1
Multinational Financial Management: An Overview
1. The most commonly accepted goal of the MNC is: a. to maximize revenues b. to maximize shareholder wealth c. to maximize profitability of the firm d. both a and b 2. Agency costs are normally larger for MNCs than for purely domestic firms. Which of the following is not a reason for this larger agency cost? a. Monitoring managers of distant subsidiaries in foreign countries is more difficult. b. Managers from different cultures may not follow uniform goals. c. U.S. managers tend to downplay the short-term effects of decisions. d. Sheer size of the larger MNCs can create larger agency problems. 3. Several constraints confront the MNC in its a ttempt to maximize shareholder wealth. Which of the following is probably not a constraint? a. competitive b. ethical c. regulatory d. environmental 4. Part of the growth of multinational business over time is due to the realization that specialization by countries can increase production efficiency, making trade essential when a country focuses on the products it produces best. This is an example of which theory of international business? a. product cycle theory b. competitive advantage theory c. imperfect markets theory d. comparative advantage theory 5. According to the ___________, firms become first established in the home market as a result of some perceived advantage they would have over existing competitors, such as a need by t he market for at least one more supplier of the product. Eventually, firms will penetrate fo reign markets to satisfy foreign demand. a. product cycle theory b. imperfect markets theory c. comparative advantage theory d. none of the above 6. Which method of international business obligates a firm to provide a specialized sales or service strategy, support assistance, and possibly an initial investment in the entit y in exchange for periodic fees? a. joint venture b. new foreign subsidiary c. licensing d. franchising 7. Multinational firms face exposure to many different types of international risk. Which of the following is not a type of exposure mentioned in the text? a. diversifiable risk b. political risk c. foreign economies d. exchange rate movements
8. A firms expects to receive $20,000 from domestic operations and 20,000 British pounds (£) fro m a business in England. If the pound's value is $1.25 , the expected total dollar cash flows are: a. $40,000 b. $36,000 c. $45,000 d. $20,000 9. Which of the following statements is not true regarding the euro? a. In 1987, several European countries conformed to the euro as their currency for business transactions between these countries. b. The euro was phased in as a currency for other transactions during 2001. c. The euro completely replaced the currencies of the participating countries by 2002. d. The creation of the euro allowed firms (including European subsidiaries of U.S.-based MNCs) to engage in international transactions with the use of one currency and eliminated transactions costs resulting from exchanging currencies. 10. A decentralized management style is more likely to result in higher agency costs because the subsidiary managers may make decisions that do not focus on maximizing the value of the entire MNC. a. True b. False 11. Using international trade as a method of conducting international business is a relatively bold approach that can be used by firms to penetrate markets. a. True b. False 12. The Single European Act of 1987 removed several cross-border barriers among European countries. It also exposed firms to additional competition. a. True b. False 13. Under NAFTA, the low-cost labor in Mexico has led to a decrease in market share for some U.S. firms. This is most pronounced in technology-intensive industries. a. True b. False 14. Political risk represents political actions taken by the host government or the public that affect an MNC's cash flows. a. True b. False 15. The so-called Asian crisis lingered in 1998 and adversely affected numerous U.S.-based MNCs that conducted business in these countries. a. True b. False 16. Licensing is a venture that is jointly owned and operated by two or more firms. a. True b. False
8. A firms expects to receive $20,000 from domestic operations and 20,000 British pounds (£) fro m a business in England. If the pound's value is $1.25 , the expected total dollar cash flows are: a. $40,000 b. $36,000 c. $45,000 d. $20,000 9. Which of the following statements is not true regarding the euro? a. In 1987, several European countries conformed to the euro as their currency for business transactions between these countries. b. The euro was phased in as a currency for other transactions during 2001. c. The euro completely replaced the currencies of the participating countries by 2002. d. The creation of the euro allowed firms (including European subsidiaries of U.S.-based MNCs) to engage in international transactions with the use of one currency and eliminated transactions costs resulting from exchanging currencies. 10. A decentralized management style is more likely to result in higher agency costs because the subsidiary managers may make decisions that do not focus on maximizing the value of the entire MNC. a. True b. False 11. Using international trade as a method of conducting international business is a relatively bold approach that can be used by firms to penetrate markets. a. True b. False 12. The Single European Act of 1987 removed several cross-border barriers among European countries. It also exposed firms to additional competition. a. True b. False 13. Under NAFTA, the low-cost labor in Mexico has led to a decrease in market share for some U.S. firms. This is most pronounced in technology-intensive industries. a. True b. False 14. Political risk represents political actions taken by the host government or the public that affect an MNC's cash flows. a. True b. False 15. The so-called Asian crisis lingered in 1998 and adversely affected numerous U.S.-based MNCs that conducted business in these countries. a. True b. False 16. Licensing is a venture that is jointly owned and operated by two or more firms. a. True b. False
2
International Flow of Funds
1. Factor income represents income received by investors on foreign investments in financial assets (securities). Factor income is part of which component of the balance of payments? a. capital account b. current account c. balance of trade d. none of the above 2. Which of the following are factors that affect international trade flows? a. government restrictions b. exchange rates c. inflation d. all of the above e. none of the above 3. Even if a country's home currency weakens, its balance of trade will not necessarily improve immediately. This may occur because: a. many international trade transactions are prearranged and cannot be immediately adjusted b. the currencies of some other countries may have strengthened c. prices on goods will remain the same, making goods just as competitive d. all of the above e. none of the above 4. Which of the following factors will lead to an inflow of direct foreign investment (DFI) into a country? a. high tax rates in the country where the investment flows b. privatization in the country where the investment flows c. an expectation that the currency in the country where the investment flows will depreciate d. all of the above e. none of the above 5. Which of the following factors will lead to an inflow of portfolio investment into a country, everything else held constant? a. an expectation of a weaker currency in the country where the investment flows b. higher tax rates in the country where the investment flows c. higher interest rates in the country where the investment flows d. none of the above e. both a and c 6. Among the major objectives of the ________ are to promote cooperation a mong countries on international monetary issues and to promote stability in exchange rates. a. International Monetary Fund (IMF) b. World Bank c. World Trade Organization d. International Financial Corporation e. none of the above 7. The World Bank does cofinancing of loans w ith which of the following entities? entit ies? a. official aid agencies b. export credit agencies c. commercial banks
d. both a and c e. all of the above
