Question 1

The international Fisher effect (IFE) suggests that:

Answer

a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.

a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.

a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.

a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

Question 2

Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries?

Answer

absolute form of PPP.

relative form of PPP.

international Fisher effect (IFE).

interest rate parity (IRP)

Question 3

Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?

Answer

If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken.

If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will weaken.

If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will strengthen.

If Country B’s inflation rate exceeds Country A’s inflation rate, Country A’s currency will weaken.

Question 4

If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:

Answer

the value of the euro would often appreciate against the dollar.

the value of the euro would often depreciate against the dollar.

the value of the euro would remain constant most of the time.

the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.

Question 5

If today’s exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:

Answer

weak-form efficient.

semistrong-form efficient.

strong-form efficient.

semiweak-form efficient.

Question 6

Sensitivity analysis allows for all of the following except:

Answer

accountability for uncertainty.

focus on a single point estimate of future exchange rates.

development of a range of possible future values.

consideration of alternative scenarios.

Question 7

If a foreign currency is expected to ____ substantially against the parent’s currency, the parent may prefer to ____ the remittance of subsidiary earnings.

Answer

weaken; delay

weaken; expedite

appreciate; expedite

appreciate; delay

Question 8

Which of the following is not one of the major reasons for MNCs to forecast exchange rates?

Answer

to decide in which foreign market to invest the excess cash.

to decide where to borrow at the lowest cost.

to determine whether to require the subsidiary to remit the funds or invest them locally.

to speculate on the exchange rate movements.

Question 9

Which of the following is not a method of forecasting exchange rate volatility?

Answer

Using the absolute forecast error as a percentage of the realized value to improve your forecast.

Using the volatility of historical exchange rate movements as a forecast for the future.

Using a time series of volatility patterns in previous periods.

Deriving the exchange rate’s implied standard deviation from the currency option pricing model.

Question 10

The maximum one-day loss computed for the value-at-risk (VAR) method does not depend on:

Answer

the expected percentage change in the currency for the next day.

the standard deviation of the daily percentage changes in the currency over a previous period.

the current level of interest rates.

the confidence level used.

Question 11

Which of the following is not a form of exposure to exchange rate fluctuations?

Answer

transaction exposure.

credit exposure.

economic exposure.

translation exposure.

Question 12

If a U.S. firm’s cost of goods sold exposure is much greater than its sales exposure in Switzerland, there is a ____ overall impact of the Swiss franc’s depreciation against the dollar on ____.

Answer

positive; interest expenses

positive; gross profit

negative; gross profit

negative; interest expenses

Question 13

U.S. based Majestic Co. sells products to U.S. consumers and purchases all of materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:

Answer

economic exposure.

translation exposure.

transaction exposure.

no exposure to exchange rate fluctuations.

Question 14

In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:

Answer

highly positive.

highly negative.

zero.

netrual.

Question 15

The ____ does not represent an obligation.

Answer

long-term forward contract

currency swap

parallel loan

currency option

Question 16

A ____ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date.

Answer

long-term forward contract

currency option contract

parallel loan

money market hedge

Question 17

A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.

Answer

the foreign currency; U.S.

the foreign currency; foreign country

dollars; foreign country

dollars; U.S.

Question 18

If a firm does not have foreign subsidiaries, it is not subject to ____.

Answer

transaction exposure

economic exposure

transformation exposure.

translation exposure

Question 19

If a U.S. firm has much more revenue than expenses denominated in euros, the firm will likely ____ if the euro ____.

Answer

benefit; weakens

be unaffected; weakens

be unaffected; strengthens

benefit; strengthens

Question 20

An MNC expects to sell fixed assets it utilizes in Europe in the distant future. In order to hedge the sale of these assets in the distant future, the MNC could create a(n) ____ that ____ the expected value of the assets in the future.

Answer

asset; matches

asset; exceeds

liability; matches

liability; is less than

Question 21

Which of the following is an example of economic exposure but not an example of transaction exposure?

Answer

An increase in the dollar’s value hurts a U.S. firm’s domestic sales because foreign competitors are able to increase their sales to U.S. customers.

An increase in the pound’s value increases the U.S. firm’s cost of British pound payables.

