Chapter 1, Introduction
CHAPTER 1
Introduction
EASY (definitional)
1.1 Historically, the primary motive for U.S. multinationals to produce abroad has been
to
a) lower costs
b) respond more quickly to the marketplace
c) avoid trade barriers
d) gain tax benefits
Ans: b
Section: evolution of multinational
Level: Easy
1.2 The primary objective of the multinational corporation is to
a.) maximize shareholder wealth
b) maximize world production
c) minimize debt
d) minimize the cost of doing business globally
Ans: a
Section: Multinational Financial Management: Theory and Practice
Level: Easy
1.3 ____________ is defined as the purchase of assets or commodities on one
market for immediate resale on another in order to profit form a price discrepancy.
a) internationalization
b) arbitrage
c) financing
d) total risk
Ans: b
Section: evolution of multinational
Level: Easy
1.4 The value of good financial management is ___________ in the global markets
because of the much greater probability of market imperfections and multiple tax rates.
a) minimized
b) neutralized
c) enhanced
d) arbitraged away
Ans: c
Section: role of the financial executive
Chapter 1, Introduction
Level: Easy
1.5 When a firm operates globally it offers advantages such as
a) greater political power at home
b) bless taxes on its profits
c) greater negotiating power with foreign minority groups
d) greater negotiating power with labor unions
Ans: d
Section: The rise of the MNC
Level: Easy
1.6 The prime transmitter of global competitive forces is the
a) public utility firm
b) financial management experience of the U.S. markets
c) the multinational corporation
d) the Federal Reserve System of the U.S.
Ans: c
Section: rise of the multinational
Level: Easy
1.7 ___________ were the earliest multinationals.
a) raw-material seekers
b) market seekers
c) cost minimizers
d) oil companies
Ans: a
Section: raw material seekers
Level: Easy
1.8 The ___________ are the archetype of the modern multinational firm that goes
overseas to produce and sell in foreign markets.
a) cost minimizers
b) market seekers
c) raw-material seekers
d) whaling companies
Ans: b
Section: market seekers
Level: Easy
1.9 ___________ are a recent category of multinationals that seek out and invest in lower
cost production sites overseas.
a) Cost minimizers
Chapter 1, Introduction
b) Market seekers
c) Raw-material seekers
d) High tech firms
Ans: a
Section: cost minimizers
Level: Easy
1.10 Which one of the following is a consequence of increased global competition?
a) the creation of new steel plants in the old industrial countries
b) the end of free-trade agreements between governments of the world
c) increased comfort level of trade unions with the consequences
d) increased anxiety among workers in the old industrial countries
Ans: d
Section: Consequences of Global Competition
Level: Easy
1.11 The defenders of multinationals believe that __________ are the appropriate reward
for efficiently providing the global economy with products and services.
a) profits
b) subsidies
c) tax holidays
d) low-interest, government-subsidized loans
Ans: a
Section: Criticisms of the Multinational Corporation
Level: Easy
1.12 International ________ can reduce the volatility of an investment portfolio because
national financial markets tend to move independently of each other.
a) arbitrage
b) centralization of the MNC’s cash
c) diversification
d) investment
Ans: c
Section: The Importance of Total Risk
Level: Easy
1.13 Companies gradually increase their commitment to international business with
strategies that are progressively more sophisticated. Which one of the following steps is
NOT one of the steps?
a) exporting
b) setting up a sales subsidiary
c) setting up a distribution system
Chapter 1, Introduction
d) creating a legal entity in the new target country
Ans: D
Section: The Process of Overseas Expansion by Multinationals
Level: Easy
1.14 Which one of the following is an alternate and/or a precursor to setting up a
production facility abroad?
a) exporting
b) setting up a sales subsidiary
c) setting up a distribution system
d) licensing
Ans: D
Section: The Process of Overseas Expansion by Multinationals
Level: Easy
MEDIUM (applied)
1.15 Referring to the text, into which category of multinational is IBM most likely to
fall?
a) raw materials seeker
b) market seeker
c) cost minimizer
d) hedge fund
Ans: b
Section: market seeker
Level: Medium
1.16 Which of the following did NOT accelerate the growth of the global economy in
the past twenty years?
a) the U.S.-Canada-Mexico free-trade pact
b) the creation of the European Union
c) China’s entrance into the WTO
d) the first Iraq War
Ans: d
Section: Consequences of Global Competition
Level: Medium
1.17 The multinational financial system does NOT enable companies to
a) avoid currency controls
b) reduce taxes
c) access lower cost financing sources
d) avoid exchange rate risk
Chapter 1, Introduction
Ans: d
Section: rise of the multinational
Level: Medium
1.18 Given the added risks associated with doing business abroad, companies should
a) limit their foreign sales to less than 40% of total sales
b) limit their foreign assets to less than 30% of total assets
c) avoid foreign markets altogether unless they can earn a return in excess of the return
they earn in their domestic market
d) not limit their foreign sales at all
Ans: d
Section: the internationalization of business
Level: Medium
1.19 Which of the following is an example of reverse foreign investment?
a) Honda builds a factory in Ohio
b) Apple builds a plant in Ireland that exports to the United States
c) British Telecom issues new stock in the United States
d) American investors buy shares in Sony
Ans: a
Section: market seeker
Level: Medium
1.20 Which of the following is NOT a failing of the theory of comparative advantage?
a. it ignores the role of uncertainty and economies of scale
b. it assumes that factors of production are immobile
c. it assumes that there are no differentiated products
d. it assumes a scarcity of resources
Ans: d
Section: rise of the multinational
Level: Medium
1.21 Although a firm may be interested in expanding overseas, it may not have the
option to acquire a local operation. This type of challenge is most common in
a) the European Union
b) the United States
c) Japan
d) developing countries
Ans: D
Section: The Process of Overseas Expansion by Multinationals
Level: Medium
Chapter 1, Introduction
1.22 What would be the preferred mode of market penetration for the firm seeking to
expand globally when the company wants to market its patent?
a) Licensing
b) Exporting
c) Setting up local facilities
d) Setting up a foreign sales office
Ans: B
Section: The Process of Overseas Expansion by Multinationals
Level: Medium
1.23 Which of the following is generally a licensing rather that an exporting opportunity
for a multinational looking to expand globally?
a) The firm has a product that can be shipped without adaptation.
b) The firm is seeking to market a specific product or process technology that can be
written down and transmitted objectively.
c) The firm has a product such as a new device that is technologically advanced.
d) A firm that has a specialized cost-saving equipment.
Ans: B
Section: The Process of Overseas Expansion by Multinationals
Level: Medium
DIFFICULT (applied)
1.24 Which of the following theories identifies specialization as the main reason for
international business activity?
a) product life cycle theory of international trade
b) theory of diversification
c) doctrine of comparative advantage
d) theory of globalization
Ans: c
Section: rise of the multinational
Level: Difficult
1.25 Critics of the multinational corporation would not fault its tendency to
a) shift production from one location to another in search of lower costs
b) avoid taxes
c) cause balance of payments difficulties
d) engage in environmental protection measures
Ans: d
Section: criticisms of the MNC
Level: Difficult
Chapter 1, Introduction
1.26 Multinational firms
a) are riskier than purely domestic firms because of the exposures of operating abroad
b) are less risky than purely domestic firms because of international diversification
c) may be less risky than domestic firms if the added risks of operating overseas are
more than offset by the ability to operate in nations whose economic cycles are not
perfectly in phase
d) invest in developed countries only and avoid developing economies
Ans: c
Section: the importance of total risk
Level: Difficult
1.27 According to the capital asset pricing model
a) only the systematic component of risk affects the required return
b) foreign investments whose returns are uncorrelated with the market's return should
have a higher required return than comparable domestic investments
c) total risk of the investment is most relevant for small to medium-sized firms
d) diversification is secondary to risk levels of the investment
Ans: a
Section: capital asset pricing
Level: Difficult
1.28 The internationalization process tends to
a) proceed in a preprogrammed series of steps
b) begin by licensing foreign producers
c) inevitably involve foreign production
d) often begin by accident
Ans: d
Section: capital asset pricing
Level: Difficult
1.29 According to the efficient market hypothesis, which one of the following is NOT
correct?
a) markets place a premium on the future
b) today’s stock price is the best predictor of tomorrow’s stock price
c) stock prices reflect all available information
d) today’s stock price incorporates the past history of prices
Ans: a
Section: market efficiency
Level: Difficult
Chapter 1, Introduction
1.30 Which one of the following provides strong evidence that internationalization
continues to grow in the world economy?
a. import restrictions by the Bush Administration on foreign steel
b. efforts suggested by politicians to restrict the sourcing of foreign products by locally
headquartered multinationals
c. the growing volume of foreign direct investment by U.S. as well as other
multinational companies
d. pressure on governments to embargo unfriendly nations
Ans: c
Section: Evolution of the Multinational Corporation
Level: Difficult
1.31 For the multinational corporation, which one of the following complements to
the integration of world wide operations is MOST critical?
a) flexibility
b) adaptability
c) speed
d) economies of scale of distribution
Ans: c
Section: A Behavioral Definition of the Multinational Corporation
Level: Difficult
1.32 According to Shapiro, if you were the CEO of a multinational corporation, which
of the following would be MOST important to you in hiring a manager? One that
a) Avoids risk at any price
b) Manages effectively the political environment of the subsidiary country
c) Anticipates every future disturbance related to the supply chain
d) Makes decisions that anticipates problems and provides solutions that enhances the
firm’s prospects for growth
Ans: d
Section: The Global Manager
Level: Difficult
Chapter 2, The Determination of Exchange Rates
CHAPTER 2
The Determination of Exchange Rates
EASY
2.1 The most likely explanation for the rise of the U.S. dollar during the early 1980s is
that the U.S.
a. budget deficit lowered U.S. interest rates
b. trade deficit accelerated U.S. inflation
c. economy slowed dramatically
d. budget deficit raised U.S. interest rates
Ans: c
Section: Expectations and the asset market model of exchange rates
Level: Easy
2.2 The U.S. dollar weakened during the 1970s for the following reasons EXCEPT
a. U.S. inflation accelerated
b. the U.S. economy weakened
c. foreigners didn't want to hold as many dollars as before
d. foreigners did want to hold many more dollars than before
Ans: d
Section: Expectations and the asset market model of exchange rates
Level: Easy
2.3 Of the following, exchange rates depend the most upon relative
a. monetary systems
b. political systems
c. trade deficits
d. inflation rates between nations
Ans: d
Section: The nature of money and currency values
Level: Easy
2.4 ______ is another name for the complete replacement of the local currency with the
U.S. dollar.
a. Seignorage
b. Dollarization
c. Depreciation
d. Appreciation
Ans: b
Section: Dollarization
Level: Easy
Chapter 2, The Determination of Exchange Rates
2.5 To some U.S. manufacturers and labor unions, a cheap yuan value gives China’s
__________ an unfair advantage in the global economy.
a. imports
b. subsidies
c. bankers
d. exporters
Ans: d
Section: Mini-Case: A yen for yuan
Level: Easy
2.6 The asset market view of exchange rate determination does NOT statee that the spot
rate
a. should follow a random walk
b. is affected primarily by a nation's long-run economic prospects
c. is influenced by a nation’s annual economic growth
d. should be strongly affected by a nation's balance of trade
Ans: d
Section: Expectations and the asset market model of exchange rates
Level: Easy
2.7 When monetary authorities have not insulated their domestic money supplies from
the foreign exchange transactions, it is known as ________ intervention.
a. unsterilized
b. sterilized
c. foreign market
d. subsidized
Ans: a
Section: Sterilized versus unsterilized intervention
Level: Easy
2.8 When the U.S. Federal Reserve sells or purchases Treasury securities in order to
sterilize the impact of their foreign exchange market interventions, it is referred to as a(n.
________ operation.
a. floating currency
b. spot rate
c. revaluation
d. open market
Ans: d
Section: Sterilized versus unsterilized intervention
Level: Easy
Chapter 2, The Determination of Exchange Rates
2.9 During the 1994 peso problem, Mexico made a fundamental error by not allowing
the ________ of pesos to fall.
a) demand
b) supply
c) devaluation
d) real exchange rate
Ans: b
Section: The peso problem
Level: Easy
2.10 When the U.S. dollar becomes weaker, U.S. exports become more ____ in foreign
markets.
a. competitive
b. costly
c. credit worthy
d. productive
Ans: a
Section: How Real Exchange Rates Affect Relative Competitiveness
Level: Easy
2.11 Although the mechanics of central bank interventions in the global currency
markets may vary from country to country, the goal is always the same, to ____ the
demand for one currency by ______ the supply of another.
a. increase, increasing
b. decrease, decreasing
c. increase, decreasing
d. decrease, increasing
Ans: a
Section: Foreign Exchange Market Intervention
Level: Easy
MEDIUM (applied)
2.12 On Friday, September 13, 1992, the lira was worth DM 0.0013. Over the weekend
the lira devalued against the DM to DM 0.0012. By how much had the lira devalued
against the DM?
a. 7.69%
b. 8.33%
c. 5.21%
d. 9.27%
Ans: a
Section: Setting the equilibrium spot exchange rate
Chapter 2, The Determination of Exchange Rates
Level: Medium
2.13 Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how
much will the dollar appreciate against the real?