8. ______________ is a component of the capital account and represents the investment in fixed assets in foreign countries that can be used to conduct business operatio ns. a. Portfolio investment b. Direct foreign investment (DFI) c. Other capital investment d. Transfer payments e. None of the above 9. The General Agreement on Tariffs and Trade (GATT): a. is an accord reached between 100 countries in 1980 b. reduced some tariffs by 80 percent on average c. removed some tariffs over a five- to ten-year period d. made more progress on reducing tariffs in service industries than in manufacturing industries e. none of the above 10. The capital account is primarily composed of merchandise exports and imports and service exports and imports. a. True b. False 11. Tariffs are taxes imposed on imported goods. a. True b. False 12. In the long run, a weak w eak dollar is expected to cause a higher balance of trade from the U.S. perspective. a. True b. False 13. The General Agreement on Tariffs and Trade (GATT) was established in 1993 to settle trade disputes and provide a forum for multilateral trade negotiations. It began operations in 1995 with a membership of 81 countries. a. True b. False 14. The International Development Association (IDA) was created in 1960 with country development objectives similar to those of the World Bank. Its loan policy is more appropriate for less prosperous nations. a. True b. False 15. Dumping reflects the exporting of products by o ne country to other countries at prices above cost. a. True b. False 16. A graphical illustration of the fact f act that the U.S. balance of trade may actually deteriorate in the short run as a result of dollar depreciation is called t he J curve effect. a. True b. False
3
International Financial Markets
1. Which of the following is not a motive for investing in foreign markets? a. expectations of a weaker foreign currency b. international diversification c. economic conditions d. all of the above are motives for investing in foreign markets 2. Which of the following are important attributes of banks that provide foreign exchange? a. speed of execution b. advice about current market conditions c. forecasting advice d. all of the above e. both b and c 3. The bid rate for the British pound is $1.65 and the ask rate is $1.68. What is the bid/ask spread? a. 1.82% b. -1.82% c. 1.79% d. -1.79% e. none of the above 4. If the value of the Canadian dollar (C$) is $0.65 and the euro (€) is worth $0.90, what is t he value of the euro in Canadian dollars? a. C$1.38 b. C$0.72 c. C$0.59 d. €0.72 e. none of the above 5. The Eurodollar market grew substantially in the 1960s and 1970s for which of the following reasons? a. higher reserve requirements for Eurobanks b. U.S. regulations in 1968 which limited foreign lending by U.S. b anks c. higher spreads that Eurobanks could charge on loans and deposits d. all of the above e. both a and c 6. Multinational corporations sometimes borrow in the Eurocredit market. These loans are denominated in dollars and many other currencies. The common maturity for Eurocredit loans is: a. one year b. three years c. five years d. ten years e. thirty years 7. A long-term bond that is issued by a borrower foreign to the country where the bond is placed is called a: a. foreign bond b. Eurobond c. Eurocredit bond d. all of the above
8. A stock offering by foreign corporations in t he U.S. is called a (an): a. American depository receipt (ADR) b. Yankee stock offering c. floating rate note (FRN) d. none of the above 9. The most common type of foreign exchange transaction is for immediate exchange at the so-called forward rate. a. True b. False 10. A purchaser of a currency put option buys t he right to sell a specific currency at a specific price within a specific period of time. a. True b. False 11. In December 1987, 12 major industrialized countries met in Buenos Aires and agreed on standardized guidelines for bank capital classification. This agreement was called the "Brazil Accord." a. True b. False 12. Loan rates float in accordance with the movement of some market interest rate, such as the Lisbon Intrabank Offer Rate (LIBOR). It is the rate commonly charged for loans between Eurobanks. a. True b. False 13. The adoption of the euro discouraged MNCs based in Europe to issue stock. a. True b. False
4
Exchange Rate Determination
1. Assume the spot rate of the euro (€ ) is $0.90. The expected spot rate one year from now is assumed to be $0.85. This percentage change reflects a: a. 5.56% appreciation of the euro b. 5.56% depreciation of the euro c. 5.88% appreciation of the euro d. 5.88% depreciation of the euro 2. The current spot rate of the British pound ( £) is $1.45. One year from now, the spot rate of the British pound is $1.51. This percentage change reflects a: a. 4.14% appreciation of the U.S. dollar. b. 4.14% depreciation of the British pound. c. 4.14% appreciation of the British pound. d. 3.97% appreciation of the British pound 3. Suppose the inflation rate in Australia goes up relative to the U.S. infla tion rate. What effect will that have on the supply, demand, and equilibrium exchange rate of the Australian dollar? a. the supply of Australian dollars will go up, the demand for Australian dollars will go down, and the Australian dollar will depreciate b. the supply of Australian dollars will go up, the demand for Australian dollars will go down, and the Australian dollar will appreciate c. the supply of Australian dollars will go down, the demand for Australian dollars will go up, and the Australian dollar will depreciate d. the supply of Australian dollars will go down, the demand for Australian dollars will go up, and the Australian dollar will appreciate 4. Suppose interest rates in Europe increase relative to U.S. interest rates. What ef fect will that have on the supply, demand, and equilibrium exchange rate of the euro (€)? a. the supply of euros will go up, the demand for euros will go down, and the euro will depreciate b. the supply of euros will go up, the demand for euros will go down, and the euro will appreciate c. the supply of euros will go down, the demand for euros will go up, and the euro will depreciate d. the supply of euros will go down, the demand for euros will go up, and the euro will appreciate 5. Suppose income levels in Australia go up relative t o the U.S. levels. What effect will that have on the supply, demand, and equilibrium price of U.S. dollars? a. the supply of U.S. dollars will go up, the demand for U.S. dollars will go down, and the U.S. dollar will depreciate b. the supply of U.S. dollars will go up, the de mand for U.S. dollars will go down, and the U.S. dollar will appreciate c. the supply of U.S. dollars will not change, the demand for U.S. dollars will go up, and the U.S. dollar will depreciate d. the supply of U.S. dollars will not change, the demand for U.S. dollars will go up, and the U.S. dollar will appreciate 6. If a bank thinks the British pound is overvalued, it should do which of the following? a. buy more of the pound before it depreciates b. buy more of the pound before it appreciates c. sell the pound before it depreciates d. sell the pound before it appreciates e. none of above
7. Assume the U.S. and Argentina have high levels of trade flows but low levels of capital flows. Which of the following statements is true regarding exchange rate determination? a. inflation differentials are very important b. interest rate differentials are very important c. income differentials are very important d. both a and c e. all of the above 8. Which of the following is not a factor that affects exchange rates? a. relative inflation rates b. relative income levels c. relative interest rates d. government controls e. all of the above are factors that affect exchange rates 9. If the U.S. intervenes in the foreign exchange market by buying U.S. dollars with Japanese yen, then the U.S. dollar should appreciate against the Japanese yen. a. True b. False 10. If the U.S. government places a high tax on interest income earned on foreign investments, it would most likely encourage the exchange of U.S. dollars for other currencies. a. True b. False 11. Currency speculators can be especially influential on the exchange rate movements of emerging markets because those markets have a smaller amount of foreign exchange trading. a. True b. False 12. A higher foreign interest rate tends to place downward pressure on the foreign currency and therefore can have an unfavorable affect on expected dollar cash flows. a. True b. False 13. If two countries engage in a large volume of international trade but very small international capital flows, relative inflation rates would likely be more influential than relative interest rates. a. True b. False
5
Currency Derivatives
1. Which of the following are possible contract periods for forward contracts? a. 30 days b. 65 days c. 97 days d. 1 year, 2 months e. all of the above 2. Assume that as of May 15, a f utures contract on 125,000 euros (€) with a June settlement date is priced at $1.00 per euro. The ______ of this currency futures contract will ________ for the euros on the settlement date. a. seller; pay $125,000 b. buyer; pay $125,000 c. seller; receive $125,000 d. buyer; receive $125,000 e. answers b and c are correct 3. The Swiss franc spot rate is $.90 and t he Swiss franc 90-day forward rate is $.88. At what discount or premium is the Swiss franc selling? a. 2.22%, premium b. -2.22%, discount c. -9.09%, discount d. 8.89%, premium e. -8.89%, discount 4. What is the typical initial margin requirement for a currency futures contract? a. $500 b. $1,000-$2,000 c. 5%-10% of the contract d. none of the above 5. Which of the following is a similarity between the currency futures market and the forward market? a. both are self-regulating b. both use standardized contract sizes c. both use standardized delivery dates d. all of the above are similarities e. none of the above are similarities 6. Which of the following factors does not affect the premium of a currency call option? a. level of existing spot price relative to strike price b. length of time before the expiration date c. the currency of the call option d. potential variability of currency e. all of the above are factors 7. Suppose Darlene is a speculator who buys five British pound call options with a strike price of $1.50 and a March expiration date. The current spot price is $1 .45. Darlene pays a premium of $0.01 per unit for the call option. Just before expiration, the spot price reaches $1.53, and Darlene exercises the option. Assume one option contract specifies 31,250 units. What is the profit or loss for Darlene? a. $625 b. $3,125