A decrease in the peso’s value decreases a U.S. firm’s dollar value of peso receivables.

A decrease in the Swiss franc’s value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.

Question 22

Even if production costs are higher in a foreign country, a U.S. firm may establish a manufacturing plant in the foreign country now if:

Answer

the host government of that country eliminates all quotas.

the host government of that country reduces all quotas.

the host government of that country increases all quotas.

the host government of that country eliminates all tariffs.

Question 23

Assume that the government of Krusho requires bribes to approve certain projects. MNCs that attempt to do business in Krusho must deal with:

Answer

protective barriers.

“red tape” barriers.

ethical differences.

regulatory barriers.

Question 24

Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound.

Answer

increase; postpone remitting earnings until the pound strengthens

decrease; postpone remitting earnings until the pound strengthens

decrease; remit earnings immediately before the pound strengthens

increase; remit earnings immediately before the pound strengthens

Question 25

When a firm perceives that a foreign currency is ____, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively ____.

Answer

overvalued; high

overvalued; low

undervalued; high

undervalued; low

Question 26

To enter markets where superior profits are possible, an MNC should:

Answer

acquire a competitor that has controlled its local market.

establish a subsidiary or acquire a competitor in a new market.

establish a subsidiary in a market where tougher trade restrictions will adversely affect the firm’s export volume.

establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.

Question 27

A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency ____ in year 1 and ____ in years 2 through 5.

Answer

depreciates; depreciates

appreciates; appreciates

depreciates; appreciates

appreciates; depreciates

Question 28

When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis.

Answer

should be; should be

should definitely not be; should definitely not be

should definitely not be; should be

should be; should definitely not be

Question 29

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ____ in the host country and there are ____ investment opportunities in the host country.

Answer

very high; limited

very low; limited

very low; numerous

very high; numerous

Question 30

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.

Answer

appreciates; decreases

depreciates; is unaffected

appreciates; is unaffected

depreciates; decreases

                FIN 535 Week 11 Final Exam Part 2 

Question 1

A previously undertaken project in a foreign country may no longer be feasible because:

Answer

interest rates have declined.

the MNC’s cost of capital has decreased.

the host government has increased its tax rates substantially.

exchange rate projections changed from a depreciation to an appreciation of the foreign currency.

Question 2

Which of the following types of international corporate control transaction is probably the most difficult to value by an MNC?

Answer

international acquisition.

newly privatized foreign business.

international alliance.

international divestiture.

Question 3

If an MNC targets a successful foreign company with plans to continue the target’s local business in a more efficient manner, the risk of the business will be relatively ____, and therefore the MNC’s required return from acquiring the target will be relatively ____.

Answer

high; high

high; low

low; high

low; low

Question 4

Which of the following is not an advantage of international acquisitions over the establishment of a new subsidiary?

Answer

The firm can immediately expand its international business.

The firm benefits from existing customer relationships.

International acquisitions are generally cheaper than the establishment of a new subsidiary.

An international acquisition typically generates quicker and larger cash flows than the establishment of a new subsidiary.

Question 5

When determining whether a particular proposed project in a foreign country is feasible:

Answer

a country risk rating can adequately substitute for a capital budgeting analysis.

country risk analysis should be incorporated within the capital budgeting analysis.

the effect of country risk on sales revenue is more important than the effect on cash flows.

the project with the highest country risk rating (lowest country risk) should be accepted.

Question 6

____ is not a political risk factor.

Answer

High interest rates in a foreign country

Currency inconvertibility

War

Corruption

Question 7

To make an MNC’s operations coincide with its own goal, a host government could do all of the following, except:

Answer

require the use of local employees for managerial positions.

require social facilities.

subsidize the MNC.

require environmental controls.

Question 8

An MNC considers direct foreign investment in Germany. It is mainly concerned with the subsidiary’s ability to generate sufficient sales there. The country risk characteristic that would best address this concern is:

Answer

the host government’s tax rates charged on remitted earnings.

the possibility of blocked funds.

the state of the economy in Germany.

the possibility of a withholding tax imposed by the German government.

Question 9

An argument for MNCs to have a debt-intensive capital structure is:

Answer

they are well diversified.

they can reduce the chance of bankruptcy.

it spreads the shareholder base.

it forces subsidiaries to pay dividends to shareholders.