a. 67%
b. 40%
c. 32%
d. 28%
Ans: a
Section: Setting the equilibrium spot exchange rate
Level: Medium
2.14 The French euro devalued by 17% against the U.S. dollar. This is equivalent to
a revaluation of the dollar against the euro by
a) 17%
b) 16.31%
c) 20.48%
d) 17.54%
Ans: c
Section: Setting the equilibrium spot exchange rate
Level: Medium
2.15 If the Australian dollar devalues against the Japanese yen by 10%, the yen will
appreciate by
a. 33.32%
b. 25.55%
c. 10.11%
d. 11.11%
Ans: d
Section: Setting the equilibrium spot exchange rate
Level: Medium
2.16 If the euro depreciates against the U.S. dollar by 50%, the dollar appreciates
against the euro by
a. 55%
b. 100%
c. 200%
d. 1,000%
Ans: b
Section: Setting the equilibrium spot exchange rate
Level: Medium
Chapter 2, The Determination of Exchange Rates
2.17 If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira
depreciates against the dollar by
a. 60%
b. 75%
c. 125%
d. 300%
Ans: a
Section: Setting the equilibrium spot exchange rate
Level: Medium
2.18 If the dinar devalues against the U.S. dollar by 45%, the U.S. dollar will appreciate
against the dinar by
a. 45%
b. 82%
c. 55%
d. 32%
Ans: b
Section: Setting the equilibrium spot exchange rate
Level: Medium
2.19 If the peso depreciates against the U.S dollar by 80%, the US dollar will appreciate
against the peso by
a. 300%
b. 200%
c. 250%
d. 400%
Ans: d
Section: Setting the equilibrium spot exchange rate
Level: Medium
2.20 If the U.S. dollar appreciates against the euro by 25%, the euro will depreciate
against the U.S. dollar
a. 25%
b. 20%
c. 30%
d. 10%
Ans: b
Section: Setting the equilibrium spot exchange rate
Level: Medium
2.21 If a foreigner purchases a U.S. government security the
a. supply of dollars rises
Chapter 2, The Determination of Exchange Rates
b. federal government deficit declines
c. demand for dollars rises
d. U.S. money supply rises
Ans: c
Section: Setting the equilibrium spot exchange rate
Level: Medium
2.22 The foreign currency price of foreign goods in terms of the local currency price of
domestic goods is called
a. the real exchange rate
b. the balance of trade
c. the trade-weighted exchange rate
d. purchasing parity
Ans: a
Section: The fundamentals of central bank intervention
Level: Medium
2.23 An increase in the real exchange rate will
a. raise national income
b. lower national income
c. make a country less competitive in international trade
d. lower the cost of foreign goods
e. c and d
Ans: e
Section: The fundamentals of central bank intervention
Level: Medium
2.24 A slowdown in U.S. economic growth will
a. boost the value of the dollar because inflation fears will be calmed
b. boost the value of the dollar because the Federal Reserve will expand the money
supply
c. lower the value of the dollar because the U.S. will be a less attractive place
to investors
d. lower the value of the dollar because interest rates will rise
Ans: c
Section: The fundamentals of central bank intervention
Level: Medium
2.25 The willingness of people to hold money
a. increases with the interest rate
b. rises with price stability
c. rises with national income
Chapter 2, The Determination of Exchange Rates
d. b and c only
Ans: d
Section: The fundamentals of central bank intervention
Level: Medium
2.26 Sound economic policies will
a. raise the value of a nation's currency by boosting the economy
b. lower the value of a nation's currency by increasing the precautionary demand for
money
c. lower the value of a nation's currency by leading to lower interest rates
d. both b and c
Ans: a
Section: The fundamentals of central bank intervention
Level: Medium
2.27 Large government budget deficits will
a. raise the value of a nation's currency by raising domestic interest rates
b. raise the value of a nation's currency by stimulating the domestic economy
c. lower the value of a nation's currency by leading to higher inflation
d. be irrelevant since historical experience shows no correlation between government
budget deficits and the value of the nation's currency
Ans: d
Section: The nature of money and currency values
Level: Medium
2.28 If you were a monetary authority and wanted to neutralize the effects of central
bank currency interventions such as interest rate changes, which of the following would
be most effective?
a. the sale or purchase of Treasury securities
b. the creation of a currency board
c. pegging the exchange rate to another currency
d. convincing investors that the currencies involved in the intervention are perfect
complements to each other
Ans: a
Section: Sterilized versus Unsterilized Intervention
Level: Medium
DIFFICULT (advanced)
2.29 Which type of money is most likely to see its value fluctuate in the foreign
exchange market?
a. fiat money
Chapter 2, The Determination of Exchange Rates
b. commodity money
c. price-indexed money
d. pegged-exchange rate
Ans: a
Section: Central bank reputations and currency values
Level: Difficult
2.30 An increase in the supply of U.S. dollars by the Federal Reserve will
a. raise the value of the dollar because it will stimulate U.S. economic growth
b. raise the value of the dollar because it will lead to higher U.S. interest rates
c. reduce the value of the dollar because of inflation fears in the United States
d. decrease the value of the dollar because it will force other countries to raise their
interest rates
Ans: c
Section: The fundamentals of central bank intervention
Level: Difficult
2.31 On July 19, 1985, the Italian lira devalued by 17% against the U.S. dollar. This is
equivalent to a revaluation of the dollar against the lira of
a. 17%
b. 16.31%
c. 20.48%=
d. 17.54%
Ans: c
Section: Setting the equilibrium spot exchange rate
Level: Difficult
2.32 Which of the following is an example of foreign exchange market intervention?
a. the U.S. government pays Social Security checks to pensioners living in Poland
b. IBM sells euros it received in international trade
c. the Canadian government pays interest to Saudi Arabian investors
d. the French government sells dollars in the foreign exchange market to prop up the
value of the euro
Ans: d
Section: The fundamentals of central bank intervention
Level: Difficult
2.33 During 1995, the yen went from $0.0125 to $0.0095238. By how much did the
dollar appreciate against the yen?
a. 23.81%
b. 31.25%
c. 15.67%
d. 40.78%
Chapter 2, The Determination of Exchange Rates
Ans: b
Section: Setting the equilibrium spot exchange rate
Level: Difficult
2.34 The _______ for/of foreign currency in the U.S. is derived from the demand for
___________ by American consumers.
a. Demand, foreign products
b. Demand, tax loopholes
c. Supply, lower tariffs
d. Supply, local products
Ans: a:
Section: Setting the equilibrium spot exchange rate
Level: Difficult
2.35 Which one of the following is NOT associated with dollarization of a nation’s
currency?
a. In Panama 30-year mortgages were no longer available
b. central banks may lose the profit on the currency they hold
c. it has been known to provide price stability
d. some capital may return and the economy begin to grow again
Ans: a
Section: Central Bank Reputations and Currency Values – Dollarization
Level: Difficult
2.36 Which one of the following is NOT a disadvantage of a strong dollar?
a. Chrysler Corporations competitiveness diminishes in foreign markets
b. American-made Dell computers lose sales to their Chinese counterparts
c. U.S. unemployment levels rise in some sectors
d. Americans will be less prone to buy foreign wines
Ans: d
Section: The Fundamentals of Central Bank Interventions – How Real Exchange Rates
Affect Relative Competitiveness
Level: Difficult
Chapter 3, The International Monetary System
CHAPTER 3
The International Monetary System
EASY (definitional)
3.1 The ________ is an exchange rate system that is relatively free from central bank
and other government-type interventions.
a) managed float
b) clean float
c) dirty float
d) target-zone arrangement
Ans: b
Section: Free float
Level: Easy
3.2 What is the name for the strategy used by governments where participants will
adjust their current and expected future currency needs as price levels change, interest
differentials appear, and economic growth occurs?
a) free float
b) clean float
c) managed float
d) dirty float
Ans: a
Section: Alternative Exchange Rate Systems
Level: Easy
3.3 When government intervention attempts to reduce for exporters and importers the
uncertainty caused by disruptive exchange rate changes for the short and medium term,
it is referred to as _________.
a) smoothing out daily fluctuations
b) leaning against the wind
c) unofficial pegging
d) a dirty float
Ans: b
Section: Managed float
Level: Easy
3.4 Under a _________, countries adjust their national economic policies to maintain
their exchange rates within a specific margin around agreed-upon, fixed central
exchange rates.
a) managed float
b) ‘beggar-thy-neighbor” devaluation
Chapter 3, The International Monetary System
c) dirty float
d) target-zone agreement
Ans: d
Section: Target-zone arrangement
Level: Easy
3.5 What is the name of the policy aimed to lessen the need to monetize a government’s
budget deficit by reducing the expenditures often with the unintended outcome of
increased unemployment?
a) fixed-rate system
b) managed float
c) target-zone arrangement
d) austerity
Ans: d
Section: Target-zone arrangement
Level: Easy
3.6 ________ is nonconvertible paper money backed only by faith in the monetary
authorities.
a) Specie
b) Fiat money
c) Seignorage
d) Par value
Ans: b
Section: The classical gold standard
Level: Easy
3.7 Under the classic gold standard, if prices began rising in the U.S.
a) the dollar value of the pound would rise
b) the dollar value of the pound would fall
c) the U.S. would begin running a balance of trade surplus
d) gold would flow out of the U.S. and the U.S. money supply would drop
Ans: d
Section: The classical gold standard
Level: Easy
3.8 The Bretton Woods system
a) ended in 1971
b) ended in 1939 when World War II began
c) is currently the basis for the international monetary system
d) is currently in use only by the major industrial nations
Chapter 3, The International Monetary System
Ans: a
Section: Introduction
Level: Easy
3.9 The current exchange rate system can best be characterized as a ___ system.
a) free float
b) managed float
c) fixed-rate
d) hybrid
Ans: d
Section: The current system of exchange rate determination
Level: Easy
3.10 Managed floats do NOT fall into which of the following categories of central bank
intervention?
a) smoothing out daily fluctuations
b) leaning against the wind
c) unofficial pegging
d) letting market forces set exchange rates
Ans: d
Section: Managed float
Level: Easy
3.11 The European Monetary System is best described as a
a) clean float
b) target-zone arrangement
c) dirty float
d) managed float
Ans: b
Section: The european monetary system
Level: Easy
3.12 Which of the following produced a valuable lesson about exchange-rate stability
and target-zone arrangements?
a) European Monetary System
b) European Community
c) European Common Market
d) European Union
Ans: a
Section: The European Monetary System and Monetary Union
Level: Easy
Chapter 3, The International Monetary System
3.13 What is the name given to profits earned by a central bank from money creation?
a) seigniorage
b) interest arbitrage
c) moral hazard
d) fiat money
Ans: a
Section: The European Monetary System and Monetary Union
Level: Easy
3.14 A weak peso is most likely to cause
a) added employment and inflation in Mexico
b) less unemployment but more inflation in Mexico
c) more unemployment but less inflation in Mexico
d) less unemployment and less inflation in Mexico
Ans: b
Section: Emerging market currency crises
Level: Easy
3.15 The Bretton Woods system fell apart because
a) of the oil crisis
b) U.S. monetary policy was too expansionary
c) the United States ran a large trade deficit
d) the United States no longer supported a pegged gold standard
Ans: b
Section: The bretton woods system
Level: Easy
3.16 The gold standard was dissolved in 1973 because
a) the U.S. printed too many dollars to maintain gold at $35/oz
b) exchange markets preferred a floating rate system
c) high interest rates raised the cost of holding gold
d) some countries preferred to hold gold instead of dollars
Ans: d
Section: The post-bretton woods system
Level: Easy
3.17 The rising dollar in the early 1980s can be attributed to
a) high real interest rates in the United States
b) improved investment prospects in the United States
c) the growing U.S. budget deficit
d) a and b only
Chapter 3, The International Monetary System
Ans: d:
Section: The rising dollar: 1980-1985
Level: Easy
3.18 The fall of the dollar beginning in 1985 can be attributed to
a) the growing U.S. budget deficit
b) the large U.S. trade deficit
c) rapid U.S. economic growth
d) the slowdown in U.S. economic growth relative to growth overseas
Ans: d
Section: The sinking dollar: 1985-1987
Level: Easy
MEDIUM (applied)
3.19 The characteristic of gold that is most important to the success of a gold standard is
that it is
a) portable
b) storable
c) easily standardized
d) expensive to produce as well as universally acceptable
Ans: d
Section: The classical gold standard
Level: Medium
3.20 A gold standard ensures a long-run tendency toward price stability because
a) gold is desirable
b) gold is durable and storable
c) the cost of producing an ounce of gold stays relatively constant overtime
d) gold supply is directly related to consumer satisfaction
Ans: c
Section: The classical gold standard
Level: Medium
3.21 Calls for a new gold standard reflect
a) fundamental distrust of government's willingness to maintain the integrity of fiat
money
b) a general willingness to accept fiat money
c) a short memory of what actually transpired under the gold standard
d) the durability and desirability of gold
Ans: a
Section: The classical gold standard
Chapter 3, The International Monetary System
Level: Medium
3.22 Assume you are a critic of the World Bank. Which one of the following would
NOT be one of your criticisms?
a) World Bank projects do not come under the scrutiny of the global financial markets.
b) The Bank should move its lending operations out of China.
c) The Bank is financing projects that encourage governments to enact changes that
make countries more attractive to private investors.
d) The Bank is funding projects to countries without giving them any incentive to
change inefficient operations in the economy.