c. $1,250 d. $6,250 e. none of the above
8. Suppose Darlene is a speculator who buys ten British pound put options with a strike price of $1.50 and a March expiration date. The current spot price is $1.55. Darlene pays a premium of $0.02 per unit for the call option. Just before expiration, the spot price reaches $1.48 and Darlene exercises the option. Assume one option contract specifies 31,250 units. What is t he profit or loss for Darlene? a. $0 b. $6,250 c. $3,125 d. $625 e. none of the above 9. Peter has purchased a call option on euros (€ ) with a strike price of $1.06 and a premium of $0.01. The current spot price of the euro is $1.04. Just before expiration, the euro's spot price is $1.09.What is the per unit profit or loss to the writer of this option? a. $.02 loss b. $.02 profit c. $.03 loss d. $.03 profit 10. The forward rate will usually contain a premium (or discount) that reflects the difference between the home inflation rate and the foreign inflation rate. a. True b. False 11. A non-deliverable forward contract (NDF) is like a regular forward contract because it is for a specified amount and a specified exchange rate. However, it differs fro m a regular forward contract because it does not have a specified future settlement date. a. True b. False 12. Forward contracts are used primarily by small firms and individuals because they can be tailored to the needs of those clients. a. True b. False 13. A company expects to receive a foreign currency from the sale of merchandise. Because it is nervous about possible exchange rate movements in this currency, it wants to hedge its position with an option in the currency. The appropriate action for them to hedge is to buy a call option. a. True b. False 14. A European-style currency option may only be exercised on the expiration dat e. a. True b. False 15. If the spot rate of a currency increased substantially over a period, the futures price would likely increase by about the same amount. a. True b. False
6
Government Influence on Exchange Rates
1. Some countries use a _________ exchange rate arrangement, in which their home currency's value is pegged to a foreign currency or to some unit of account. a. fixed b. freely floating c. managed float d. pegged e. none of the above 2. Currently, the U.S. dollar is under which type o f exchange rate system? a. fixed b. freely floating c. managed float d. pegged e. none of the above 3. The U.S. dollar was under which type of exchange rate system from 1944 to 1971? a. fixed b. freely floating c. managed float d. pegged e. none of the above 4. Which of the following countries suspended participation in the exchange rate mechanism (ERM) of the European Economic Community during the 1992 crisis? a. Britain b. France c. Italy d. Switzerland e. both a and c 5. Which of the following strategies would result in successful sterilized intervention by the Fed if it wanted to make the U.S. dollar depreciate in v alue? a. sell dollars in the currency markets, buy government treasury bonds b. sell dollars in the currency markets, sell government treasury bonds c. buy dollars in the currency markets, buy government treasury bonds d. buy dollars in the currency markets, sell government treasury bonds e. none of the above 6. Assume the Fed wants to boost exports for the United Stat es. Which of the following strategies would help boost exports? a. raise interest rates b. increase the money supply by selling government bonds c. lower interest rates d. decrease the money supply by selling government bonds e. none of the above 7. Assume the Fed wants to decrease inflation in the United St ates. Which of the following strategies would help reduce inflation? a. raise interest rates b. increase the money supply by buying government bonds
c. lower interest rates d. decrease the money supply by buying government bonds e. none of the above
8. Which of the following statements is not true with respect to the euro since its introduction in 1999? a. its value declined substantially against the British pound, the dollar, and many other currencies from 1999 to 2000 b. there was more money flowing out of Europe and into U.S. and other financial markets than money flowing from these countries to Europe, causing a depreciation of the euro after it was introduced c. investors preferred to hold assets denominated in dollars, pounds, or yen rather than in euros, contributing to the depreciation of the euro d. all of the above are true with respect to the euro 9. In December 1971, the Bretton Woods Agreement called for a devaluation of the U.S. dollar by about 8 percent against other currencies. a. True b. False 10. A currency board is a system for maintaining the value of the local currency with respect to some other specified currency. To do this, the currency board must have credibility in its promise to maintain the exchange rate. a. True b. False 11. Three members of the European Union initially decided not to participate in the single European currency (euro). These countries are the United Kingdom, Denmark, and Sweden. a. True b. False 12. The European Central Bank is based in Frankfurt and is responsible for setting monetary policy for all participating European countries. Its objective is to control inf lation in the participating countries and to stabilize the value of the euro with respect to other major currencies. a. True b. False 13. One method of direct intervention by t he U.S. Federal Reserve System in currency markets is to sell dollars and buy foreign currencies to make the U.S. dollar depreciate. a. True b. False 14. Dollarization represents the replacement of a foreign currency with U.S. dollars. This process is a lit tle less drastic than a currency board. a. True b. False
7
International Arbitrage and Interest Rate Parity
1. Bank A quotes a bid price of $1.52 and an ask price of $1.54 for the British pound. Bank B quotes a bid price of $1.51 and an ask price of $1.53 for the British pound. If a trader has $1 00,000 to invest, what should the trader do to take advantage of locational arbitrage and how much profit would t he trader make? a. buy pounds at Bank A, sell pounds at Bank B, make $1,000 b. buy pounds at Bank A, sell pounds at Bank B, make $657.89 c. buy pounds at Bank B, sell pounds at Bank A, make $1,000 d. buy pounds at Bank B, sell pounds at Bank A, make $657.89 e. none of the above, locational arbitrage is not possible 2. National Bank quotes a bid price of $1.15 and an ask price of $1.17 f or the euro. City Bank quotes a bid price of $1.10 and an ask price of $1.14 for the euro. If you have $1,000,000 to invest, what would your profit be from conducting locational arbitrage? a. locational arbitrage is not possible in this situation b. $30,000 c. $10,000 d. $50,000 e. none of the above 3. A bank quotes a bid price of $1.50 for the British pound (£), a rate of $0.75 for the Swiss franc (Sf), and a rate of Sf2.02 for the British pound. If I have $100,000 to invest, what should I do to take advantage of triangular arbitrage and how much profit would I make (assume the bid and ask prices are the same)? a. buy pounds with dollars, sell pounds for francs, buy dollars with francs, make $101,000 profit. b. buy pounds with dollars, sell pounds for francs, buy dollars with francs, make $1,000 profit. c. buy francs with dollars, sell francs for pounds, buy dollars with pounds, make $101,000 profit. d. buy francs with dollars, sell francs for pounds, buy dollars with pounds, make $1,000 profit. e. none of the above, triangular arbitrage is not possible. 4. The spot rate is $0.75 for the Swiss franc ( Sf), the 180 day forward rate for the Swiss franc is $0.80, the 180 day interest rate in the U.S. is 4%, and the 180 day interest rate in Switzerland is 3%. If I have $100,000 to invest, what would my approximate annual yield be from covered interest arbitrage? a. 9.87% b. 10.93 c. 21.87 d. 19.73% e. none of the above, a covered interest arbitrage profit cannot be made. 5. Assume the Swiss franc has a 90-day interest rate of 3% and the U.S. dollar has a 4% 90-day interest rate. What is the non-annualized discount or premium on the Swiss franc? a. 9.7% premium b. 9.7% discount c. 0.97% premium d. 0.97% discount e. none of the above 6. Assume interest rate parity does not hold, yet covered interest arbitrage is still not possible. Which of the following is not a reason for this anomaly? a. accounting differences b. transaction costs
