follow many of the principles
outlined by the different schools of thought on exchange rate determination (parity
conditions, balance of payments approach, and asset approach) relatively well in the
medium to long term.
The U.S. Internal Revenue Service can reallocate revenues and expenses between
parent corporations and their subsidiaries to more clearly reflect a proper allocation of
income. In such instances it is the responsibility of the corporation to prove that the IRS
has been arbitrary in its decision-making, thus establishing a “guilty until proved
innocent” tax approach.
Swap and forward transactions account for an insignificant portion of the foreign
exchange market.
The relationship among stakeholders used to determine and control the strategic
direction and performance of an organization is termed:
A) corporate governance.
B) Anglo-American activism.
C) capital structure.
D) working capital management.
Who pays the costs of creating a sponsored ADR?
A) the foreign firm whose stocks underlie the ADR
B) the U.S. bank creating the ADR
C) both the U.S. bank and the foreign firm
D) the SEC since they require the regulation
A tax that is effectively a sales tax at each stage of production is defined as a/an
________ tax.
A) flat
B) equitable
C) value-added tax
D) none of the above
Depositary receipts traded outside the United States are called ________ depositary
receipts.
A) Euro
B) Global
C) American
D) none of the above
TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to
an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and
the Euro appreciates against the dollar from $1.40/€ at the time the loan was made to
$1.45/€ at the end of the first year, what is the before tax cost of capital if the firm
repays the entire loan plus interest (rounded)?
A) 1.73%
B) 5.50%
C) 10.50%
D) 9.27%
Which of the following is NOT true regarding a letter of credit?
A) The importer and exporter agree on a transaction.
B) The importer applies to its local bank for the issuance of a letter of credit.
C) The exporter applies to its local bank for the issuance of a letter of credit.
D) The importer’s bank cuts a sales contract based on its assessment of the
creditworthiness of the importer.
When there is a full forward cover with the spot rate equal to the forward rate all of the
following are true EXCEPT:
A) The hedge is asymmetric.
B) There is no uncovered exposure remaining.
C) The total position is a perfect hedge.
D) The currency hedge ratio is equal to 1.
The financial manager of a firm has a variable rate loan outstanding. If she wishes to
protect the firm against an unfavorable increase in interest rates she could:
A) sell an interest rate futures contract of a similar maturity to the loan.
B) buy an interest rate futures contract of a similar maturity to the loan.
C) swap the adjustable rate loan for another of a different maturity.
D) none of the above
The problems that may arise due to the separation of ownership and management in
large business organizations is know as:
A) separation anxiety.
B) the agency problem.
C) corporate disconnect theory.
D) none of the above
An example of economies of scale in financing include:
A) being able to access the Euroequity, Eurobond, and Eurocurrency markets.
B) being able to ship product in shiploads or carloads.
C) being able to use large-scale plant and equipment.
D) all of the above
Which of the following is NOT a contributing factor to the segmentation of capital
markets?
A) excessive regulatory control
B) perceived political risk
C) anticipated foreign exchange risk
D) All of the above are contributing factors.
World War I caused the suspension of the gold standard for fixed international exchange
rates because the war:
A) cost too much money.
B) interrupted the free movement of gold.
C) lasted too long.
D) used gold as the main ingredient in armament plating.
Level III ADR commitment applies to:
A) firms that want to list existing shares on the NYSE.
B) banks issuing foreign mutual funds.
C) ADR issues of under $25,000.
D) the sale of a new equity issued in the United States.
Option premiums deteriorate at an/a __________ as they approach expiration.
A) increasing rate
B) proportional
C) decreasing rate
D) less than proportional rate
________ is the alteration of economic or financial fundamentals that are thought to be
drivers of capital to flow in and out of specific currencies.
A) Indirect Intervention
B) Direct Intervention
C) Foreign Direct Investment
D) Capital Controls
A well-diversified portfolio has about ________ of the risk of the typical individual
stock.
A) 8%
B) 19%
C) 27%
D) 52%
The ________ is the instrument normally used to actually effect payment in
international commerce.
A) banker’s acceptance
B) bill of exchange
C) bill of lading
D) letter of credit
The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go
up is to:
A) do nothing.
B) pay floating and receive fixed.
C) receive floating and pay fixed.
D) none of the above
A small economy country whose GDP is heavily dependent on trade with the United
States could use a(n) ________ exchange rate regime to minimize the risk to their
economy that could arise due to unfavorable changes in the exchange rate.
A) pegged exchange rate with the United States
B) pegged exchange rate with the Euro
C) independent floating
D) managed float
Exchange rate pass-through may be defined as:
A) the bid/ask spread on currency exchange rate transactions.
B) the degree to which the prices of imported and exported goods change as a result of
exchange rate changes.
C) the PPP of lesser-developed countries.
D) the practice by Great Britain of maintaining the relative strength of the currencies of
the Commonwealth countries under the current floating exchange rate regime.
The stock exchange with the greatest value of shares traded is:
A) NYSE.
B) Tokyo.
C) Nasdaq.
D) London.
A ________ is any restriction that limits or alters the rate or direction of capital
movement into or out of a country.
A) capital budget
B) capital control
C) balance of trade deficit
D) balance of trade surplus
________ occur as a result of changes in the value of currency, whereas ________
occur as a result of ongoing business activities.
A) Operating gains or losses; translation gains or losses
B) Swap losses; translation gains or losses
C) Translation gains or losses; operating gains or losses
D) all of the above
________ is the active buying and selling of the domestic currency against foreign
currencies.
A) Indirect Intervention
B) Direct Intervention
C) Foreign Direct Investment
D) Federal Funding
A U.S. firm sells merchandise today to a British company for £150,000. The current
exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses
to avoid any hedging techniques designed to reduce or eliminate the risk of changes in
the exchange rate. If the exchange rate changes to $1.52/£ the U.S. firm will realize a
________ of ________.
A) loss; $4,500
B) gain; $4,500
C) loss; £4,500
D) gain; £4,500
In January 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre,
with the U.S. dollar. This practice is known as:
A) bi-currencyism.
B) securitization
C) a Yankee bailout.
D) dollarization.
Which of the following is NOT an example of diversification in financing?
A) raising funds in more than one market
B) raising funds in more than one country
C) diversifying sales
D) All of the above qualify.
The ________ provides a means to account for international cash flows in a
standardized and systematic manner.
A) parity conditions
B) asset approach
C) balance of payments
D) International Fisher Effect
From the viewpoint of a British investor, which of the following would be a direct
quote in the foreign exchange market?
A) SF2.40/£
B) $1.50/£
C) £0.55/€
D) $0.90/€
Of the following, which was NOT cited by the authors as a valuable function provided
by the Eurocurrency market?
A) Eurocurrency deposits are an efficient and convenient money market device for
holding excess corporate liquidity.
B) Eurocurrency deposits are a tool used by the Federal Reserve to regulate the money
supply of countries that peg their currency against the U.S. dollar.
C) The Eurocurrency market is a major source of short-term bank loans to finance
corporate working capital needs.
D) All of the above were cited by the authors.
Which of the following is NOT an important concept when distinguishing between
international and domestic financial management?
A) corporate governance
B) culture, history, and institutions
C) political risk
D) All of the above are important distinguishing concepts.