Ans: c
Section: The Gold Exchange Standard and Its Aftermath: 1925-1944
Level: Medium
3.23 Under the gold standard
a) price levels rose dramatically
b) price levels stayed constant over time
c) the long-run stability of the price level includes alternating periods of inflation and
deflation
d) fiat money is more valuable
Ans: c
Section: The classical gold standard
Level: Medium
3.24 Under a fixed-rate system, a country that followed policies that would lead to a
higher rate of inflation than that experienced by its trading partners would
a) experience a balance-of-payments surplus as its goods became more expensive
b) see an decrease in the supply of its currency on the foreign exchange markets
c) find its currency subject to upward pressure
d) experience a balance-of-payments deficit as its goods became more expensive
Ans: d
Section: Fixed-rate system
Level: Medium
3.25 Under a fixed-rate system, a country that followed policies leading to a lower
inflation rate than that experienced by its trading partners would
a) come under pressure to expand its money supply
b) restrict the growth of its money supply
c) experience a balance-of-payments deficit
d) be forced to buy its currency in the foreign exchange market
Ans: a
Section: Fixed-rate system
Chapter 3, The International Monetary System
Level: Medium
3.26 Under which one of the following would a country that followed policies leading
to a lower inflation rate than that experienced by its trading partners would come under
pressure to expand its money supply?
a) fixed-rate currency system
b) freely-floating currency system
c) managed float
d) currency board
Ans: a
Section: Fixed-rate system
Level: Medium
3.27 Underlying the emerging markets currency crises, there is a fundamental conflict
among policy objectives that the target nations have failed to resolve. Which one of the
following is NOT in conflict?
a) IMF bailouts
b) fixed exchange rates
c) independent domestic monetary policy
d) free capital movement
Ans: a
Section: Emerging market currency crises
Level: Medium
DIFFICULT (applied)
3.28 In a fixed-rate system central banks would NOT maintain currency values by
a) increasing the money supplies of nations with overvalued currencies
b) boosting the money supplies of nations with undervalued currencies
c) buying up overvalued currencies in the foreign exchange market
d) selling undervalued currencies in the foreign exchange market
Ans: a
Section: Fixed-rate system
Level: Difficult
3.29 Governments intervene in the foreign exchange markets for all of the following
EXCEPT to
a) earn foreign exchange
b) reduce economic uncertainty
c) improve the nation's export competitiveness
d) reduce inflation
Ans: a
Section: Managed float
Chapter 3, The International Monetary System
Level: Difficult
3.30 Under a fixed-rate system, which of the following four alternatives to devaluation
is most likely to succeed?
a) foreign borrowing
b) austerity 財政緊縮
c) wage and price controls
d) exchange controls
Ans: b
Section: Fixed-rate system
Level: Difficult
3.31 In order to boost the value of the DM relative to the dollar
a) the Fed should sell dollars for DM and the Bundesbank should buy DM with dollars
b) the Fed should sell dollars for DM and the Bundesbank should buy dollars with DM
c) the Fed should sell DM for dollars and the Bundesbank should sell dollars for DM
d) the Fed should sell DM for dollars and the Bundesbank should buy DM with dollars
Ans: a
Section: Managed float
Level: Difficult
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
CHAPTER 4
Parity Conditions in International Finance and Currency Forecasting
EASY (definitional)
4.1 What is the name of the theory that states exchange-adjusted prices on identical
tradeable goods and financial assets must be within transaction costs of equality
globally? The Law of
a) One Price
b) Arbitrage
c) Parity
d) Capital Market Segmentation
Ans: a
Section: Arbitrage and the Law of One Price
Level: Easy
4.2 In its absolute version, purchasing power parity states that price levels worldwide
should be _______when expressed in a common currency.
a) equal
b) roughly equal
c) different
d) opportunities for arbitrage
Ans: a
Section: Purchasing power parity
Level: Easy
4.3 Which one of the following parity theories states that, in its absolute version, price
levels globally should be equal when expressed in a common currency?
a) purchasing power parity
b) international Fisher effect
c) interest rate parity
d) the unbiased forward rate
Ans: a
Section: Purchasing power parity
Level: Easy
4.4 The theory of relative purchasing power parity states that, between two nations, the
a) inflation rates are unrelated
b) exchange rate differential reflects the inflation rate differential
c) inflation rate is smaller in weaker currencies
d) the interest rate is greater than the inflation rate during depreciations
Ans: b
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
Section: Purchasing power parity
Level: Easy
4.5 The Fisher effect states that the _________ rate is made up of a real required rate of
return and an inflation premium.
a) nominal exchange
b) real exchange
c) nominal interest
d) adjusted dividend
Ans: c
Section: The fisher effect
Level: Easy
4.6 A rise in the inflation rate in one nation relative to others will be associated with a
fall in the first nation’s exchange rate and with a rise of its interest rate relative to
foreign interest rates. The two conditions combined result in the _________ Effect.
a) Fisher
b) Herstatt
c) Unbiased forward rate
d) International Fisher
Ans: d
Section: The fisher effect
Level: Easy
4.7 When a rise in the expected inflation rate in one nation relative to others will be
associated with an expected fall in the first nation’s exchange rate accompanied by a rise
of its expected interest rate relative to foreign expected interest rates, we are describing
the
a) International Fisher Effect
b) Purchasing Power Parity
c) Interest Rate Parity
d) Unbiased forward rate
Ans: a
Section: The Fisher Effect
Level: Easy
4.8 Which one of the following statements concerning exchange rate changes is correct?
a) Changes in expected, as well as actual, inflation will cause exchange rate changes.
b) Changes in expected, but not actual, inflation will cause exchange rate changes.
c) An increase in a currency’s expected rate of inflation makes that currency less
expensive to hold over time, all other things being equal.
d) An increase in a currency’s expected rate of inflation makes that currency more in
demand at the same price, all other things being equal.
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
Ans: a
Section: Expected Inflation and Exchange Rate Changes
Level: Easy
4.9 When real interest rates are determined by the global supply and demand for funds,
we claim that it is an example of
a) capital market integration
b) capital market segmentation
c) a real interest rate differential
d) a nominal interest rate differential
Ans: a
Section: The Fisher Effect
Level: Easy
MEDIUM (applied)
4.10 Suppose annual inflation rates in the U.S. and Mexico are expected to be 6% and
80%, respectively, over the next several years. If the current spot rate for the Mexican
peso is $.005, then the best estimate of the peso's spot value in 3 years is
a) $.00276
b) $.01190
c) $.00321
d) $.00102
Ans: d
Section: Purchasing power parity
Level: Medium
4.11 If the expected inflation rate is 5% and the real required return is 6%, then the
Fisher effect says that the nominal interest rate should be
a) 1%
b) 11.3%
c) 11%
d) 6%
Ans: b
Section: The fisher effect
Level: Medium
4.12 The inflation rates in the U.S. and France in January 1991 were expected to be 4%
per annum and 7% per annum, respectively. If the current spot rate that day was $.1050,
then the expected spot rate in three years was
a) $.1150
b) $.1112
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
c) $.0964
d) $.0992
Ans: c
Section: Purchasing power parity
Level: Medium
4.13 Suppose the expected inflation in the U.S. on January 1, 1988 was projected at 5%
annually for the next 5 years and at 12% annually in Italy for the same time period, and
the lira/$ spot rate that day was currently at L2400 = $1, then the PPP estimate of the
spot rate five years from now was
a) 1738
b) 3314
c) 2560
d) 2250
Ans: b
Section: Purchasing power parity
Level: Medium
4.14 If expected inflation is 20% and the real required return is 10%, then the Fisher
effect says that the nominal interest rate should be exactly
a) 30%
b) 32%
c) 22%
d) 12%
Ans: b
Section: The fisher effect
Level: Medium
4.15 On January 1, 1990, the annual inflation rates in the U.S. and Greece were
expected to be 3% and 8%, respectively. If the current spot rate that day for the drachma
was $.007, then the expected spot rate in three years was
a) $.00607
b) $.00823
c) $.00751
d) $.00694
Ans: a
Section: Purchasing power parity
Level: Medium
4.16 If a country's freely floating currency is undervalued in terms of purchasing power
parity, its capital account is likely to be
a) in deficit or tending toward a deficit
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
b) in surplus or tending toward a surplus
c) Subsidized by the International Monetary Fund
d) a candidate for loans from the World Bank
Ans: a
Section: Purchasing power parity
Level: Medium
4.17 If the rate of inflation in all of the world’s currency markets rises from 5% to 7%,
this will tend to make forward exchange rates move toward
a) smaller premiums or larger discounts in relation to the dollar
b) larger premiums or smaller discounts in relation to the dollar
c) no change on average
d) parity
Ans: c
Section: Purchasing power parity
Level: Medium
4.18 A 150% real return in Brazil is higher than a 15% dollar return in the U.S.
a) because arbitrage opportunities exist
b) when the inflation controls are suspended in Brazil
c) it depends on whether these are nominal or real returns
d) regardless of nominal or real returns
Ans: c
Section: Purchasing power parity
Level: Medium
4.19 On January 1, 1994, the annual inflation rates in the U.S. and Italy were expected
to be 4% and 7%, respectively. If the current spot rate on that day was $1 = L2,000, then
the expected spot rate for the lira in three years was
a) $.0004591
b) $.0011590
c) $.0009892
d) $.0005471
Ans: a
Section: Purchasing power parity
Level: Medium
4.20 On January 1, 1985, the annual inflation rates in the U.S. and France were
expected to be 4% and 6%, respectively. If the current spot rate that day was $.1250,
then the expected spot rate in two years was
a) $.1299
b) $.1150
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
c) $.1203
d) $.1335
Ans: c
Section: Purchasing power parity
Level: Medium
4.21 Suppose five-year deposit rates on Eurodollars and Euro marks are 12% and 8%,
respectively. If the current spot rate for the mark is $0.50, then the spot rate for the mark
five years from now implied by these interest rates is
a) .5997
b) .4169
c) .5185
d) .4821
Ans: a
Section: The international fisher effect
Level: Medium
4.22 The direct spot quote for the Canadian dollar is $.76 and the 180-day forward rate
is $.74. The difference between the two rates is likely to mean that
a) inflation in the U.S. during the past year was lower than in Canada
b) interest rates are rising faster in Canada than in the U.S.
c) prices in Canada are expected to rise more rapidly than in the U.S.
d) the Canadian dollar's spot rate is expected to rise in terms of the U.S. dollar
Ans: c
Section: Interest rate parity theory
Level: Medium
4.23 Suppose that on January 1, 1987, the spot rate on the Dutch guilder was $0.39 and
the 180-day forward rate was $0.40. The difference between the spot and forward rates
suggested that
a) interest rates were higher in the U.S. than in the Netherlands
b) the guilder had risen in relation to the dollar
c) the inflation rate in the Netherlands was declining
d) the guilder was expected to fall in value relative to the dollar
Ans: a
Section: Interest rate parity theory
Level: Medium
4.24 Suppose the price indexes in Mexico and the U.S., which both began the year at
100, are at 160 and 103, respectively, by the end of the year. If the exchange rate began
the year at Mex$4.5 = $1 and ended the year at Mex$5.9 = $1, then the change in the
real value of the peso during the year is (a "-" indicates a real devaluation)
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
a) 0.0%
b) -5.0%
c) 18.5%
d) -8.2%
Ans: c
Section: Purchasing power parity
Level: Medium
4.25 Suppose the spot rates for the pound, mark, and Swiss franc prior to 1999 were
$1.20, $.32, and $.40, respectively. At the same time, the associated 90-day interest rates
(annualized) were 16%, 8%, and 4%, while the U.S. 90-day interest rate was 12%. What
was the 90-day forward rate (to the nearest cent) on a TCU (TCU 1 = ￡1 + DM1 + SFr1)
if interest parity were to hold?
a) $1.92
b) $1.98
c) $1.94
d) $1.87
Ans: a
Section: Interest rate parity theory
Level: Medium
4.26 The current five-year Euro yen rate is 6% per annum (compounded annually). The
five-year Eurodollar rate is 8.5%. What is the implied forward premium or discount of
the yen (over the current spot rate) for a five-year forward contract?
a) 4.17% premium
b) 18.46% discount
c) 11.00% discount
d) 12.36% premium
Ans: d
Section: Interest rate parity theory
Level: Medium
4.27 Suppose the spot rates on Janurary 1, 1992 for the pound, mark, and Swiss franc
were $1.50, $.42, and $.48, respectively. At the time, the associated 90-day interest rates
(annualized) were 12%, 6%, and 4%, while the U.S. 90-day interest rate (annualized)
was 8%. What was the 90-day forward rate on a DCU (DCU 1 = ￡1 + DM1 + SFr1) if
interest parity were to hold?
a) $2.4027
b) $2.3923
c) $2.4196
d) $2.3738
Ans: b
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
Section: Interest rate parity theory
Level: Medium
4.28 Suppose it is January 1, 1998 and spot pounds are selling at $1.7342, while 90-day
forward pounds are selling at $1.7156. At the same time, DM spot and 90-day forward
rates are $0.6138 and $0.6014, respectively. According to these quotes the
a) pound is selling at a 3.87% forward discount relative to the DM
b) pound is selling at a 2.37% forward premium relative to the DM
c) DM is selling at a 0.97% forward discount relative to the pound
d) DM is selling at a 1.54% forward premium relative to the pound
Ans: a
Section: Interest rate parity theory
Level: Medium
4.29 If annualized interest rates in the U.S. and France on January 1, 1991 are 9% and
13%, respectively, and the spot value of the franc is $.1109, then at what 180-day
forward rate will interest rate parity hold?
a) $.1070
b) $.1150
c) $.1088
d) $.1130
Ans: c
Section: Interest rate parity theory
Level: Medium
4.30 If annualized interest rates in the U.S. and Switzerland are 10% and 4%,
respectively, and the 90-day forward rate for the Swiss franc is $.3864, at what current
spot rate will interest rate parity hold?
a) $.3902
b) $.3874
c) $.3807
d) $.3792
Ans: c
Section: Interest rate parity theory
Level: Medium
4.31 The spot rate on the euro is $1.33 and the 180-day forward rate is $1.34. The
difference between the two rates means
a) interest rates are higher in the U.S. than in Germany
b) the euro has risen in relation to the dollar
c) the inflation rate in Germany is declining
d) the euro is expected to fall in value relative to the dollar
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
Ans: a
Section: Interest rate parity theory
Level: Medium
4.32 It is July 1, 1990. Suppose the spot rates for the pound, mark, and Swiss franc are
$1.30, $.35, and $.40, respectively. The associated 90-day interest rates (annualized) are
16%, 8%, and 4%, while the U.S. 90-day interest rate (annualized) is 12%. What is the
90-day forward rate on an ACU (ACU 1 = ￡1 + DM1 + SFr1) if interest parity holds?
a) $2.0512
b) $2.1134
c) $2.0397
d) $2.0489
Ans: d
Section: Interest rate parity theory
Level: Medium
4.33 The current five-year Euro yen and Eurodollar rates are 8% and 12.5% per annum,
respectively. What is the implied forward premium or discount of the yen (over the
current spot rate for a five-year forward contract)?
a) 4.17% premium
b) 18.46% discount
c) 17.74% discount
d) 22.64% premium
Ans: d
Section: Interest rate parity theory
Level: Medium
4.34 The 90-day interest rates (annualized) in the U.S. and Japan are, respectively, 10%
and 7%, while the direct spot quote for the yen in New York is $.004300. At what
90-day forward rate would interest rate parity hold?
a) .004430
b) .004271
c) .004332
d) .004176
Ans: c
Section: Interest rate parity theory
Level: Medium
4.35 If annualized interest rates on January 1, 1985 in the U.S. and France were 9% and
13%, respectively, and the spot value of the franc was $.1109, then at what 180-day
forward rate would interest rate parity hold?
a) $.1070
b) $.1150
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
c) $.1088
d) $.1130
Ans: c
Section: Interest rate parity theory
Level: Medium
DIFFICULT (applied)
4.36 Suppose the pound devalues from $1.25 at the start of the year to $1.00 at the end
of the year. Inflation during the year is 15% in England and 5% in the U.S. What is the
real devaluation (-) or real revaluation (+) of the pound during the year?
a) - 12.38%
b) - 20.71%
c) + 2.39%
d) + 1.46%
Ans: a
Section: Purchasing power parity
Level: Difficult
4.37 Suppose it is May 1, 1981 and the price indexes in Spain and the U.S., which both
began the year at 100, are at 117 and 105, respectively, by the end of the year. If the
beginning and ending exchange rates, respectively, for the peseta are $.1320 and $.1125,
then the change in the real value of the peseta (a "-" indicates a real devaluation) during
the year is
a) 0%
b) -5.0%
c) 2.4%
d) -8.2%
Ans: b
Section: Purchasing power parity
Level: Difficult
4.38 Suppose the Swiss franc revalues from $0.40 at the beginning of the year to $0.44
at the end of the year. U.S. inflation is 5% and Swiss inflation is 3% during the year.