c. currency restrictions d. differential tax laws e. all of the above are reasons
7. Which of the following forms of arbitrage takes advantage of differentials in cross exchange rates? a. locational arbitrage b. covered interest arbitrage c. triangular arbitrage d. interest rate arbitrage e. none of the above 8. The British pound (£) is worth $1.60, while the euro (€) is worth $.95. What is the value of the British pound with respect to the euro? a. €0.59 b. €1.68 c. £1.68 d. £0.59 e. none of the above 9. Arbitrage can be loosely defined as capitalizing on a discrepancy in quoted prices. In many cases, there is no investment of funds tied up for any length of time and no risk involved in the strategy. a. True b. False 10. According to interest rate parity, if the interest rate in the U.S. is greater than the interest rate in Canada, then the Canadian dollar forward rat e should be at a discount. a. True b. False 11. If the interest rate in the United Kingdom is 6% and the interest rate in the U.S. is 4%, the approximate premium on the British pound forward rate should be 2%. a. True b. False 12. If interest rate parity exists, then foreign investors will earn the same return as U.S. investors. a. True b. False 13. In triangular arbitrage, currency transactions are conducted in the spot market to capitalize on a discrepancy in the cross exchange rate between two currencies. a. True b. False
8
Relationships Among Inflation, Interest Rates, and Exchange Rates
1. There are various forms of purchasing power parity (PPP) theory. Which form of PPP is also known as the "law of one price"? a. numerical form b. relative form c. accounting form d. absolute form e. none of the above 2. Inflation in the U.S. is 3% and the inflation rate in Europe is 5%. From the perspective of the U.S., what should the euro adjustment be if purchasing power parity (PPP) applies? a. 1.94% appreciation b. -1.9% depreciation c. -1.94% depreciation d. 1.9% appreciation e. none of the above 3. Which of the following is not a reason for deviations in PPP? a. relative income levels b. trade barriers c. interest rate differentials d. several substitutes for traded goods e. all of the above are reasons for deviations 4. Assume Switzerland has a one-year interest rate of 3% and t he U.S. has a 4%, one-year interest rate. If the International Fisher effect (IFE) holds, what would your forecast for the Swiss franc exchange rate with respect to the dollar be? a. 9.7% appreciation b. 9.7% depreciation c. 0.97% appreciation d. 0.97% depreciation e. none of the above 5. Assume the United Kingdom has a one-year interest rate of 6 % and the U.S. has a 4%, one-year interest rate. If the spot rate is $1.50 per British pound an d the international Fisher effect (IFE) holds, what would you forecast for the future spot rate of the pound in one year (using the simplified method)? a. $1.5288 b. $1.5300 c. $1.4700 d. $1.4717 e. none of the above 6. Which of the following statements is false? a. the international Fisher effect (IFE) uses interest rates to predict forward rates. b. the international Fisher effect (IFE) uses interest rates to pr edict future spot rates. c. interest rate parity (IRP) uses interest rates to predict forward rates. d. purchasing power parity (PPP) uses inflation rates to predict future spot r ates. e. all of the above are true statements.
7. The absolute form of purchasing power parity (PPP) accounts for the possibilities of market imperfections such as transportation costs, tariffs, and quotas. a. True b. False 8. While the relationship between inflation differentials and exchange rates is not perfect even in the long run, recent research supports the use of inflation differentials to forecast long-run movements in exchange rates. a. True b. False 9. The International Fisher effect (IFE) uses interest rates rather than inflation rate differentials to explain exchange rate changes over time. It is closely related to the PPP theory because interest rates are often not correlated with inflation rat es. a. True b. False 10. It is possible for purchasing power parity (PPP) to hold but for the international Fisher effect (IFE) to not hold over the same time period. a. True b. False 11. Unlike purchasing power parity (PPP), the international Fisher effect (IFE) consistently holds over the short run. a. True b. False 12. The international Fisher effect (IFE) and interest rate parity (IRP) use interest rate differentials to predict expected future spot rates. a. True b. False 13. A somewhat simplified statistical test of purchasing power parity (PPP) could be developed by applying regression analysis to historical exchange rates and inflation differentials. a. True b. False
9
Forecasting Exchange Rates
1. Which of the following is not a corporate function that makes exchange rate forecasting necessary? a. hedging decisions b. capital budgeting decisions c. earnings assessments d. short-term investment decisions e. all of the above are corporate functions that make exchange rate forecasting necessary 2. Which of the following is not a method of forecasting exchange rates? a. institutional b. fundamental c. technical d. market-based e. all of the above are general groups for forecasting exchange rates 3. Which of the following is a limitation in fundamental forecasting? a. uncertain timing of impact b. the forecasts are always inaccurate c. omission of other relevant factors from the model d. both a and c e. all of the above 4. Market-based forecasting is based on what? a. spot rates b. forward rates c. either a or b d. neither a nor b 5. ___________ forecasting involves use of historical exchange rate data to predict future values. a. fundamental b. technical c. market-based d. none of the above 6. Using the mixed forecasting method to predict the value of the Japanese yen, which of the following factors should be considered? a. recent movements in the yen b. Japanese inflation c. the current spot rate of the yen d. all of the above e. none of the above 7. If a forecaster predicts the British pound to be $1.70 in one year, but the spot rate of the pound turns out to be $1.80 in one year, what is the absolute forecast error as a percentage of realized value? a. 5.56% b. -5.56% c. -5.88% d. 5.88% e. none of the above
8. MNC A uses a regression model to forecast the value of the euro in the upcoming period. The following regression model was developed: €t = b0 + b1INFt-1 + b2INCt-1, w here the two variables are the percentage change in the inflation differential between the U.S. and Europe and the quarterly percentage change in the income growth differential between the U.S. and Europe, respectively. The coefficients for the regression model are: b0 = 0.005, b1 = 0.9 , and b2 = 0.7. In the most recent quarterly, U.S. inflation increased by 1%, while European inflation increased by 2%. Also in t he most recent quarter, U.S. income growth increased by 1.5%, while European income growth increased by 2%. Based on this information, what is the expected change in the euro? a. 0.75% appreciation b. 0.75% depreciation c. 1.05% appreciation d. 0.05% depreciation e. none of the above 9. From a corporate point of view, use of t echnical forecasting may be limited in that it typically focuses on the near future. a. True b. False 10. Regression analysis, sensitivity analysis, and purchasing power parity (PPP) can be used for fundamental forecasting of exchange rates. a. True b. False 11. The forward rate is considered biased in market-based forecasting because of implications of interest rate parity. a. True b. False 12. Some studies have shown forecast services to be not much more accurate than freely available forecasts. a. True b. False 13. On a graph with X as the predicted value, Y as the realized value, and a 45 degree line drawn from the apex, upward bias would be shown if more points are below the line than above the line. a. True b. False 14. If currency markets are weak-form efficient, then fundamental forecasting cannot be used to improve forecasts. a. True b. False