Question 10

One argument for why subsidiaries should be wholly-owned by the parent is that the potential conflict of interests between the MNC’s ____ is avoided.

Answer

managers and shareholders

majority shareholders and minority shareholders

existing creditors

managers and creditors

Question 11

Other things being equal, countries with relatively ____ populations and ____ inflation are more likely to have a low cost of capital.

Answer

young; high

old; high

old; low

young; low

Question 12

In general, MNCs probably prefer to use ____ foreign debt when their foreign subsidiaries are subject to potentially ____ local currencies.

Answer

more; strong

more; weak

less; strong

less; weak

Question 13

Other things being equal, the financial leverage of MNCs will be higher if the governments of their home countries are ____ likely to rescue them (in the event of failure), and if their home countries are ____ likely to experience a recession.

Answer

more; more

less; more

less; less

more; less

Question 14

The ____ for a given country represents the annualized yield offered on debt for various maturities.

Answer

LIBOR

yield curve

parallel loan

interest rate swap

Question 15

In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.

Answer

callable

putable

amortizing

zero-coupon

Question 16

A currency swap between two firms of different countries enables the exchange of ____ for ____ at periodic intervals.

Answer

stock; one currency

stock; a portfolio of foreign currencies

one currency; stock options

one currency; another currency

Question 17

A ____ gives its owner the right to enter into a swap.

Answer

basis swap

swaption

callable swap

putable swap

Question 18

Under a(n) ____ arrangement, the exporter ships the goods to the importer while still retaining actual title to the merchandise.

Answer

draft

consignment

prepayment

open account

Question 19

An exchange of goods between two parties under two distinct contracts expressed in monetary terms is:

Answer

compensation.

counterpurchase.

factoring.

accounts receivable financing.

Question 20

Consider an importer that issues a promissory note to pay for the imported capital goods over a period of five years. The notes are extended to an exporter who sells them at a discount to a bank. This reflects:

Answer

accounts receivable financing.

forfaiting.

factoring.

a letter of credit.

Question 21

Which of the following is not a program of the Export-Import Bank of the U.S.?

Answer

working capital guarantee program.

project finance loan program.

direct loan program.

the foreign sales corporation program.

Question 22

A ____ provides a summary of freight charges and conveys title to the merchandise.

Answer

letter of credit

banker’s acceptance

bill of lading

bill of exchange

Question 23

____ typically have maturities of less than one year.

Answer

Eurobonds

Euro-commercial paper

Euronotes

ADRs

Question 24

MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has ____ in euros, it could borrow ____, resulting in an offsetting effect.

Answer

payables; euros

receivables; euros

payables; dollars

receivables; dollars

Question 25

Assume the U.S. one-year interest rate is 9%, while the Chilean one-year interest rate is 13%. If the Chilean peso ____ by ____%, a U.S.-based MNC would incur the same financing cost in dollars versus Chilean pesos over a one year period.

Answer

depreciates; 3.54

appreciates; 3.54

depreciates; 3.67

appreciates; 3.67

Question 26

A firm without any exposure to foreign exchange rates would likely increase this exposure the most by:

Answer

borrowing domestically.

borrowing a portfolio of foreign currencies that are not highly correlated.

borrowing a portfolio of foreign currencies that are highly correlated.

borrowing two foreign currencies that are negatively correlated.

Question 27

To ____, MNCs can use preauthorized payments.

Answer

accelerate cash inflows

minimize currency conversion costs

manage blocked funds

manage intersubsidiary cash transfers

Question 28

The effective yield of investing in a foreign currency depends on both the ____ and the ____ of the foreign currency.

Answer

inflation rate; exchange rate movements

income level; interest rates

interest rates; exchange rate movements

interest rates; amount invested

Question 29

According to the international Fisher effect:

Answer

exchange rates adjust to compensate for income differentials between countries.

interest rates adjust to compensate for income differentials between countries.

exchange rates adjust to compensate for interest rate differentials between countries.

exchange rates adjust to compensate for risk differentials between countries.

Question 30

____ may complicate cash flow optimization.

Answer

The use of a zero-balance account

Government restrictions

Leading and lagging

The use of the balance-sheet approach