What is the real devaluation (-) or real revaluation (+) of the Swiss franc during the
year?
a) + 7.9%
b) - 5.3%
c) + 8.1%
d) - 1.6%
Ans: a
Section: Purchasing power parity
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
Level: Difficult
4.39 Suppose the value of the Polish zloty moves from Z 1000 = $1 at the start of the
year to Z 1,800 at the end of the year. At the same time, the Polish price level changes
from an index of 100 on January 1 to 134 on December 31. U.S. inflation during the
year was 4.5%. If the one-year interest rate on the zloty is 44%, what was the real dollar
cost of borrowing the zloty during the year?
a) 17.53%
b) 27.81%
c) -23.44%
d) -8.76%
Ans: c
Section: Purchasing power parity
Level: Difficult
4.40 Suppose it is October 1, 1990 and inflation rates in the U.S. and France are
expected to be 4% and 9%, respectively, next year and 6% and 7%, respectively, in the
following year. If the current spot rate is $.1050, then the expected spot value of the
franc in two years is
a) $.1111
b) $.1024
c) $.0992
d) $.1074
Ans: c
Section: Purchasing power parity
Level: Difficult
4.41 Suppose it is January 1, 1994 and the Deutsche mark revalues from $.30 at the
beginning of the year to $.33 at the end of the year. Inflation during the year is 5% in the
U.S. and 3% in Germany. What is the real devaluation (-) or real revaluation (+) of the
Deutsche mark during the year?
a) + 7.9%
b) - 5.3%
c) + 8.1%
d) - 1.6%
Ans: a
Section: Purchasing power parity
Level: Difficult
4.42 If the U.S. trade balance with Japan is expected to go from a deficit this year to a
surplus next year, the forward rate on yen would
a) be less than the spot rate
b) be higher than the spot rate
Chapter 4, Parity Conditions in International Finance and Currency Forecasting
c) equal the spot rate
d) could be either above or below the spot rate
Ans: d
Section: The relationship between the forward rate and the future spot rate
Level: Difficult
4.43 The following exchange and interest rate quotations in 1998 were observed:
Eurocurrency rates Exchange rate per $
90-days (% annum)
(Discretely-compounded) Spot
90-day
forward
Bid:
Ask:
$
15 5/8
16
DM
7 7/8
8 1/4
￡
12 1/4
13
DM
1.881
1.843
￡
.4961
.4902
DM
1.801
1.773
￡
.4937
.4889
An arbitrage profit can be obtained by
a) borrowing pounds and lending dollars
b) borrowing dollars and lending DM
c) borrowing DM and lending pounds
d) there are no arbitrage opportunities
Ans: a
Section: Interest rate and parity theory
Level: Difficult
Chapter 5, The Balance of Payments and International Economic Linkages
CHAPTER 5
The Balance of Payments and International Economic Linkages
EASY (definitional)
5.1 A balance of trade deficit results in a current account
a) deficit
b) surplus
c) IMF intervention
d) World Bank loan
Ans: a
Section: Current account
Level: Easy
5.2 The account that records imports and exports of goods, services, income, and
current unilateral transfers is known as the
a) current account
b) capital account
c) financial account
d) balance-of-payment account
Ans: a
Section: Balance-of-Payment Categories
Level: Easy
5.3 The change in private domestic borrowing or lending required to keep payments in
balance without adjusting official reserves is called
a) the net liquidity balance
b) the balance of payments
c) the balance on current account
d) the balance on capital account
Ans: a
Section: Balance-of-payment Categories
Level: Easy
5.4 Tourism shows up on the ____ account.
a) merchandise
b) current
c) capital
d) official reserves
Ans: b
Section: Current account
Chapter 5, The Balance of Payments and International Economic Linkages
Level: Easy
5.5 The accounting statement that summarizes all the economic transactions between
residents of the home country and residents of all other countries is called the
a) balance of trade
b) current account balance
c) balance of payments
d) capital account balance
Ans: c
Section: Balance-of-payment categories
Level: Easy
5.6 What is another name for gifts and grants overseas?
a) Unilateral transfers 單方面轉移收支
b) Basic balance
c) Reserve assets
d) Direct investment
Ans: a
Section: Balance-of-Payment Categories
Level: Easy
5.7 The sale of US treasury bonds by a Frenchman shows up as
a) a credit on the capital account
b) a debit on the trade account
c) a credit on the official reserves account
d) none of the above
Ans: d
Section: Capital accounts
Level: Easy
5.8 The sale of American computers to the Spanish government shows up as
a) a debit on the official reserves account
b) a credit on the official reserves account
c) a credit on the trade account
d) a debit on the current account
Ans: c
Section: Current account
Level: Easy
5.9 Recent US trade deficits can be attributed to
a) Japanese protectionism
b) high US wages and benefits
Chapter 5, The Balance of Payments and International Economic Linkages
c) lack of American competitiveness abroad
d) the US savings deficit
Ans: d
Section: The international flow of goods
Level: Easy
5.10 The US savings deficit can be attributed, in part, to
a) the growing US budget deficit
b) high real interest rates abroad
c) low American investment in plant and equipment
d) rising US taxes on capital accumulation
Ans: a
Section: The international flow of goods
Level: Easy
5.11 What theory holds that a country’s trade deficit worsens just after its currency
depreciates because price effects will dominate the effect on volume of imports in the
short run?
a) J-curve theory
b) Protectionism theory
c) Official reserve transactions theory
d) Net liquidity balance theory
Ans: a
Section: Coping with the Current-Account Deficit
Level: Easy
MEDIUM (applied)
5.12 Which one of the following would NOT be considered as part of a nation’s capital
account?
a) license fees earned by Hewlett Packard
b) purchases by the Chinese of U.S. real estate
c) increases in Brazilian bank deposits in San Francisco banks
d) purchases of U.S. Treasury bonds by the Bank of England
Ans: a
Section: Balance-of-Payment Categories
Level: Medium
5.13 To which balance of payment category would purchases of gold by the Bank of
England belong?
a) Official Reserve Account
b) Current Account
Chapter 5, The Balance of Payments and International Economic Linkages
c) Capital Account
d) Unilateral transfers
Ans: a
Section: Balance-of-Payment Categories
Level: Medium
5.14 In a freely floating exchange rate system, if the capital account surplus for the U.S.
rises, what will most likely happen to the real value of the dollar?
a) it will decline
b) it will rise
c) there is no impact on the dollar
d) the IMF will step in to adjust rising exchange rates
Ans: b
Section: The link between the current and the capital accounts
Level: Medium
5.15 If a real value of a nation's freely floating currency increases, and the nation's
current account is initially zero, its capital account will most likely be
a) in deficit
b) in surplus
c) adjusted for the rate of inflation
d) decreased by the amount of increase in the current account
Ans: b
Section: The link between the current and the capital accounts
Level: Medium
5.16 In a freely floating exchange rate system, if the capital account is running a deficit
a) the balance of payments must run a deficit
b) the balance of payments must be a deficit
c) the current account must run a deficit
d) the current account must run a surplus
Ans: d
Section: The link between the current and the capital accounts
Level: Medium
5.17 As the real value of the dollar rises, the balance on current account is likely to
a) increase
b) decrease
c) stay the same
d) move with the capital account adjustments factor
Ans: b
Chapter 5, The Balance of Payments and International Economic Linkages
Section: The link between the current and the capital goods
Level: Medium
5.18 Which of the following accounts is the best measure of the change in private
domestic borrowing or lending that is required to keep payments in balance without
adjusting official reserves?
a) net liquidity balance
b) direct investment
c) basic balance
d) official reserve transactions balance
Ans: a
Section: The link between the current and the capital goods
Level: Medium
5.19 In a freely-floating exchange rate system, the sale of Japanese cars to the United
States will be offset by which item on the US balance of payments?
a) a credit on the net liquidity balance
b) a debit on the capital account
c) a debit on the trade account
d) a credit on the current account
Ans: d
Section: The link between the current and the capital goods
Level: Medium
5.20 The Japanese current account surplus can best be attributed to
a) the high rate of Japanese domestic investment
b) Japanese protectionism
c) the high rate of Japanese savings
d) government budget deficits
Ans: c
Section: The link between the current and the capital goods
Level: Medium
5.21 The most likely way to reduce the Japanese trade surplus is to
a) revalue the Japanese yen
b) impose quotas on imports from Japan
c) boost Japanese savings
d) boost Japanese consumption
Ans: d
Section: The link between the current and the capital goods
Level: Medium
Chapter 5, The Balance of Payments and International Economic Linkages
DIFFICULT (applied)
5.22 Suppose Lufthansa buys 10 Boeing 747s for $150 million in 1991, financed by a
five-year loan from the US Export-Import Bank. There is a one year grace period on
principal and interest payments. Which one of the following would NOT be one of the
net impacts of this sale in 1991?
a) a $150 million reduction in the U.S. trade deficit
b) a $150 million reduction in the U.S. capital account surplus
c) a $150 million increase in the U.S. trade deficit
d) zero change in the U.S. balance of payments in 1991
Ans: c
Section: The link between the current and the capital goods
Level: Difficult
5.23 If a nation's income exceeds its spending, then which of the following would NOT
result?
a) savings will exceed domestic investment
b) the nation must run a current-account surplus
c) the nation must run a capital-account deficit
d) savings will equal domestic investment
Ans: d
Section: The link between the current and the capital goods
Level: Difficult
5.24 A nation that is running a savings deficit
a) must spend less than it produces
b) will invest domestically more than it saves
c) will invest domestically less than it saves
d) must have a net capital outflow
Ans: b
Section: The link between the current and the capital goods
Level: Difficult
5.25 In order to reduce its current-account deficit, the United States would NOT do
which of the following?
a) reduce the federal budget deficit
b) raise national product relative to national spending
c) increase savings relative to domestic investment
d) decrease savings relative to domestic investment
Ans: d
Section: The link between the current and the capital goods
Level: Difficult
Chapter 6, Country Risk Analysis
CHAPTER 6
Country Risk Analysis
EASY (definitional)
6.1 The degree of political risk faced by a firm operating in a foreign country
a) can be determined by using a political risk index
b) depends on the benefits provided by the firm
c) both a and b
d) depends on how the firm has structured its operations
Ans: d
Section: Measuring political risk
Level: Easy
6.2 Frequently used indicators of political risk include economic factors but NOT
a) inflation
b) balance-of-payment deficits
c) balance-of-payment surpluses
d) health care reform
Ans: d
Section: Measuring political risk
Level: Easy
6.3 An index that attempts to incorporate all of the economic, social and political factors related
to country risk is the
a) Profit Opportunity Recommendation rating
b) Per capital income rating
c) Gross domestic product
d) Consumer price index
Ans: a
Section: Measuring political risk
Level: Easy
6.4 In which one of the following countries was capital flight unusually large due to economic
regulations that were considered punitive?
a) India
b) Brazil
c) Indonesia
d) China
Ans: a
Section: Measuring political risk
Level: Easy
6.5 One good indicator of political risk is
Chapter 6, Country Risk Analysis
a) the seriousness of capital flight
b) the level of local interest rates
c) the level of local tax rates
d) a large middle class population
Ans: a
Section: Capital flight
Level: Easy
6.6 Capital flight occurs for several reasons, most of which have to do with
a) government regulations on interest rates
b) high taxes on local investments
c) the threat of government seizure of local assets
d) inappropriate economic policies
Ans: b
Section: Capital flight
Level: Easy
6.7 Expropriation or creeping expropriation is most likely in the ------ sector of an economy.
a) manufacturing
b) agricultural
c) construction
d) extractive
Ans: d
Section: Market-oriented versus statist policies
Level: Easy
6.8 The great economic lesson of the ill-fated, post-World War II experiment in Communism is
that _________ work and command economies do not.
a) state subsidies
b) market forces
c) five-year plans
d) centralized economic controls
Ans: d
Section: Market-oriented versus statist policies
Level: Easy
6.9 A large government deficit relative to GDP, a high rate of money expansion accompanied by
fixed exchange rates, along with substantial government expenditures are some of the common
characteristics of _________ risk.
a) exchange rate
b) interest rate
c) country
d) investment
Chapter 6, Country Risk Analysis
Ans: c
Section: Key indicators of country risk
Level: Easy
6.10 A structure of incentives that rewards risk taking in productive ventures is an indicator of
long-run _____________ health for a country.
a) social
b) political
c) economic
d) spiritual
Ans: c
Section: Key indicators of country risk
Level: Easy
6.11 High tax rates are a key indicator of country risk because they
a) destroy incentives to work, save, and invest
b) create large government deficits relative to GDP
c) involve substantial government expenditures yielding low rates of return
d) corrupt a well-functioning legal system
Ans: a
Section: Key indicators of country risk
Level: Easy
6.12 The state’s best strategy is to provide basic _________ in order to promote economic
growth.