10 Measuring Exposure to Exchange Rate Fluctuations 1. Some have argued the exchange rate risk is irrelevant. Which of the following is not an argument for exchange rate risk irrelevance? a. purchasing power parity argument b. investor hedge argument c. interest rate parity argument d. currency diversification argument e. all of the above are arguments for irrelevance 2. One of the arguments for exchange rate risk irrelevance is that if a U.S.-based MNC is well diversified across numerous countries, its value will not be affected by exchange rate movements because of offsetting affects. This identifies which argument? a. purchasing power parity argument b. investor hedge argument c. interest rate parity argument d. currency diversification argument e. none of the above 3. The exposure of the MNC's consolidated financial statements to exchange rate fluctuations is what type of exposure? a. economic b. translation c. transaction d. none of the above 4. Over the next year, an MNC expects British pound (£) inflows of £10,000, outflows of £15,000, and a British pound exchange rate of $1.50. It expects Swiss franc (Sf) inflows of Sf30,000, outflows of Sf20,000, and a Swiss franc exchange rate of $0.75. The company expects Mexican peso (p) inflows of p1,000,000, outflows of p1,500,000, and a Mexican peso exchange rate of $0.20. What is this MNC's transaction exposure? a. -£5,000, +Sf10,000, -p500,000 b. +£5,000, -Sf10,000, +p500,000 c. -$7,500 on pounds, +$7,500 on francs, +$100,000 on pesos d. -$7,500 on pounds, +$7,500 on francs, -$100,000 on pesos e. none of the above 5. Using the information in question 4, the MNC expects the Swiss franc and the British pound to be perfectly negatively correlated over this year and the peso to have 0 correlation to the pound and the franc. What will be the MNC's transaction exposure? a. The pound and franc exposures will offset, leaving just peso exposure. b. The MNC will still have pound, franc, and peso exposure. c. The MNC will have no exposure because it converts the currencies to dollars. d. None of the above. 6. Translation exposure is not dependent on which of the following? a. accounting methods used b. locations of foreign subsidiaries
c. proportion of business conducted by foreign subsidiaries d. translation exposure is dependent on all of the above e. translation exposure is dependent on none of the above 7. The degree to which a firm's present value of future long-term cash flows can be influenced by exchange rate fluctuations is referred to as transaction exposure to exchange rates. a. True b. False 8. If a local currency appreciates and the firm's exports are denominated in the local currency, the firm should expect net cash flows from transactions to decrease. a. True b. False 9. A firm without any foreign inflows or outflows (a purely domestic company) is still vulnerable to economic exposure. a. True b. False 10. One method of measuring an MNC's transaction exposure is to classify the cash flows into different income statement items and subjectively predict each income statement item based on a forecast of exchange rates. a. True b. False 11. Under Financial Accounting Standards Board No. 52 (FASB-52), revenues, expenses, and gains and losses of a foreign entity from its functional into the reporting currency is done using the weighted average exchange rate. a. True b. False 12. Most analysts agree that translation exposure is the most relevant form of exposure. a. True b. False
11 Managing Transaction Exposure
1. A U.S.-based MNC has sold C$5,000,000 of product to a Canadian company and will receive payment in 90 days. Which of the following would provide a complete hedge of transaction exposure for the firm? a. buy futures contracts that expire in six months b. buy put options that expire in 90 days c. buy a forward contract d. buy raw materials worth C$3,000,000 in Canada e. none of the above 2. A U.S.-based multinational wants to hedge a payable in Swiss francs that is due in six months. Generally, what should the company do if it wants to use a money market hedge? a. borrow dollars, convert to francs, lend in francs for six months b. borrow dollars, convert to francs, sell the francs forward six months c. borrow francs, convert to dollars, lend the dollars d. borrow francs, convert to dollars, sell the dollars forward six months e. none of the above 3. A U.S.-based multinational expects to receive 200,000 Australian dollars (A$) in 90 days. It wants to hedge the position with a money market hedge. Interest rates for 90 days are 3% in the U.S. and 2% in Australia. How much should the MNC borrow approximately? a. $194,175 b. A$200,000 c. A$194,175 d. A$196,078 e. none of the above 4. In 90 days, a company has a Swiss franc payable of Sf1,000,000 due. A call option on francs that expires in 90 days has an exercise price of $0.85 and a premium of $0.02. A put option on francs that expires in 90 days has an exercise price of $0.90 and a premium of $0.03. What option should the company choose and how much will it pay in dollars if it exercise the option, including the premium? a. buy the call, pay $850,000 b. buy the put, pay $850,000 c. buy the call, pay $830,000 d. buy the put, pay $870,000 e. none of the above 5. In 180 days, a company expects a Mexican peso receivable of p10,000,000. The forward rate on the peso is $0.15 and the expected peso spot rate in 180 days is $0.16. If the company chooses to hedge, what should it do and what is the expected real cost of the hedge? a. buy the peso forward, real hedge cost is $100,000 b. buy the peso forward, real hedge cost is $1,500,000 c. sell the peso forward, real hedge cost is $100,000 d. sell the peso forward, real hedge cost is $1,500,000 e. none of the above
6. Which of the following is not a technique for hedging long-term transaction exposure? a. leading and lagging b. long-term forward contract c. currency swap d. parallel loan e. all of the above are techniques 7. Bulldog Corporation has payables of €125,000, 90 days from now. There is a call option available with an exercise price of $1.05. Assume that the option premium is $0.03 per unit and that Bulldog buys this option. Bulldog does not have to exercise its call option if it can obtain pounds at a lower spot rate. Bulldog expects the spot rate of the euro to be $1.03 when the payables are due. What is the total amount Bulldog will pay for the €125,000, including the option premium? a. $135,000 b. $132,500 c. $263,750 d. none of the above 8. A company should hedge every expected transaction. a. True b. False 9. A company can hedge transaction exposure by buying call options or selling put options. a. True b. False 10. To hedge receivables with a futures contract, the company would need to sell currency futures representing the currency and amount related to the receivable. a. True b. False 11. Overhedging is hedging a larger amount in a currency than the actual transaction amount. A solution to avoid overhedging is to hedge only the minimum known amount in the future transaction. a. True b. False 12. A Japanese company that expects the yen to appreciate would want to lead payables that are in U.S. dollars. a. True b. False 13. An MNC reduces its transaction exposure to exchange rate movements by diversifying its business among numerous countries that do not have highly correlated currencies. This method of reducing exposure is called cross-hedging. a. True b. False
14. Selective hedging occurs when a company chooses to hedge only in those situations in which it expect the currency to move in a direction that will make hedging feasible. a. True b. False 15. A currency swap involves an exchange of currencies between two parties with a promise to reexchange currencies at a specified exchange rate and future date. a. True b. False
12 Managing Economic Exposure and Translation Exposure 1. A U.S.-based MNC obtains 60% of its revenue in euro-denominated sales. All of the MNC's expenses are in U.S. dollars. How can this MNC reduce its economic exposure? a. build a production facility in Germany b. borrow eurodollars in France c. denominate its sales in dollars instead of euros d. a and c e. all of the above 2. A U.S. importer obtains 60% of his imports from Japan. All of the importer's sales are in U.S. dollars. How can this importer reduce his economic exposure? a. sell more product in Europe b. increase sales in the U.S. c. borrow Japanese yen to finance operations d. both a and c e. none of the above 3. A U.S.-based MNC obtains 60% of its financing in euros. All of the MNC's sales are in U.S. dollars. How will a depreciation of the euro affect the MNC's dollar earnings? a. increase earnings b. decrease earnings c. no effect d. cannot be determined 4. A U.S.-based MNC expects earnings of £200,000 this year at a British subsidiary, which it plans to reinvest in the subsidiary. If the firm is committed to hedging translation exposure, how should it hedge its pound translation exposure if it expects a depreciation of the pound through the year? a. buy pound futures contracts b. buy a forward contract c. either a or b d. none of the above 5. Which of the following are limitations in hedging translation exposure? a. inaccurate earnings forecasts b. accounting distortions c. increased transaction exposure d. both b and c e. all of the above 6. When deciding how to restructure operations to reduce economic exposure, which of the following questions should an MNC not consider? a. Should the firm attempt to increase or reduce sales in new or existing foreign markets? b. Should the firm increase or reduce its dependency on foreign suppliers? c. Should the firm establish or eliminate production facilities in foreign markets? d. Should the firm increase or reduce its level of debt denominated in foreign currencies? e. The MNC should consider all of the above questions when deciding how to restructure.
