Archives: Quiz

1) Bond averages that are expressed in percentages are not comparable to the S&P 500. 2) The price of a call option is often more volatile than the price of the underlying stock. Answer: T 3) Yields on municipal bonds […]

1) It is possible to have an opportunity loss when using futures to hedge. 2) Hedgers should buy calls if they are hedging an expected outflow of foreign currency. Answer: T 3) Assume a regression model in which the dependent […]

1) The exchange rates of smaller countries are very stable because the market for their currency is very liquid. 2) Leading refers to the payment of supplies earlier than necessary; lagging refers to the payment of supplies later than allowed. […]

1) If a foreign project is financed with a subsidiary’s retained earnings, the subsidiary’s investment could be viewed as an opportunity cost, since the funds could be remitted to the parent rather than invested in the foreign project. 2) To […]

1) Imperfect markets represent conditions under which factors of production are immobile. 2) Inflation and interest rate differentials between the U.S. and foreign countries are examples of variables that could be used in fundamental forecasting. Answer: T 3) The interest […]

1) Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries. 2) Because increased external financing by a foreign subsidiary reduces the external financing needed by the parent, such an action will […]

1) Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen. 2) Assuming that a subsidiary is wholly owned, a subsidiary’s perspective is appropriate in attempting […]

1) Direct intervention is usually more effective than indirect intervention. 2) A parallel loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future. Answer: T 3) A money market hedge […]

1) The weights assigned to factors when assessing country risk should always be higher for the political risk factors than the financial factors. 2) A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast. Answer: […]

1) Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economic problems. 2) If an MNC uses a long-term forward contract to hedge the exchange rate risk associated with a […]

1) A draft drawn on and accepted by a bank is called a banker’s acceptance. 2) Purely domestic firms are never affected by economic exposure. Answer: F 3) Many MNCs simultaneously swap interest payments and currencies. Answer: T 4) When […]

1) Downsizing reduces expenses but may also reduce productivity and revenue. 2) In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign […]

1) If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country. 2) Assume that the real interest rate in the U.S. and in […]

1) There is an advantage to using equity rather than debt financing because dividend payments are tax deductible. 2) A reduction in hedging will probably reduce transaction exposure. Answer: F 3) They key to international diversification is selecting foreign projects […]

1) A subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are international rather than domestic. 2) The feasibility of a multinational project from the parent’s perspective is dependent not on the subsidiary cash […]

1) Fundamental models examine moving averages over time and thus allow the development of a forecasting rule. 2) Changes in country ownership of long-term and short-term assets are measured in the balance of payments with the capital account. Answer: T […]

1) Regarding the U.S. balance of payments, capital account items are relatively minor compared to the financial account items. 2) The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies. Answer: F 3) […]

1) A centralized management style for an MNC results in relatively high agency costs. 2) Margin requirements are deposits placed by investors in futures contracts with their respective brokerage firms when they take their position. They are intended to minimize […]

1) U.S. government officials would likely prefer that China devalue the yuan against the dollar. 2) A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts […]

1) Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC needs to hedge. 2) If the cross exchange rate of two nondollar currencies implied by their individual spot rates with […]

1) Forecast errors tend to be large for short forecast horizons. 2) When viewed as a project, the international acquisition usually generates quicker and larger cash flows than the establishment of a new subsidiary, but it also requires a larger […]

1) When comparing the forward hedge to the options hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty. 2) With a bull spread, the spreader believes that […]

1) Even if an existing business adds value to an MNC, it may be worthwhile to assess whether the business would generate more value to the MNC if it was restructured. 2) If interest rate parity holds, then the international […]

1) The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm. 2) Franchising is the process by which national governments sell state owned operations to corporations and other investors. […]

1) The interest rate of euronotes is based on the T-bill rate. 2) Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is used for longer-term forecasts. Answer: F 3) A floating coupon rate is an advantage to […]

1) Because creditors may prefer that firms maintain low exposure to exchange rate risk, exchange rate movements may cause earnings to be more volatile, and because investors may prefer corporations to perform hedging for them, exchange rate risk is probably […]