a) health care services
b) lifelong pensions for its workers
c) economic and political stability
d) natural resources
Ans: b
Section: key indicators of country risk
Level: Easy
6.13 What ultimately determines a nation’s ability to repay foreign loans is its ability to generate
___________.
a) hard currencies
b) soft currencies
c) more employment
d) more imports
Ans: a
Section: Key indicators of country risk
Level: Easy
Chapter 6, Country Risk Analysis
6.14 A system that substitutes state-owned or state-guided enterprises for the private sector is
known as
a) socialism
b) democratic socialism
c) statism
d) free market economy
Ans: c
Section: Key indicators of country risk
Level: Easy
6.15 The economic experiences of Mexico, Chile, and Argentina in the recent past show that
they all possessed a_________.
a) political party system of many factions
b) loosely drawn economic plan that is allowed to evolve over time
c) political lead who is more of a manager than a leader
d) head of state who demonstrates strong will and leadership
Ans: d
Section: lessons from international debt crisis
Level: Easy
MEDIUM (applied)
6.16 When investing in a natural resource project, a mining firm would NOT add value to the
project by
a) taking out political risk insurance from the home government
b) using foreign financing
c) selling copper in advance to customers
d) using local financing
Ans: d
Section: Key indicators of country risk
Level: Medium
6.17 During the 1980s many Latin American countries believed in a policy that economic
growth was best promoted by extensive state ownership which led to
a) capital flight
b) increased growth in GDP
c) rampant deflations
d)_ import subsidies
Ans: a
Section: Economic and political factors underlying country risk
Level: Medium
Chapter 6, Country Risk Analysis
6.18 Which one of the following is a tough-minded economic policy that may halt capital
flight?
a) making utilities publicly owned
b) granting government subsidies to local firms
c) imposing protective tariffs
d) removing barriers to investment by foreigners
Ans: d
Section: Capital flight
Level: Medium
6.19 An oil company would NOT manage its political risk in Nigeria by
a) taking out political risk insurance
b) using foreign non-recourse financing
c) selling oil in advance
d) using local financing
Ans: d
Section: Capital flight
Level: Medium
6.20 Political risk is primarily a function of
a) instability in the government
b) uncertainty over property rights
c) the level of violence in the societyy
d) a country’s national debt
Ans: b
Section: Measuring political risk
Level: Medium
DIFFICULT (applied)
6.21 Which one of the following is NOT a form of direct political risk to the multinational
corporation?
a) currency controls
b) privatization of public utilities
c) changes in tax or labor laws
d) regulatory restrictions
Ans: b
Section: Measuring political risk
Level: Difficult
6.22 Which one of the following is NOT a measure of political instability?
a) the number of political parties in one nation
b) frequency of changes of government
Chapter 6, Country Risk Analysis
c) the level of violence
d) conflicts with neighboring states
Ans: a
Section: Measuring political risk
Level: Difficult
6.23 Which of the following foreign investments would be least subject to expropriation?
a) an oil well in an LDC that is providing needed foreign exchange
b) a coffee plantation that is producing beans for export
c) an assembly plant for automobiles located in an LDC
d) a tire making plant in an LDC that is substituting for tire imports
Ans: c
Section: Key indicators of country risk
Level: Difficult
6.24 A U.S. company whose foreign property has been expropriated is most likely to receive
legal aid and indemnification from
a) OPIC
b) the U.S. Supreme Court
c) the International Center for Settlement of Investment Dispute
d) the U.S. Appeals Court
Ans: a
Section: Key indicators of country risk
Level: Difficult
6.25 To halt capital flight, which one of the following would NOT be a constructive measure
governments may take?
a) cutting budget deficits
b) impose comprehensive capital controls
c) sell off state-owned enterprises
d) allowing for freer trade
Ans: b
Section: Capital flight
Level: Difficult
Chapter 7, The Foreign Exchange Market
CHAPTER 7
The Foreign Exchange Market
EASY (definitional)
7.1 Most international currency transactions are conducted by
a) major banks
b) arbitrageurs
c) speculators
d) hedgers
Ans: a
Section: Organization of the Foreign Exchange Market
Level: Easy
7.2 Exports of goods and services by the United States by 2008 total more than
_________ of gross domestic product.
a) 10%
b) 20%
c) 50%
d) 75%
Ans: a
Section: Introduction
Level: Easy
7.3 Most currency transactions are channeled through the worldwide ________ market
which accounts for _______ of foreign exchange transactions.
a) stock, 50%
b) interbank, 50%
c) interbank, 95%
d) internet, 30%
Ans: c
Section: Organization of the foreign exchange market
Level: Easy
7.4 The overwhelming majority of foreign exchange transactions involve
a) multinational corporations buying and selling foreign exchange
b) importers and exporters buying and selling foreign exchange
c) banks buying and selling foreign exchange
d) governments buying and selling foreign exchange
Ans: c
Section: The participants
Level: Easy
Chapter 7, The Foreign Exchange Market
7.5 The world's largest currency trading market is
a) New York
b) Frankfurt
c) Tokyo
d) London
Ans: d
Section: Size
Level: Easy
7.6 American terms refers to the
a) number of U.S. dollars per unit of foreign currency
b) number of foreign-currency units per U.S. dollar
c) quotation system found in the United States
d) bid-ask spread on the U.S. dollar
Ans: a
Section: Spot quotations
Level: Easy
7.7 When exchange rates are quoted as the number of U.S. dollars per unit of foreign
currency, it is referred to as
a) American terms
b) European terms
c) fixed-exchange terms
d) spot-market terms
Ans: a
Section: The Spot Market
Level: Easy
7.8 When the home currency price of a certain fixed quantity of the foreign currency is
quoted, it is referred to as the
a) indirect quotation
b) direct quotation
c) European quotation
d) American quotation
Ans: b
Section: The Spot Market
Level: Easy
7.9 Trading on the foreign exchange market is
a) located in a physical headquarters in London
b) takes place within an organized exchange
Chapter 7, The Foreign Exchange Market
c) conducted by licensed brokers from the London stock exchange
d) an electronically linked network of banks, brokers, and dealers
Ans: d
Section: Organization
Level: Easy
7.10 Traders on the foreign exchange market use ___________ to eliminate or cover the
risk of loss on export or import orders denominated in foreign currencies.
a) currency options
b) forward contracts
c) money-market hedges
d) currency futures contracts
Ans: b
Section: The participants
Level: Easy
7.11 Hedgers, mostly _____________, engage in forward contracts on the foreign
exchange markets to protect the home currency value of various foreign
currency-denominated assets and liabilities on their balance sheets.
a) commercial banks
b) public utilities
c) multinational corporations
d) speculators
Ans: c
Section: The participants
Level: Easy
7.12 What is the name of the foreign bank account that a trader maintains in a foreign
bank and from which they would request transfer of currency to the account of another
trader with whom they have concluded a transaction?
a) nostro account
b) short sale account
c) settlement account
d) interbank account
Ans: a
Section: The Mechanics of Spot Transactions
Level: Easy
7.13 A ___________ between a bank and a customer calls for a fixed delivery date, at a
fixed exchange rate for a specified amount of one currency against another currency
payment.
a) spot quotation
Chapter 7, The Foreign Exchange Market
b) currency option
c) currency swap
d) forward contract
Ans: d
Section: The forward market
Level: Easy
7.14 The risk that a central bank will not make the necessary transfer of foreign currency
to complete a currency settlement is known as ________ risk.
a) exchange rate
b) Herstatt
c) Interest-rate
d) settlement
Ans: b
Section: The mechanics of spot transactions
Level: Easy
7.15 When an importer goes long in the forward market, they would be
a) buying currency for future delivery
b) selling currency for future delivery
c) arbitraging the interest rate differential
d) buying a forward contract at a premium
Ans: a
Section: The Forward Market
Level: Easy
MEDIUM (applied)
7.16 The spot and 30-day forward rates for the Dutch euro are $1.4757 and $1.48,
respectively. The guilder is said to be selling at a forward
a) premium of 1.2%
b) premium of 3.5%
c) discount of 3.5%
d) discount of 1.2%
Ans: b
Section: Forward quotations
Level: Medium
7.17 Suppose the spot direct quotes for the pound sterling and euro are $1.3981-89 and
$.1230-33, respectively. What is the direct quote for the pound in Paris?
a) €1.1339-73/￡
b) €.8793-.8819/￡
Chapter 7, The Foreign Exchange Market
c) ￡.0808-12/€
d) ￡.0976-87/€
Ans: a
Section: Spot quotations
Level: Medium
7.18 Suppose it is 1995 and the following direct quotes are received for spot and one-
month French francs in New York: .1160-684-6. Then the outright 30- day forward
quote for the French franc was:
a) .1156-62
b) .1164-74
c) .1166-72
d) .1154-64
Ans: b
Section: Forward quotations
Level: Medium
7.19 Suppose it is 1990 and the spot direct quotes for the Swedish krona and French
franc are $.1395-99 and $.1130-33, respectively. What is the direct quote for the krona
in Paris?
a) 1.2312-81
b) 1.2435-37
c) .0806-11
d) .0973-81
Ans: a
Section: Spot quotations
Level: Medium
7.20 Suppose pound sterling is quoted at $1.4419-36, and the Swiss franc is quoted at
$0.6250-67. What is the direct quote for the pound in Zurich?
a) 2.3035-70
b) 2.3018- 88
c) 2.3008-98
d) 2.3020-50
Ans: c
Section: Spot quotations
Level: Medium
7.21 Suppose the Brazilian Real is quoted at $0.9455-9510, and the Thai baht is quoted
at $25.2513-3986. What is the direct quote for the Real in Bangkok?
a) 27.1267-5673
b) 26.7801-9801
Chapter 7, The Foreign Exchange Market
c) 25.2597-2700
d) 26.5524-8626
Ans: d
Section: Spot quotations
Level: Medium
7.22 If the direct price of the dollar is DM2.5 in 1990 Frankfurt and transaction costs
were .4% of the amount transacted, then the minimum- maximum direct quotes for the
DM in New York were:
a) $.3968-4032
b) $2.4800-2.5200
c) $.3984-.4016
d) $2.4900-2.5100
Ans: a
Section: Spot quotations
Level: Medium
7.23 It is 1985 and suppose the 90-day forward quotes on the DM and the French franc
are $.4002-10 and $.1180-90, respectively. What is the direct 90-day forward quote for
the franc in Frankfurt?
a) 3.3625-54
b) 3.3631-92
c) .2943-74
d) .2949-68
Ans: c
Section: Forward quotations
Level: Medium
7.24 The spot and 180-day forward rates for the euro are $1.3310 and $1.3402,
respectively. The euro is said to be selling at a forward
a) discount of 6.9%
b) premium of 6.9%
c) discount of 1.4%
d) premium of 1.4%
Ans: d
Section: Forward quotations
Level: Medium
7.25 Suppose the spot direct quotes for the Italian euro and Swedish krone are $1.2509-
51 and $.1201-10, respectively. What is the direct quote for the Swedish krone in Milan?
a) €.00413-25/Kr
b) €.00422-31/Kr
Chapter 7, The Foreign Exchange Market
c) €.0957-67/Kr
d) Kr.0957-67/€
Ans: c
Section: Forward quotations
Level: Medium
7.26 Suppose the direct quote for sterling in New York is $1.3110-5. Then the direct
quote for dollars in London is:
a) .7110-5
b) 2.6220-30
c) .7625-8
d) 1.3110-5
Ans: c
Section: Spot quotations
Level: Medium
7.27 An American company that imports leather goods from England is most likely to
be
a) long pounds
b) short pounds
c) can't tell
Ans: b
Section: Spot quotations
Level: Medium
DIFFICULT (applied)
7.28 On December 3,2001, spot Japanese yen were sold at $0.008058. Suppose the
180-day forward Japanese yen was selling at a 1.91% annualized premium, what is the
180-day forward rate of the yen?
a) 0.008245
b) 0.008135
c) 0.008457
d) 0.010638
Ans: b
Section: Forward quotations
Level: Difficult
7.29 Suppose the spot rate and forward rate for the British pound are $1.4248 and
$1.4179 respectively. Assume the forward pound is selling at a 1.94% annualized
discount, what is the number of days of the forward contract?
a) 180 days
Chapter 7, The Foreign Exchange Market
b) 120 days
c) 90 days
d) 60 days
Ans: c
Section: Forward quotations
Level: Difficult
7.30 Suppose one observed the following direct spot quotations in New York and
London, respectively: $1.2500-60 and ￡.8000-50. Arbitrage profits per $1 million equal
a) $637
b) $0
c) $1,268
d) $4,492
Ans: b
Section: Currency arbitrage
Level: Difficult
7.31 Suppose it is January 1980 and the $/DM exchange rate is DM1 = $.35 and the
DM/FF exchange rate is FF1 = DM.31. What is the FF/$ exchange rate?
a) 3.226 French francs per dollar
b) 1.129 French francs per dollar
c) .886 French francs per dollar
d) 9.217 French francs per dollar
Ans: d
Section: Cross rates
Level: Difficult
7.32 Suppose the following direct quotes are received for spot and one-month French
francs in New York: .1260-684-6. Then the outright 30-day forward quote for the
French is:
a) .1256-62
b) .1264-74
c) .1266-72
d) .1254-64
Ans: b
Section: Forward quotations
Level: Difficult
7.33 If the direct price of the dollar is DKK5 in Copenhagen and transaction costs are .
5%, then the minimum-maximum direct quotes for the Danish krone in New York are
a) 4.9750-5.0250
b) 4.9500-5.0500
Chapter 7, The Foreign Exchange Market
c) .1980-.2020
d) .1990-.2010
Ans: c
Section: The spot quotations
Level: Difficult
7.34 Suppose the pound sterling is selling for $1.62 and the buying rate for the Swiss
franc is $0.71. Then the ￡/SFr cross rate is
a) ￡1 = SFr 0.4383
b) SFr 1 = ￡2.2817
c) ￡1 = SFr 2.2817
d) SFr 1 = ￡1.2817
Ans: c
Section: Cross rates
Level: Difficult
7.35 Suppose the quote for euro is $.9865-92/€. The percent spread is
a) 2.31%
b) 0.97%
c) 0.62%
d) 0.27%
Ans: d
Section: Transaction costs
Level: Difficult
Chapter 8, Currency Futures and Options Markets
CHAPTER 8
Currency Futures and Options Markets
EASY (definitional)
8.1 What is the name of the market in the U.S. where trade takes place in currency
futures? The
a) United Currency Options Market
b) Philadelphia Stock Exchange
c) New York Futures Market
d) Chicago Mercantile Exchange
Ans: d
Section: Futures contracts
Level: Easy
8.2 In the currency futures market, what is the term that describes the number of
contracts in a currency outstanding at any one time?