7. Some revenue or expenses may be more exchange rate sensitive than others. a. True b. False 8. When a firm has exposure in a foreign currency that has a greater impact on cash outflows than cash inflows, the firm should increase foreign supply orders. a. True b. False 9. Since economic exposure is not considered "real" exposure, there are good arguments against hedging this exposure. a. True b. False 10. A U.S. MNC expects earnings of £200,000 at a British subsidiary, which it expects to reinvest in the subsidiary. A good translation exposure strategy if the MNC fears an appreciation of the pound through the year is to sell the pounds forward. a. True b. False 11. Some MNCs do not consider hedging translation exposure because they do not perceive this exposure to be relevant. a. True b. False
13 Direct Foreign Investment
1. Establishing subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based identifies which cost-related motive of direct foreign investment (DFI)? a. the use of foreign technology b. the exploitation of monopolistic advantages c. international diversification d. entering profitable markets e. none of the above 2. Establishing a subsidiary in a new market that results in increased production and possibly greater production efficiency identifies which benefit of direct foreign investment (DFI)? a. the entrance into markets in which superior profits are possible b. international diversification c. the exploitation of monopolistic advantages d. full benefits from economies of scale e. none of the above 3. Establishing a subsidiary in a market to sell a product in which competitors are unable to produce the identical product identifies which benefit of direct foreign investment? a. the entrance into profitable markets b. international diversification c. the exploitation of monopolistic advantages d. full benefits from economies of scale e. none of the above 4. If the U.S. places restrictions on the import of automobiles, what would likely happen to direct foreign investment (DFI) by foreign automobile producers in the U.S.? a. it would increase b. it would decrease c. it would remain unchanged d. any of the above might happen 5. A U.S.-based MNC invests 60% of its funds in U.S. projects with an expected annual return of 20% and a standard deviation of 10%. This MNC invests 40% of its funds in European projects with an expected annual return of 30% and a standard deviation of 15%. If the correlation coefficient is 0.5, what is the portfolio variance? a. 10.39% b. 1.08% c. 1.88% d. 13.69% e. none of the above 6. A U.S.-based MNC invests 60% of its funds in U.S. projects with an expected annual return of 20% and a standard deviation of 10%. This MNC invests 40% of its funds in foreign projects with an expected annual return of 30% and a standard deviation of 15%. If the correlation coefficient is 0.5, what is the portfolio return?
a. 25% b. 26% c. 22% d. 24% e. none of the above 7. Some governments allow international acquisitions, but impose special requirements on MNCs. Which of the following are examples of these requirements? a. install pollution control equipment b. require MNCs to export the products they produce c. retain all employees of the target firm d. both b and c e. all of the above 8. Corporations are increasingly establishing or acquiring overseas plants to learn about the technology of foreign countries. a. True b. False 9. The conversion of European currencies to the euro in 1999 for business transactions and in 2002 for all transactions reduced the influence of exchange rates on the selection of a European country for direct foreign investment. a. True b. False 10. The Asian crisis in 1997 created potentially profitable opportunities for direct foreign investment in many of the affected countries by U.S. and European MNCs . a. True b. False 11. When examining the frontier of efficient project portfolios, the term "efficient" refers to a maximum return for a given expected risk. a. True b. False 12. MNCs can probably achieve the most desirable risk-return characteristics from the project portfolios if they sufficiently diversify among products but not among geographic markets. a. True b. False 13. Reacting to trade restrictions is a cost-related motive for direct foreign investment (DFI). a. True b. False 14. An implicit barrier to DFI in some countries is the "red tape" involved, such as procedure and documentation requirements. a. True b. False
14 Multinational Capital Budgeting
1. Suppose the home tax rate is high for the parent company and the host country taxes imposed on the subsidiary are low. Which of the following statements is true? a. Capital budgeting projects would look better from the parent's point of view than the subsidiary's point of view. b. Capital budgeting projects would look worse from the parent's point of view than the subsidiary's point of view. c. Capital budgeting projects would look worse from the subsidiary's point of view than the parent's point of view. d. both a and c e. none of the above
2. Suppose the parent company obtains excessive remittances on the subsidiary by charging it high administrative fees. Which of the following statements is probably true? a. Capital budgeting projects would look better from the parent's point of view than the subsidiary's point of view. b. Capital budgeting projects would look worse from the parent's point of view than the subsidiary's point of view. c. Capital budgeting projects would look worse from the subsidiary's point of view than the parent's point of view. d. Both a and c. e. None of the above.
3. Suppose a parent company projects the euro to appreciate over the life of a capital budgeting project for its European subsidiary. Which of the following statements is probably true? a. Capital budgeting projects would look better from the parent's point of view than the subsidiary's point of view. b. Capital budgeting projects would look worse from the parent's point of view than the subsidiary's point of view. c. Capital budgeting projects would look worse from the subsidiary's point of view than the parent's point of view. d. Both a and c. e. None of the above.
4. Which of the following would have a positive affect on the cash flows received by a parent company from a foreign subsidiary? a. blocked funds b. an increase in the relative inflation rate of the host country c. host government incentives d. both b and c e. all of the above
5. Which of the following would have a negative affect on the cash flows of a foreign subsidiary? a. blocked funds b. a currency depreciation of the host currency c. host government incentives d. all of the above e. none of the above 6. When adjusting project assessment for risk, which of the following is used to generate a probability distribution of net present value (NPV) based on a range of possible values for one or more input variables? a. risk-adjusted discount rate b. sensitivity analysis c. simulation d. both b and c e. none of the above 7. A parent company wishes to compute the net present value (NPV) of a capital budgeting project for its German subsidiary. The initial investment by the parent is $5,000,000. The project will last three years. Estimated remittances to the parent by the German subsidiary are expected to be €2,000,000, €3,000,000, and €2,000,000, in years 1, 2, and 3, respectively. The current spot rate of the euro is $1.03. Exchange rates for the euro are expected to be $1.05, $1.07, and $1.01 in years 1, 2, and 3, respectively. An appropriate discount rate for this project is 12%. What is the NPV of this project? Should the project be undertaken? a. NPV = $2,000,000; undertake project b. NPV = $871,788; undertake project c. NPV = $721,788; undertake project d. NPV = $871,788; do not undertake project e. NPV = $721,788; do not undertake project
8. A withholding tax affects the cash flows of the parent and the subsidiary. a. True b. False 9. The parent's perspective should always be used to decide whether a capital budgeting project should be undertaken. a. True b. False 10. Once the relevant cash flows for a project have been estimated, they should be discounted at the MNC's cost of capital. a. True b. False
11. The net present value (NPV) from the parent's perspective is based on a comparison of the present value of the cash flows received by the parent to the initial outlay by the parent. a. True b. False 12. From the viewpoint of the parent, the joint impact of inflation and exchange rate fluctuations on a subsidiary's net cash flows may produce a partially offsetting effect. a. True b. False 13. Multinational capital budgeting problems should not include debt payments in the measurement of cash flows, because all financing costs are captured by the discount rate. a. True b. False
15 Multinational Restructuring