1) Regression analysis cannot be used to assess the sensitivity of a company’s performance to economic conditions because economic conditions are unpredictable. 2) If a U.S.-based MNC focused completely on importing, then its valuation would likely be adversely affected if […]

1) Privatization involves the sale of previously government-owned businesses by the government. 2) Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on the local currency of that country. Answer: […]

1) The forward premium is the price specified in a call or put option. 2) Currency swaps, whereby two parties exchange currencies at a specified point in time for a specified price, are often used by MNCs to hedge against […]

1) The maximum one-day loss estimated using the value-at-risk (VAR) method is independent of the confidence level used. 2) Even after an MNC’s accept/reject decision of a foreign acquisition has been made, it should be reassessed at various times. In […]

1) A country with fixed exchange rates often faces constraints on growth. 2) Since earnings can affect stock prices, many MNCs are concerned about translation exposure. Answer: T 3) When the current exchange rate is less than the strike price, […]

1) American style options can be exercised any time up to maturity. 2) Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency […]

1) Higher interest rates tend to increase the growth of an economy and increase the demand for an MNC’s products. 2) Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as exchange rates […]

1) A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an increase in agency costs. 2) If the futures rate is lower than the forward rate, astute investors would attempt […]

1) In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate. 2) Hedging translation exposure with forward contracts can backfire […]

1) Acquirers may have different required rates of return because of differences in the ability to use financial leverage. 2) Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would […]

1) Two methods to assess exchange rate volatility are the volatility of historical exchange rate movements and the exchange rate’s implied standard deviation from the currency option pricing model. 2) Some MNCs use a country’s yield curve to compare annualized […]

1) If foreign exchange markets are strong-form efficient, then all relevant public and private information is already reflected in today’s exchange rates. 2) If partial financing is provided by the foreign subsidiary, including foreign interest payments in the cash flow […]

1) China is commonly criticized for keeping the yuan’s value at superficially high levels. 2) An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the […]

1) An MNC must assess country risk not only in countries where it currently does business but also in those where it expects to export or establish subsidiaries. 2) If interest rate parity exists, and transaction costs do not exist, […]

1) Nonfinancial information plays no part in capital budgeting. 2) The prime rate is the interest rate the bank charges its most creditworthy customers. Answer: T 3) Net working capital indicates the percentage of current liabilities to current assets. Answer: […]

1) The issuer has no price risk in a firm commitment offering once the offer price is set. 2) The United States economy has little influence on the economies of other nations. Answer: F 3) An indirect exchange rate quotation […]

1) The weighted average cost of capital represents the minimum required rate of return on a capital-budgeting project and is found by multiplying the cost of each capital structure component by its appropriate weight and summing the terms. 2) It […]

1) A NPV profile shows how NPV varies given alternative IRRs. 2) Asset management ratios indicate the ability to meet short-term obligations to creditors as they come due. Answer: F 3) Special Drawing Rights are international reserve assets created by […]

1) The net present value, internal rate of return and payback period methods always agree on which project would enhance shareholder wealth and which would diminish it. 2) Savings surplus occurs when all of an economic units income is not […]

1) Research suggests that a portfolio of 20 or 30 different stocks has eliminated most of the portfolios systematic risk. 2) The operating cycle measures the time between when a firm pays its suppliers for inventory and when it collects […]

1) The variance of a portfolio would be calculated by finding the variances of the individual components of the portfolio and finding the weighted average of those variances. 2) If the interest rate is 0% for 10 years, then the […]

1) Nations that export more than they import will have a trade deficit. 2) The variance or standard deviation measures the risk per unit of return. Answer: F 3) Cannibalization occurs when a project robs cash flow from the firms […]

1) The EPS/EBIT indifference level represents the level of EBIT at which the firm would be indifferent between two different capital structures because they both result in the same level of EPS. 2) Bond issues of a single firm can […]

1) U.S. Treasury bills are sold at a discount through competitive bidding in an annual auction. 2) The Federal Reserve System was not able to regulate money and credit until after World War II. Answer: F 3) The selection stage […]