a) open interest
b) closed interest
c) long position
d) in-the-money
Ans: a
Section: Futures contracts
Level: Easy
8.3 Which of the following has provided a major inducement for speculators to
participate in the futures market?
a) low margin requirements
b) low bid-ask spreads
c) high volume compared to the forward market
d) all of the above
Ans: a
Section: Forward contracts versus futures contracts
Level: Easy
8.4 This shows how much money must be in the futures market account balance when
the contract is first entered into. It is the
a) initial performance bond
b) performance bond call
c) maintenance performance bond
d) account balance
Chapter 8, Currency Futures and Options Markets
Ans: a
Section: Futures contracts
Level: Easy
8.5 Options traded in the interbank market are known as
a) listed options
b) exchange-traded options
c) over-the-counter options
d) long-term options
Ans: c
Section: Future contracts
Level: Easy
8.6 Major advantages of futures contracts include the
a) large number of currencies traded
b) extensive delivery dates available
c) freedom to liquidate the contract at any time before its maturity
d) unlimited contract sizes
Ans: c
Section: Advantages and disadvantages of future contracts
Level: Easy
8.7 The major disadvantage of forward and futures contracts relative to options is that
the forwards and futures contracts
a) cannot protect the holder against the risk of adverse movements in exchange rates
b) are more expensive
c) are available only for relatively short maturities
d) eliminate the possibility of gaining a windfall profit from favorable movements in
exchange rates
Ans: d
Section: Advantages and disadvantages of future contracts
Level: Easy
8.8 Suppose the current spot rate for the euro is $1.3427. A call option with an exercise
price of $1.3550 is said to be
a) in-the-money
b) out-of-the-money
c) at-the-money
d) past breakeven
Ans: b
Section: Using currency options
Chapter 8, Currency Futures and Options Markets
Level: Easy
8.9 Suppose the current spot rate for the pound is $01.7427. A put option with an
exercise price of $01.7550 is said to be
a) in-the-money
b) out-of-the-money
c) at-the-money
d) past breakeven
Ans: a
Section: Using currency options
Level: Easy
8.10 What is the name for the value of the option that is the amount by which the option
is in-the-money?
a) intrinsic value
b) economic value
c) market price
d) the currency spread
Ans: a
Section: Option Pricing and Valuation
Level: Easy
MEDIUM (applied)
8.11 Which one of the following is credited with an important role on the Chicago
Mercantile Exchange because, in the process of realizing profit opportunities, they keep
futures rates in line with bank forward rates?
a) speculators
b) hedgers
c) arbitrageurs
d) currency traders
Ans: c
Section: Futures contracts
Level: Medium
8.12 The basic difference(s) between forward and futures contracts is that
a) forward contracts are individually tailored while futures contracts are standardized
b) forward contracts are negotiated with banks whereas futures contracts are bought and
sold on an organized exchange
c) forward contracts have no daily limits on price fluctuations whereas futures contracts
have a daily limit on price fluctuations
d) all of the above
Chapter 8, Currency Futures and Options Markets
Ans: d
Section: Forward contract versus futures contract
Level: Medium
8.13 Suppose the current spot rate for the Australian dollar is U.S.$0.8321. The intrinsic
value of an A$50,000 call option with an exercise price of U.S.$0.8195 is
a) $0
b) $630
c) $740
d) $2,340
Ans: b
Section: Option pricing and valuation
Level: Medium
8.14 The time value of a European option
a) is always positive for an out-of-the-money option
b) is always positive for an in-the-money option
c) is always positive for an at-the-money option
d) decreases with the time that remains until the option expires
Ans: a
Section: Option pricing and valuation
Level: Medium
8.15 You can speculate on a pound depreciation by
a) selling pound futures and buying a pound call option
b) buying pound futures and a pound put option
c) selling pound futures and a pound put option
d) none of the above
Ans: d
Section: Using forward or futures contracts versus options
Level: Medium
DIFFICULT (applied)
8.16 Suppose you are holding a long position in a euro futures contract that matures in
76 days. The agreed-upon price is $1.15 for 125,000 euro. At the close of trading today,
the futures price has risen to $1.155. Under marking to market, you now
a) hold a futures contract that has risen in value by $1,250
b) hold a futures contract that has fallen in value by $625
c) will receive $625 and a new futures contract priced at $1.155
d) must pay over $1,250 to the seller of the futures contract
Ans: c
Section: Computing gains, losses and maintenance margins
Chapter 8, Currency Futures and Options Markets
Level: Difficult
8.17 Suppose that the interbank forward bid for March 20 on Swiss francs is $0.7827 at
the same time that the price of IMM Swiss franc futures for delivery on March 20 is
$0.7795. How much of an arbitrage profit could a dealer earn per March Swiss franc
futures contract of SFr 125,000?
a) $400
b) $68
c) $215
d) $58
Ans: a
Section: Arbitrage between the futures and forward markets
Level: Difficult
8.18 Suppose it is May 1998 and the current spot rate for the DM is $0.5925. The call
premium on a call option with an exercise price of $0.5675 is $0.0373. What is the time
value of one DM 62,500 call option?
a) $2,331.25
b) $1,562.50
c) $950.00
d) $768.75
Ans: d
Section: Option pricing and valuation
Level: Difficult
8.19 Suppose it is January 1990 and the current spot rate for the DM is $0.5925. The
call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the
intrinsic value of one DM 62,500 call option?
a) $2,331.25
b) $1,562.50
c) $950.00
d) $768.75
Ans: b
Section: option pricing and valuation
Level: Difficult
8.20 The value of a European option always
a) exceeds its intrinsic value
b) rises with the time to maturity
c) rises with the interest rate
d) rises with the volatility of the exchange rate
Ans: d
Chapter 8, Currency Futures and Options Markets
Section: Option pricing and valuation
Level: Difficult
8.21 A rise in the domestic interest rate will
a) raise the value of foreign-currency call options and reduce the value of
foreign-currency put options
b) raise the value of foreign-currency put options and reduce the value of
foreign-currency call options
c) raise the value of both foreign-currency put and call options
d) reduce the value of both foreign-currency put and call options
Ans: a
Section: Option pricing and valuation
Level: Difficult
8.22 A rise in the foreign interest rate will
a) raise the value of foreign-currency call options and lower the value of
foreign-currency put options
b) raise the value of foreign-currency put options and lower the value of
foreign-currency call options
c) raise the value of both foreign-currency put and call options
d) reduce the value of both foreign-currency put and call options
Ans: b
Section: Option pricing and valuation
Level: Difficult
8.23 You can speculate on an appreciation of the Japanese yen by
a) selling a yen put option and buying a yen call option
b) selling a yen put option and selling a yen call option
c) buying a yen put option and selling a yen call option
d) buying a yen put option and buying a yen call option
Ans: a:
Section: Option pricing and valuation
Level: Difficult
8.24 Fluor Corporation has just made a French euro bid on a major project located in
France. It won't find out for 60 days whether it has won the contract. There will be a
10% signing bonus payable to the winner in euros. The best way to protect against
currency risk on its bid is for Fluor to
a) buy a euro futures contract
b) sell a euro call option
c) sell a euro futures contract
d) buy a euro put option
Ans: d
Chapter 8, Currency Futures and Options Markets
Section: Using forward or futures contracts versus options contracts
Level: Difficult
Chapter 9, Swaps and Interest Rate Derivatives
CHAPTER 9
Swaps and Interest Rate Derivatives
EASY (definitional)
9.1 An __________ swap is an agreement between two parties to exchange interest
payments for a specific maturity in an agreed upon notional amount.
a) interest rate
b) currency
c) bond
d) currency bond
Ans: a
Section: Interest rate swaps
Level: Easy
9.2 In a __________ swaps, two parties exchange floating interest payments based on
different reference rates.
a) basis
b) coupon
c) notional
d) forward rate
Ans: a:
Section: Interest rate swaps
Level: Easy
9.3 The theoretical principal underlying the swap is termed the
a) basis amount
b) swap differential
c) notional principal
d) arbitrage principal
Ans: c
Section: Interest rate swaps
Level: Easy
9.4 In the swap market, the reference amount against which the interest is calculated is
known as the
a) notional principal
b) basis amount
c) arbitrage principal
d) swap differential
Ans: a
Section: Interest rate swaps
Chapter 9, Swaps and Interest Rate Derivatives
Level: Easy
9.5 In a _____ swap, one party pays a fixed rate calculated at the time off trade as a
spread to a particular Treasury bond, and the other sides pays a floating rate.
a) currency
b) interest rate
c) coupon
d) basis
9.6 The exchange of debt-service obligations denominated in one currency for the
service on an agreed-upon principal amount of debt denominated in another currency is
known as
a) a currency swap
b) an interest rate swap
c) a floating-rate bond
d) a fixed-rate bond
Ans: a
Section: Currency swaps
Level: Easy
Ans: c
Section: Interest rate swaps
Level: Easy
9.7 In a currency swap, the effective interest rate on the money raised is known as the
a) notional principal
b) all-in cost
c) right of offset
d) yield to call
Ans: b
Section: Currency swaps
Level: Easy
9.8 Swaps provide a real economic benefit to the counterparties only if a barrier exists to
prevent ______ from functioning fully.
a) hedging
b) factoring
c) arbitrage
d) forfaiting
Ans: c
Section: Economic advantages of swaps
Level: Easy
Chapter 9, Swaps and Interest Rate Derivatives
9.9 A(n) ________ is a cash-settled, over-the-counter forward contract that allows a
company to fix an interest rate to be applied to a specified future interest period on a
notional principal amount.
a) interest rate currency swap
b) dual currency bond
c) exchange of principal
d) forward rate agreement
Ans: d
Section: Forward rate agreement
Level: Easy
9.10 The average interest rate offered by a specific group of multinational banks in
London is known as the
a) LIBOR rate
b) prime rate
c) fed funds rate
d) Eurobond rate
Ans: a
Section: Interest rate swaps
Level: Easy
9.11 In the swap market, the reference amount against which the interest is calculated is
known as the
a) notional principal
b) basis amount
c) arbitrage principal
d) swap differential
Ans: a
Section: Interest rate swaps
Level: Easy
9.12 A(n) __________ is a contract that fixes an interest rate today on a future loan or
deposit
a) inverse floater
b) step-up
c) step-down
d) forward forward
Ans: d
Section: Forwards
Level: Easy
Chapter 9, Swaps and Interest Rate Derivatives
9.13 A _________ future is a cash-settled futures contract for a three-month $1,000,000
eurodollar deposit that pays LIBOR.
a) forward
b) eurodollar
c) forward rate agreement
d) currency swap
Ans: b
Section: Eurodollar futures
Level: Easy
9.14 What is the name of the debt instruments with a high coupon in earlier payment
periods and a lower coupon in later payment periods?
a) step-down coupon notes
b) callable step-up notes
c) inverse floaters
d) structured notes
Ans: a
Section: Structured Notes
Level: Easy
MEDIUM (applied)
9.15 Swaps are primarily of value because they permit firms to
a) tap new capital markets
b) reduce risks
c) reduce taxes
d) a and b only
Ans: d
Section: Economic advantages of swaps
Level: Medium
9.16 A currency swap is equivalent to a
a) currency option, with the exercise price equal to the current spot rate
b) long-dated forward foreign exchange contract, where the forward rate is the current
spot rate.
c) interest rate swap, where the basis is the differential between the fixed and floating
interest rates
d) short-term currency futures contract
Ans: b
Section: Currency swaps
Level: Medium
Chapter 9, Swaps and Interest Rate Derivatives
9.17 A currency swap is most similar in economic purpose to a
a. basis swap
b. parent company loan
c. debt-equity swap
d. parallel loan
Ans: d
Section: Currency swaps
Level: Medium
9.18 Currency swaps are often used to provide long-term financing in foreign currencies
but NOT because
a) long-term capital markets are not well developed
b) long-term forward foreign exchange markets are absent
c) of high foreign taxes
d) long-term capital markets are easily accessible
Ans: c
Section: Currency swaps
Level: Medium
9.19 If the world capital market were fully integrated, the incentive to swap would be
____ because ____ arbitrage opportunities would exist.
a) increased; more
b) reduced; fewer
c) increased; fewer
d) reduced; more
Ans: b
Section: Economic advantages of swaps
Level: Medium
DIFFICULT (applied)
The following statement is to be used in answering questions 20 and 21.
Company X, a low-rated firm, desires a fixed-rate, long-term loan. X presently has access
to floating interest rate funds at a margin of 1.25% over LIBOR. Its direct borrowing cost
is 11% in the fixed-rate bond market. In contrast, company Y, which prefers a
floating-rate loan, has access to fixed-rate funds in the Eurodollar bond market at 9% and
floating-rate funds at LIBOR + 1/4%. Suppose they split the cost savings.
9.20 How much would X pay for its fixed-rate funds?
a) 9.5%
b) 10.0%
c) 10.5%
Chapter 9, Swaps and Interest Rate Derivatives
d) 10.75%
Ans: c
Section: Interest rate and currency swaps,
Level: Difficult
9.21 How much would Y pay for its floating-rate funds?
a) LIBOR -.25%
b) LIBOR -.50%
c) LIBOR
d) LIBOR + .5%
Ans: a
Section: Interest rate and currency swaps
Level: Difficult
The following statement is to be used in answering questions 22-24.