1. Which of the following is a viable choice for handling the managerial talent of a target following an acquisition? a. allow the target to be managed as it was before b. downsize the target firm c. maintain the existing employees but restructure the operations d. b and c only e. all of the above 2. Which of the following is not a country-specific factor when estimating the cash flows that will be provided by the foreign target to the parent following an acquisition? a. target's previous cash flows b. target's local economic conditions c. target's currency conditions d. target's industry's conditions e. all of the above are country-specific factors
3. Target A is receptive to an acquisition, has favorable local economic and industry conditions, acceptable political and currency conditions, high prevailing stock prices, and reasonable tax laws. Target B is not receptive to an acquisition, has favorable local economic and industry conditions, acceptable political and currency conditions, low prevailing stock prices, and reasonable tax laws. Target C is receptive to an acquisition, has unfavorable local economic and industry conditions, acceptable political and currency conditions, low prevailing stock prices, and reasonable tax laws. Which target(s) should the firm pursue for acquisition? a. target A only b. target B only c. target C only d. both a and c e. none of the above 4. Which of the following is not a reason for different valuations of a specific target among MNCs? a. estimated cash flows of the target b. exchange rate effects on remitted funds c. the required rate of return d. all of the above are reasons for different valuations 5. A joint venture or licensing agreement represents which type of multinational restructuring? a. international acquisitions of privatized businesses b. international partial acquisition c. international alliance d. international divestiture e. none of the above
6. A call option on real assets represents: a. a proposed project that contains an option of divesting part or all of the project b. a proposed project that contains an option of pursuing an additional venture c. a foreign government guarantee that a target can be acquired d. none of the above 7. European firms in particular have been attractive targets for U.S. firms attempting to establish a presence in Europe. This is because of to the more uniform regulations across European countries and the euro, among other factors. a. True b. False 8. In general, the Asian crisis has lowered the initial outlay for acquiring Asian firms. However, the lower economic growth and weak currencies in the region may not justify the lower initial outlay. a. True b. False 9. Adoption of the euro simplifies the analysis for an MNC that is comparing possible target firms in those participating countries. a. True b. False 10. An MNC that plans to acquire a target would prefer to time its bid for the target when the local stock market prices are generally low. a. True b. False 11. When an MNC considers a partial acquisition of a firm, its valuation of that firm can be conducted in a similar manner as when it purchases the entire firm, especially when it plans to purchase a substantial amount of shares so that it could control the firm. a. True b. False 12. A put option on real assets represents a proposed project that contains an option of divesting part or all of the project. a. True b. False
16 Country Risk Analysis
1. Which of the following is not a form of political risk? a. attitude of consumers in the host country b. attitude of host government c. blockage of fund transfers d. bureaucracy e. all of the above are forms of political risk 2. What type of country risk assessment includes the historical stability of the host government? a. macropolitical risk b. macrofinancial risk c. micropolitical risk d. microfinancial risk e. none of the above 3. What type of country risk assessment is represented by the sensitivity of the firm's business to inflation trends? a. macropolitical risk b. macrofinancial risk c. micropolitical risk d. microfinancial risk e. none of the above 4. The technique to assess country risk that involves the collection of independent opinions on country risk, without group discussion by the assessors who provide these opinions, is called: a. inspection visits b. discriminant analysis c. regression analysis d. delphi e. none of the above 5. A firm is attempting to quantify country risk. It gives 40% weight to financial factors and 60% to political factors. Political factor A has a 40% weight and a rating of 3; political factor B has a 40% weight and a rating of 4; and political factor C has a 20% weight and a rating of 2. Financial factor A has a 30% weight and a rating of 5, and financial factor B has a 70% weight and a rating of 1. What is the overall country risk rating? a. 2.80 b. 2.70 c. 2.60 d. 3.00 e. none of the above 6. Which of the following is not a method of reducing exposure to host government takeovers? a. hire local labor b. borrow local funds c. use a long-term horizon
d. purchase insurance e. all of the above will reduce exposure 7. Currency incompatibility occurs when governments do not allow the home currency to be exchanged into other currencies. a. True b. False 8. Exchange rates, foreign interest rates, and foreign inflation rates are financial risk factors that should be considered when assessing country risk. a. True b. False 9. Regression analysis may be used to assess country risk, since it can measure the sensitivity of one variable to other variables. a. True b. False 10. The foreign investment risk matrix (FIRM) quantifies an overall country risk rating for individual countries. a. True b. False 11. Industrialized countries such as Germany and Japan are assigned a higher political risk rating than economic risk rating. a. True b. False 12. Many home countries of MNCs have investment guarantee programs that insure to some extent the risks of expropriation, wars, or currency blockage. a. True b. False
17 Multinational Cost of Capital and Capital Structure
1. The cost of capital is typically different for MNCs than for domestic firms. According to the author, which of the following does not result in a higher cost of capital for MNCs? a. international diversification b. exposure to exchange rate risk c. exposure to country risk d. all of the above significantly affect the probability of bankruptcy 2. The cost of debt varies across countries for several reasons. Which of the following can cause a difference in the debt risk premiums across countries? a. demographics b. monetary policies c. tax laws d. government willingness to rescue failing firms e. none of the above affect the risk premium 3. Which of the following can affect the cost of equity? a. price/earnings multiple b. opportunity cost c. investment opportunities d. all of the above e. none of the above 4. Which of the following corporate characteristics will lead to more equity financing over debt financing in the capital structure of an MNC? a. stable cash flows b. parent guarantees on subsidiary debt c. lower credit risk d. agency problems e. none of the above 5. If markets are segmented and the cost of funds in the subsidiary's country is excessive, which of the following country characteristics will lead to more equity financing over debt financing in the capital structure of the MNC? a. high local interest rates b. a depreciating local currency c. a threat by the host country to block funds d. all of the above e. none of the above 6. Which of the following equations is a valid representation of the CAPM? a. Kd = Rf + B(Rm - Rf) b. Ke = (Rf + B)(Rm - Rf) c. ke = Rf + B(Rm - Rf) d. ke = Rf + BRm - Rf e. none of the above
7. Under the capital asset pricing model (CAPM), we can say with certainty that an MNC will have a lower cost of capital than a purely domestic firm in the same industry . a. True b. False 8. German and Japanese firms can have a higher degree of financial leverage than U.S. firms. However, the Japanese and German firms do not necessarily have a higher associated risk premium associated with their cost of debt. a. True b. False 9. One method of accounting for a foreign project's risk is to adjust the firm's weighted average cost of capital. If the project has a risk higher than the firm's risk, then the weighted average cost of capital should be reduced. a. True b. False 10. Investors in some countries are restricted by their governments to invest in local markets only. Even when investors are allowed to invest in other countries, they may not have complete information about stocks of companies outside their home countries. This represents an implicit barrier to cross-border investing. a. True b. False 11. Increased debt financing by the subsidiary will always be offset by reduced debt financing by the parent to keep the "global" target capital structure. a. True b. False 12. One appropriate way for a parent to offset one subsidiary's low degree of financial leverage is for the parent to have another subsidiary issue more debt in some other host country. a. True b. False 13. It can be argued that the adoption of the euro increased the cost of equity capital in Europe by reducing market imperfections. a. True b. False
18 Long-Term Financing
1. When making long-term financing decisions, an MNC would prefer to borrow in a country with a currency that is expected to: a. remain stable b. appreciate currency c. depreciate currency d. none of the above 2. Suppose a U.S.-based MNC borrowed £10,000 at 10% for three years. The current spot rate is $1.50. The MNC expects the pound's spot rate to be $1.55 at the end of year one, $1.60 at the end of year 2, and $1.55 at the end of year 3. What is the MNC's annual cost of financing if it has no existing business in the United Kingdom and has to convert dollars to meet the pound obligation? a. 11.44% b. 10% c. 8.59% d. 13.56% e. none of the above 3. A U.S.-based MNC borrowed €15,000 at 8% for three years. The current spot rate is $1.10. The MNC expects the euro's spot rate to be $1.09 at the end of year one, $1.08 at the end of year 2, and $1.05 at the end of year 3. What is the MNC's annual cost of financing? a. 4.77% b. 10.11% c. 6.39% d. 2.36% e. none of the above 4. Which of the following could be used to hedge a five-year loan denominated in euros? a. futures contracts b. forward contracts c. call option contracts d. all of the above e. none of the above 5. A bond that is issued in several currencies is a: a. Special Drawing Right (SDR) b. currency cocktail bond c. shogun bond d. both a and b e. all of the above
6. MNC A can borrow fixed rate at 8% or variable rate at LIBOR +1%. MNC B can borrow fixed rate at 9.5% fixed or variable rate at LIBOR +1.5%. What type of swap should these companies use given this information? a. interest rate swap b. parallel loan c. currency swap d. all of the above e. none of the above 7. Eurobonds are often issued with a floating coupon rate tied to LIBOR. a. True b. False 8. Issuing bonds in a foreign currency in the same volume as the company's revenues in that foreign currency will completely eliminate the exchange rate risk of the bonds. a. True b. False 9. The creation of the euro has limited the use of currency cocktail bonds in Europe. a. True b. False 10. A "back-to-back" loan represents simultaneous loans provided by two parties with an agreement to repay at a specified point in the future. a. True b. False 11. The yield curve of a country is a good tool to determine at which maturity an MNC operating in that country should borrow. a. True b. False 12. Simulation can be used to incorporate possible outcomes for the exchange rate, but not for the coupon rate over the life of the loan. a. True b. False
19 Financing International Trade
1. Which of the following is not a payment method for international trade? a. prepayment b. a bill of exchange c. consignment d. factoring e. open account 2. Assume that goods are available to an importer before payment, that payment is made by the importer after the buyer sells the goods, and that the risk to the importer is negligible. Which type of payment method for international trade is likely being used in this example? a. sight draft b. time draft c. consignment d. letter of credit e. none of the above 3. A type of financing where the exporter sells the accounts receivable without recourse is called: a. forfaiting. b. factoring. c. banker's acceptances. d. accounts receivables financing. e. none of the above. 4. A type of financing where a bill of exchange, or time draft, is created is called: a. forfaiting. b. factoring. c. a banker's acceptance. d. a and c. e. all of the above. 5. Which of the following is not offered by the Export-Import Bank of the U.S. (Ex-Imbank)? a. Working Capital Guarantee Program b. Financial Institution Buyer Credit Policy c. Bank Bill of Lading Policy d. a and c e. none of the above are offered by the Ex-Imbank 6. An Ex-Imbank insurance policy for multiple exporters that is issued to an administrator is called a(n): a. umbrella policy. b. multi-buyer policy. c. single-buyer policy. d. small business policy. e. none of the above.
7. A bill of lading serves as a receipt for shipment and a summary of freight charges; most importantly, it conveys title to the merchandise. a. True b. False 8. Forfaiting refers to the purchase of financial obligations, such as bills of exchange or promissory notes, with recourse to the original holder. a. True b. False 9. A clearing account arrangement denotes the exchange of goods between two parties under two distinct contracts expressed in monetary terms. a. True b. False 10. Ex-Imbank's lending rates are generally slightly above market rates because they are insured. a. True b. False 11. The Domestic International Sales Corporation (DISC) is the primary tax vehicle to promote U.S. exports. a. True b. False 12. Private Export Funding Corporation (PEFCO) loans are typically used to finance large projects and have very long terms (5 to 25 years). a. True b. False
20 Short-Term Financing
1. Assume an MNC borrows 1,000,000 Swiss francs for one year at 9%. The spot rate for the Swiss franc was $0.80 when it took out the loan and $0.75 when it was paid off after the year. What was the MNC's approximate effective financing rate? a. 9% b. 15.81% c. 2.19% d. 1.73% e. none of the above 2. Which of the following is not used directly by MNCs as a criterion for deciding whether to borrow in a foreign currency? a. interest rate parity b. the forward rate as a forecast c. purchasing power parity d. exchange rate forecasts e. all of the above are used directly as criteria 3. Assume the forward rate is used to forecast the future spot rate of the euro. Further assume that an MNC is financing with euros and does not cover the position. Interest rate parity holds. The effective financing rate will be _______ than the domestic rate if the future spot rate of the euro is ________ than the forward rate. a. greater; less b. less; greater c. less; less d. a and b are correct e. none of the above 4. An MNC can borrow in the U.S. at 10%. Furthermore, the MNC can borrow funds in Germany at 8%. What is the expected exchange rate change of the euro at which this MNC would be indifferent between borrowing in U.S. dollars or in euros? a. 1.82% depreciation b. 1.82% appreciation c. 1.85% depreciation d. 1.85% appreciation e. none of the above 5. Assume the interest rate on British pound loans is 7% and our company expects the pound to depreciate by 3% over the next year. What would be the expected effective financing rate? a. 10.21% b. 7.00% c. 10.00% d. 3.79% e. none of the above
6. Euronotes are unsecured debt securities based on LIBOR with typical maturities of one, three, or six months. a. True b. False 7. A negative effective financing rate implies the U.S. firm actually paid fewer dollars in total loan payments than the number of dollars borrowed. a. True b. False 8. If an MNC has an expected effective financing rate of 10% from borrowing in yen, and an interest rate of 8% on a Japanese loan, a company would expect the Japanese yen to depreciate. a. True b. False 9. Short-term financing decisions affect the value of the MNC by influencing the required rate of return (k). a. True b. False 10. Financing with a portfolio of currencies would not be much more effective than financing with a single currency if the currencies in the portfolio are highly correlated. a. True b. False 11. An MNC may consider financing in a foreign currency to offset a net payables position in that foreign currency. a. True b. False
21 International Cash Management 1. Which of the following is not a technique to optimize cash flows? a. accelerating cash inflows b. maximizing currency conversion costs c. managing blocked funds d. managing intersubsidiary cash transfers e. all of the above are techniques to optimize cash flows 2. Which of the following is not a complication an MNC may encounter in optimizing cash flows? a. company-related characteristics b. managing intersubsidiary cash transfers c. government restrictions d. characteristics of banking systems e. all of the above are techniques to optimize cash flows 3. Assume a company invested $100,000 in Canada for one year at 10%. The spot rate of the Canadian dollar was $0.65 when the investment was made and $0.70 when the investment matured. What was the approximate effective yield on this investment? a. 10.00% b. 2.14% c. 20.00% d. 18.46% e. none of the above 4. If covered interest arbitrage is feasible for investors residing in the home country, then which of the following is true? a. Interest rate parity exists. b. Interest rate parity exists and the forward rate is an accurate forecast of the future spot rate. c. Interest rate parity exists and the forward rate is expected to overestimate the future spot rate. d. Interest rate parity does not exist and the forward premium (discount) exceeds (is less than) the interest rate differential. e. Interest rate parity does not exist and the forward premium (discount) is less than (exceeds) the interest rate differential. 5. An MNC has an investment in Greece at an interest rate of 8%. The interest rate in the U.S. is 6%. What expected change in the euro over the investment period would make the MNC indifferent between investing in Greece and investing in the U.S.? a. 1.89% appreciation b. 1.89% depreciation c. 1.85% appreciation d. 1.85% depreciation e. none of the above