Axil Corp. has not tapped the Deutsche mark public debt market because of concern
about a likely appreciation of that currency and only wishes to be a floating-rate dollar
borrower, which it can be at LIBOR + 1%. Bevel Corp. strongly prefers fixed-rate DM
debt, but it must pay 1.5% more than the 6 1/4% coupon that Axil's DM notes would
carry. Bevel, however, can obtain Eurodollars at LIBOR + ?%.
9.22 What is the maximum possible cost savings to Axil from engaging in a currency
swap with Bevel?
a) 1%
b) 75%
c) 2%
d) 1.25%
Ans: c
Section: Interest rate and currency swaps
Level: Difficult
9.23 What is the maximum possible cost savings to Bevel from engaging in a currency
swap with Axil?
a) 1%
b) 75%
c) 2%
d) 1.25%
Ans: c
Section: Interest rate and currency swaps
Level: Difficult
Chapter 9, Swaps and Interest Rate Derivatives
9.24 Suppose a bank charges .8% to arrange the swap and Axil and Bevel split the
resulting cost savings. Then Axil will pay --- for its floating-rate money and Bevel will
pay ---- for its fixed-rate money.
a) LIBOR - .7%; 7.5%
b) LIBOR + .4%; 7.15%
c) LIBOR; 7.45%
d) LIBOR + .5%; 6.75%
Ans: b
Section: Interest rate and currency swaps
Level: Difficult
9.25 The economic benefits associated with swaps may derive from all of the following
EXCEPT
a) legal restrictions on spot and forward foreign exchange transactions
b) different perceptions by investors of risk and creditworthiness of the two parties to the
swap
c) appeal or acceptability of one borrower to a certain class of investor
d) in nations with fixed or pegged exchange rates
Ans: d
Section: Economic advantages of swaps
Level: Difficult
9.26 Suppose a U.S. corporation wants to secure fixed-rate funds in pounds in order to
reduce its pound exposure, but is hampered in doing so because it is a relatively unknown
credit in the British financial market. In contrast, a British company that is well
established in its own country may desire floating-rate dollar financing, but is relatively
unknown in the U.S. financial market. What is the most appropriate form of swap for
these two parties?
a) interest rate/currency swap
b) currency swap
c) interest rate swap
d) debt/equity swap
Ans: a
Section: Interest rate and currency swaps
Level: Difficult
Chapter 10, Measuring and Managing Translation and Transaction Exposure
CHAPTER 10
Measuring and Managing Translation and Transaction Exposure
EASY (definitional)
10.1 ___________ a certain currency exposure means establishing an offsetting
currency position so that the gain or loss from the exposure on the original currency is
exactly offset buy the gain or loss from the currency hedge.
a) Arbitraging
b) Cross-hedging
c) Hedging
d) Risk shifting
Ans: c
Section: Alternative measures of foreign exchange exposure
Level: Easy
10.2 Hedging cannot provide protection against ________ exchange rate changes.
a) expected
b) nominal
c) real
d) pegged
Ans: a
Section: Designing a hedging strategy
Level: Easy
10.3 The basic hedging strategy involves
a) reducing hard currency assets and soft currency liabilities
b) increasing hard currency liabilities and soft currency assets
c) reducing soft currency assets and hard currency liabilities
d) converting soft currencies to hard currencies and lending hard currencies
Ans: c
Section: Designing a hedging strategy
Level: Easy
10.4 Translation exposure reflects the exposure of a company's
a) foreign operations to currency movements
b) foreign sales to currency movements
c) financial statements to currency movements
d) cash flows to currency movements
Ans: c
Section: Alternative currency translation methods
Level: Easy
Chapter 10, Measuring and Managing Translation and Transaction Exposure
10.5 The type of exposure that arises from the need, for purposes of reporting and
consolidating, to convert the financial statements of foreign operations from the
local currencies involved to the home currency is known as
a) translation exposure
b) accounting exposure
c) transaction exposure
d) both a and b
Ans: d
Section: Alternative Currency Translation Methods
Level: Easy
10.6 The type of exposure that measures the extent to which currency fluctuations can
alter a company’s future operating cash flows, that is, its future revenues and costs
is known as
a) translation exposure
b) accounting exposure
c) transaction exposure
d) operating exposure
Ans: d
Section: Alternative Currency Translation Methods
Level: Easy
10.7 The current standard for measuring translation exposure is
a) the current/noncurrent method
b) the monetary/nonmonetary method
c) FASB 8
d) FASB 52
Ans: d
Section: Alternative Currency Translation Methods
Level: Easy
10.8 Under FASB 52, most financial statements must be translated using the
a) monetary/nonmonetary method
b) current/noncurrent method
c) current rate method
d) temporal method
Ans: c
Section: Alternative Currency Translation Methods
Level: Easy
Chapter 10, Measuring and Managing Translation and Transaction Exposure
10.9 Firms that attempt to reduce risk and beat the market simultaneously may end up
with
a) more risk, not less
b) less risk
c) a profit as well as reduced risk
d) a loss as well as reduced risk
Ans: a
Section: Designing a hedging strategy
Level: Easy
10.10 One argument that favors centralization of foreign risk management is the ability
to take advantage of the portfolio effect through ________.
a) risk shifting
b) risk sharing
c) offshore banking
d) exposure netting
Ans: d
Section: Centralization versus decentralization
Level: Easy
10.11 The ability to take advantage of the portfolio effect through exposure netting to
manage foreign risk assumes the firm will use
a) centralization of its hedging activities
b) segmentation of its hedging activities to the firm’s foreign subsidiaries
c) decentralization of its hedging activities
d) foreign banks and the purchase of forward contracts.
Ans: a
Section: Centralization versus decentralization
Level: Easy
10.12 In a forward market hedge, a company that is long a foreign currency will ____
the foreign currency forward.
a) buy
b) sell
c) borrow
d) lend
Ans: b
Section: Centralization versus decentralization
Level: Easy
Chapter 10, Measuring and Managing Translation and Transaction Exposure
10.13 A ________ involves simultaneously borrowing and lending activities in two
different currencies to lock in the currency’s value of a future foreign currency cash
flow.
a) forward contract
b) currency collar
c) money-market hedge
d) currency option
Ans: c
Section: Money-market hedge
Level: Easy
10.14 A __________ involves offsetting exposures in one currency with exposures in
the same or another currency, where exchange rates are expected to move in such a way
that losses on the first exposed position should be offset by gains on the second currency
exposure and vice versa.
a) forward contract
b) exposure netting
c) money-market hedge
d) currency option
Ans: b
Section: Exposure netting
Level: Easy
10.15 The FASB document that aims to establish accounting and reporting standards for
derivative instruments and for hedging activities is FASB
a) 8
b) 52
c) 100
d) 133
Ans: d
Section: Accounting for Hedging and FASB 133
Level: Easy
10.16 Which one of the following is most likely to depreciate?
a) hard currency
b) soft currency
c) currency with a high national growth rate
d) currency with expected interest rates expected to decrease
Ans: b
Section: Managing Translation Exposure
Level: Easy
Chapter 10, Measuring and Managing Translation and Transaction Exposure
MEDIUM (applied)
10.17 The major difference between the temporal method and the
monetary/nonmonetary method is that
a) under the monetary/nonmonetary method, long-term debt is translated at the
historical rate, whereas under the temporal method, long-term debt is translated at the
current rate
b) under the monetary/nonmonetary method, inventory is always translated at the
historical rate, whereas under the temporal method, inventory may be translated at the
current rate if the inventory is shown on the balance sheet at market values
c) under the monetary/nonmonetary method, fixed assets are translated at the historical
rate, whereas under the temporal method, fixed assets may be translated at the current
rate
d) under the monetary/nonmonetary method, accounts receivable are always translated
at the historical rate, whereas under the temporal method, receivables may be translated
at the current rate
Ans: b
Section: Alternative currency translation methods
Level: Medium
10.18 ____________ exposure results from the possibility of incurring a gain or loss
related to a sale or purchase already entered into and denominated in another currency.
a) translation
b) transaction
c) operating
d) accounting
Ans: b
Section: Transaction exposure
Level: Medium
10.19 It is possible for transaction exposure to be positive and translation exposure in
the same currency to be
a) always positive
b) exactly offsetting
c) negative
d) synonymous
Ans: c
Section: Transaction exposure
Level: Medium
10.20 Which one of the following would NOT be a suggested element for an effective
exposure management strategy?
a) determine the types of exposure to be monitored
Chapter 10, Measuring and Managing Translation and Transaction Exposure
b) formulate corporate objectives
c) ensure that the corporate objectives a consistent with maximizing shareholder value
d) avoid the use of forward contracts where possible
Ans: d
Section: Designing a hedging strategy
Level: Medium
The following information is to be used in answering questions 21-22.
In 1995, Ajax Manufacturing's German subsidiary has the following balance sheet:
Cash, marketable
securities
Accounts receivable
Inventory (at market.
Fixed Assets
Total assets
DM 250,000
1,000,000
2,700,000
5,100,000
-----------------
DM 9,050,000
Current liabilities
Long-term debt
Equity
Total liabilities
plus equity
DM 750,000
3,400,000
4,900,000
---------------
DM 9,050,000
Suppose the DM appreciates from $0.70 to $0.76 during the period.
10.21 Under the current/noncurrent method, what is Ajax's translation gain (loss).?
a) a gain of $294,000
b) a gain of $192,000
c) a loss of $174,000
d) a loss of $12,000
Ans: b
Section: Current/non current method
Level: Medium
10.22 Under the temporal method, what is Ajax's translation gain (loss).?
a) a gain of $294,000
b) a gain of $192,000
c) a loss of $174,000
d) a loss of $12,000 = -0.06 x (750K+3400K-250K-1000K-2700K)
Ans: d
Section: Temporal method
Level: Medium
10.23 Under the current rate method, what is Ajax's translation gain (loss).?
a) a gain of $294,000
b) a gain of $192,000
c) a loss of $174,000
d) a loss of $12,000
Chapter 10, Measuring and Managing Translation and Transaction Exposure
Ans: a
Section: Current rate method
Level: Medium
10.24 Under the monetary/non-monetary method, what is Ajax's translation gain (loss)?
a) a gain of $294,000
b) a gain of $192,000
c) a loss of $174,000 = -0.06x(750K+3400K-250K-1000K)
d) a loss of $12,000
Ans: c
Section: Monetary/non-monetary method
Level: Medium
10.25 Which of the following is a basic hedging technique during a depreciation?
a) buy local currency forward
b) sell a local currency put option
c) reduce levels of local currency cash and marketable securities
d) loosen credit (increase local currency receivables)
Ans: c
Section: Costs and benefits of standard hedging techniques
Level: Medium
10.26 Dell Computer has a ￡1 million receivable that it expects to collect in one year.
Suppose the interest rate on pounds is 15%. How could Dell protect this receivable using
a money market hedge?
a) borrow ￡1 million pounds today
b) lend ￡1 million pounds today
c) borrow ￡869,565 pounds today
d) lend ￡986,754 pounds today
Ans: c
Section: Basic hedging techniques
Level: Medium
10.27 Suppose markets are efficient, there are no taxes, and relative prices remain
constant. In such a world,
a) hedging can not still be of value
b) exchange risk management remains of vital concern
c) markets are always free of inflation
d) exchange risk is nonexistent
Chapter 10, Measuring and Managing Translation and Transaction Exposure
Ans: b
Section: Managing risk management
Level: Medium
10.28 American Airlines hedges a ￡2.5 million receivable by selling pounds forward. If
the spot rate is ￡1 = $1.73 and the 90-day forward rate is $1.7158, what is American's
cost of hedging?
a) $142,000
b) $35,500
c) $8,875
d) it is unknown at the time American enters into its hedge
Ans: d
Section: The true cost of hedging
Level: Medium
10.29 Suppose it is 1987 and General Motors uses a money market hedge to protect an
Lit 200 million payable due in one year. The U.S. interest rate at the time of the hedge
was 9% and the lira interest rate was 14%. If the spot rate moved from Lit 1293 at the
start of the year to Lit 1349 at the end of the year, what was GM's cost of the money
market hedge?
a) $3,647
b) $414
c) GM gained $1,069
d) GM gained $5,631
Ans: b
Section: Money-market hedge
Level: Medium
10.30 Suppose PepsiCo hedges a ￥1 billion dividend it expects to receive from its
Japanese subsidiary in 90 days with a forward contract. The current spot rate is ￥150/$1
and the 90-day forward rate is ￥149/$1. If the spot rate in 90 days is ￥154/$, how much
has this forward market hedge cost PepsiCo?
a) $173,160
b) $44,743
c) Pepsi gains $173,160 from the forward contract
d) Pepsi gains $217,903 from the forward contract
Ans: d
Section: Money-market hedge
Level: Medium
Chapter 10, Measuring and Managing Translation and Transaction Exposure
DIFFICULT (applied)
10.31 Suppose the English subsidiary of a U.S. firm had current assets of ￡1 million,
fixed assets of ￡2 million and current liabilities of 1 million pounds both at the start and
at the end of the year. There are no long-term liabilities. If the pound depreciated during
that year from $1.50 to $1.30, the translation gain (loss) to be included in the parent
company's equity account according to FASB #52 is
a) 0 since the current assets and current liabilities cancel
b) +$200,000
c) -$250,000
d) -$400,000
Ans: d
Section: Application of FASB No. 52
Level: Difficult
10.32 Suppose the German subsidiary of a U.S. firm had current assets of €3 million,
fixed assets of €6 million and current liabilities of €3 million both at the start and at the
end of the year. There are no long-term liabilities. If the euro depreciated during that
year from $.48 to $.38, the FASB-52 translation gain (loss. to be included in the parent
company's equity account is
a) 0, since the current assets and current liabilities cancel
b) +$300,000
c) -$350,000
d) -$600,000
Ans: d
Section: Application of FASB No. 52
Level: Difficult
10.33 Transaction gains and losses that result from adjusting assets and liabilities
denominated in a currency other than the functional currency must appear on the foreign
unit's income statement unless the gains or losses are attributable to
a) foreign currency transactions that are designated as an economic hedge of a net
investment in a foreign entity
b) intercompany foreign-currency transactions that are of a short- term nature
c) foreign-currency transactions that involve currency speculation
d) the prospect of government intervention using currency controls
Ans: a
Section: Application of FASB No. 52
Level: Difficult
10.34 If you fear the dollar will rise against the Spanish peseta, with a resulting adverse
change in the dollar value of the equity of your Spanish subsidiary, you can hedge by
Chapter 10, Measuring and Managing Translation and Transaction Exposure
a) selling pesetas forward in the amount of net assets
b) buying pesetas forward in the amount of net assets
c) reducing the liabilities of the subsidiary
d) selling pesetas forward in the amount of total assets
Ans: a
Section: Forward market hedge
Level: Difficult
10.35 On March 1, 1998, Bechtel submits a franc-denominated bid on a project in
France. Bechtel will not learn until June 1 whether it has won the contract. What is the
most appropriate way for Bechtel to manage the exchange risk on this contract?
a) sell the franc amount of the bid forward for U.S. dollars
b) buy French francs forward in the amount of the contract
c) buy a put option on francs in the amount of the franc exposure
d) sell a call option on francs in the amount of franc exposure
Ans: c
Section: Foreign currency options
Level: Difficult
10.36 A Japanese firm sells TV sets to an American importer for one billion yen
payable in 90 days. To protect against exchange risk, the importer could
a) borrow yen, convert to dollars, and lend dollars for the interim period
b) sell yen on the forward market
c) sell a call option on yen
d) buy a futures contract for yen on the IMM
Ans: d
Section: Cross-hedging
Level: Difficult
10.37 If you fear the dollar will rise against the French euro, with a resulting adverse
change in the dollar value of the equity of your French subsidiary, you can hedge by
a) selling euros forward in the amount of net assets
b) buying euros forward in the amount of net assets
c) reducing the liabilities of the subsidiary
d) selling euros forward in the amount of total assets
Ans: a
Section: Forward market hedge
Level: Difficult
Chapter 10, Measuring and Managing Translation and Transaction Exposure
10.38 Suppose that the spot rate and the 90-day forward rate on the pound sterling are
$1.35 and $1.30, respectively. Your company, wishing to avoid foreign exchange risk,
sells ￡500,000 forward 90 days. Assuming that the spot rate remains the same 90 days
hence, your company would
a) receive ￡500,000 90 days hence
b) receive more than ￡500,000 in 90 days
c) have been better off not to have sold pounds forward
d) receive nothing
Ans: c
Section: Forward market hedge
Level: Difficult
10.39 In 1993, Ford simultaneously borrows Spanish pesetas at 13% and invests dollars
at 10%, both for one year. At the time Ford enters into these transactions, the spot rate
for the peseta is $0.095. If the spot rate is Ptas. 1 = $0.087 in one year, what is the cost
to Ford of this money market hedge?
a) 2.0%
b) 3.8%
c) 1.3%
d) Ford has a 6.5% gain, not a cost
Ans: d
Section: Forward market hedge
Level: Difficult
10.40 Du Pont has entered into a currency risk sharing arrangement with British Gas.
Under the contract, Du Pont agrees to pay British Gas a base price of $10 million for gas
purchases, but the parties would share the currency risk equally beyond a neutral zone,
specified as a band of exchange rates: $1.67-1.73:￡1. Within the neutral zone, Du Pont
must pay BG the pound equivalent of $10 million at the base rate of $1.70. Suppose the
spot rate at the time of payment is ￡1 = $1.63. How much will Du Pont owe British Gas?
a) $10 million
b) $9,702,381
c) $9,588,235
d) $9,819,277
Ans: b
Section: Currency risk sharing
Level: Difficult
The following information is to be used in answering questions 36-38.
U.S. borrowing rate for 1 year = 9.5%
Chapter 10, Measuring and Managing Translation and Transaction Exposure
U.S. deposit rate for 1 year = 8.7%
French borrowing rate for 1 year = 11.3%
French deposit rate for 1 year = 10.2%
French franc spot quote = $0.1763-78
French franc 1-year forward quote = $0.1729-47
10.41 What value can Alcoa lock in for a receivable of FF 3 million due in one year if
it executes a money market hedge today?
a) $525,540
b) $516,545
c) $530,012
d) $520,940
Ans: b
Section: Money-market hedge
Level: Difficult
10.42 What value can Alcoa lock in for its FF 3 million receivable if it executes a
forward contract today?
a) $518,700
b) $524,100
c) $528,900
d) $532,410
Ans: a
Section: Forward market hedge
Level: Difficult
10.43 Suppose Alcoa in 1995 had a payable of FF 1 million due in one year. Alcoa's
cost of the payable using a money market hedge is ----- and its cost using a forward
market hedge is -----.
a) $173,900; $177,470
b) $174,925; $176,300
c) $176,671; $172,900
d) $178,937; $174,700
Ans: d
Section: Money-market hedge
Level: Difficult
10.44 In 1990, Goodyear had operations in both Germany and the Netherlands. In the
past the Dutch guilder and Deutsche mark were highly correlated in their movements
Chapter 10, Measuring and Managing Translation and Transaction Exposure
against the U.S. dollar. If the Dutch unit has net inflows of guilders and the German unit
has net inflows of DM, then Goodyear's combined transaction exposure
a) approximately equals the sum of its guilder and DM exposures
b) is less than the sum of its guilder and DM exposures because the currencies are
highly correlated
c) is less than the sum of its guilder and DM exposures because of diversification
between the company’s subsidiaries
d) is not significant due to the highly correlated nature of the two currencies
Ans: a
Section: Cross-hedging
Level: Difficult
10.45 In 1996, DEC hedges a FF 3.2 million receivable due in 180 days. The current
spot rate is FF 1 = $0.18834 and the 180-day forward rate is FF 1 = $0.18625. If the spot
rate at the end of 180 days is $0.18728, how much has the forward market hedge cost
DEC?
a) $6,688
b) $3,392
c) $3,296
d) DEC gains $6,688 on the hedge
Ans: c
Section: Forward market hedge
Level: Difficult
Chapter 11, Measuring and Managing Economic Exposure
CHAPTER 11
Measuring and Managing Economic Exposure
EASY (definitional)
11.1 During a home currency appreciation, exporters may pull out of markets that
foreign competition makes ________.
a) unprofitable
b) more competitive
c) profitable
d) more liquid
Ans: a
Section: Foreign exchange risk and economic exposure
Level: Easy
11.2 Economic exposure is based on the extent to which the ______ of the firm will
change when exchange rates change.
a) value
b) current assets
c) long-term liabilities
d) competitive advantages
Ans: a
Section: Foreign exchange risk and economic exposure
Level: Easy
11.3 The exposure that is based on the extent to which the value of the firm will change
when future exchange rates change is known as
a) translation exposure
b) accounting exposure
c) transaction exposure
d) economic exposure
Ans: d
Section: Foreign exchange risk and economic exposure
Level: Easy
11.4 _______ exposure arises because currency fluctuations can alter a company’s
future revenues and expenses.
a) transaction
b) operating
c) political
d) translation
Ans: b
Chapter 11, Measuring and Managing Economic Exposure
Section: Foreign exchange risk and economic exposure
Level: Easy
11.5 When an exposure arises due to currency fluctuations that may alter a company’s
future revenues and expenses is referred to as
a) operating exposure
b) translation exposure
c) political exposure
d) accounting exposure
Ans: a
Section: Foreign exchange risk and economic exposure
Level: Easy
11.6 With respect to home currency (HC) appreciation, the key issue for a domestic firm
is its degree of ____.
a) market share
b) product differentiation
c) marketing plan
d) pricing flexibility
Ans: d
Source: Operating exposure
Level: Easy
11.7 In the face of exchange rate volatility, developing a pricing strategy must address
two key issues:
a) market selection and segmentation
b) market share and the work force
c) market share and profit margin
d) market share and segmentation
Ans: c
Section: Pricing strategy
Level: Easy
11.8 The _______ the price elasticity of demand, the _____ the incentive to hold down
price and thereby expand sales.
a) lower, greater
b) lower, lower
c) greater, lower
d) greater, greater
Ans: d
Section: Operating exposure
Level: Easy
Chapter 11, Measuring and Managing Economic Exposure
11.9 During periods of exchange rate volatility, firms dealing in _______ products face
more exchange rate risk that the firms selling _________ products.
a) low demand, high demand
b) low supply, high supply
c) undifferentiated, differentiated
d) differentiated, undifferentiated
Ans: c
Section: Operating exposure
Level: Easy
11.10 With respect to production management of exchange risk, ________ and plant
location are the principal variables that companies may change to manage the risk.
a) product innovation
b) product retirement
c) market selection
d) product sourcing
Ans: a
Section: Product strategy
Level: Easy
11.11 Product innovation and plant location are the principal variables that companies
may change to manage the risk with respect to
a) production management
b) product retirement
c) market selection
d) product pricing
Ans: a
Section: Product strategy
Level: Easy
11.12 One way an MNC may improve productivity in the face of exchange rate volatility
is by revising ________.
a) product offerings
b) the input mix
c) and shifting production between plants
d) the promotional strategy
Ans: a
Section: Product strategy
Level: Easy
11.13 The greatest boost to a firm’s competitiveness comes from compressing the time
it takes to bring new and improved products to market also known as _________.
Chapter 11, Measuring and Managing Economic Exposure
a) product innovation
b) the product cycle
c) input mix
d) market segmentation
Ans: b
Section: Planning for exchange rate changes
Level: Easy
11.14 While the strategic marketing and production adjustments occur over the long run,
financial management may finance the firm’s operations such that shortfalls in cash flows
during the adjustments are offset by a reduction in __________ expenses.
a) marketing
b) production
c) debt-servicing
d) hedging
Ans: c
Section: Financial management of exchange rate risk
Level: Easy
MEDIUM (applied)
11.15 A weak dollar will
a) force American exporters to raise their foreign currency prices
b) enable American importers to reduce their dollar costs
c) enable American exporters to improve their profit margins
d) cost American exporters market share abroad
Ans: c
Section: Real exchange rate changes and exchange rate risk
Level: Medium
11.16 Which of the following would accompany a weak U.S. dollar?
a) American exporters raise their foreign currency prices
b) American importers reduce their dollar costs
c) American exporters improve their profit margins
d) American exporters lose market share abroad
Ans: c
Section: Real exchange rate changes and exchange rate risk
Level: Medium
11.17 A company producing an undifferentiated product and competing with
internationally diversified competitors will face a relatively ___ price elasticity of
demand for its products and possess a relatively ___ degree of pricing flexibility.
a) high, low
Chapter 11, Measuring and Managing Economic Exposure
b) low, low
c) low, high
d) high, high
Ans: a
Section: Operating exposure
Level: Medium
11.18 Which one of the following would NOT be an appropriate response for a U.S.
exporter to appreciation of the dollar?
a) raise the foreign currency price if the dollar appreciation was expected to be
temporary and the cost of regaining market share was minimal
b) move some production offshore if the appreciation were expected to persist for an
extended period
c) keep the foreign currency price constant if demand is quite elastic
d) lower the foreign currency price if demand is inelastic for the product
Ans: d
Section: Operating exposure
Level: Medium
11.19 Which one of the following areas is NOT a way companies often respond to
exchange rate risk when they alter their product strategy?
a) shifting the firm’s manufacturing base to another country
b) the timing of new-product introduction
c) changing the size of its product line
d) product innovation with advanced technology
Ans: a
Section: Product strategy
Level: Medium
11.20 Which of the following strategies assumes that the MNC has already collected a
portfolio of different facilities world wide?
a) production shifting
b) product innovation
c) product sourcing
d) raising productivity
Ans: a
Section: Shifting production among plants
Level: Medium
11.21 For the strategy of product shifting to succeed, it is assumed the MNC has
collected
a) a portfolio of production facilities worldwide
Chapter 11, Measuring and Managing Economic Exposure
b) the funding of global banks
c) a set of efficient production processes
d) a collection of subsidiaries in low cost markets
Ans: a
Section: Shifting production among plants
Level: Medium
11.22 When we examine operating exposure, the key issue for a domestic firm is its
a) prior import competition
b) pricing flexibility
c) asset valuation adjustment
d) low import content
Ans: b
Section: Operating exposure
Level: Medium
DIFFICULT (applied)
11.23 Volkswagen almost went bankrupt in 1973 because
a) it failed to offset the exchange risk associated with its cost structure and revenue
structure with a suitable liability structure
b) it gambled on the value of dollar
c) it priced its cars in dollars
d) it priced its cars in deutschemarks
Ans: a
Section: Financial management of exchange rate risk
Level: Difficult
11.24 A company producing a differentiated product and competing with internationally
diversified competitors will face a relatively __ price elasticity of demand for its products
and possess a relatively ___ degree of pricing flexibility.
a) high, low
b) low, low
c) low, high
d) high, high
Ans: c:
Section: Operating exposure
11.25 The appropriate response for a U.S. exporter to depreciation of the dollar would
be to
a) raise the foreign currency price if the dollar depreciation was expected to be
temporary and the cost of losing market share was minimal
Chapter 11, Measuring and Managing Economic Exposure
b) move some production offshore if the depreciation were expected to persist for an
extended period
c) lower the foreign currency price constant if demand is quite inelastic
d) set up a netting center in the home country
Ans: a
Section: Characteristic economic effects of exchange rate changes
Level: Difficult
11.26 Suppose McDonald's charges Ptas. 25 for a burger in Madrid. Its costs are Ptas.
18 per burger and these costs are not expected to change with the exchange rate. If the
peseta devalues from $0.107 to $0.096, what price will McDonald's have to charge for its
burgers to maintain its dollar profit margin?
a) Ptas. 25.80
b) Ptas. 27.86
c) Ptas. 22.43
d) Ptas. 24
ANSWER: a
Section: Calculating economic exposure
Level: Difficult
11.27 Suppose Apple is selling Macintosh computers in 1996 in Germany for DM 5,500
when the exchange rate is DM 1 = $0.68. If the DM rises to $0.71, what price must Apple
charge to maintain its dollar unit revenue?
a) DM 5,147
b) DM 6,361
c) DM 5,743
d) DM 5,268
Ans: d:
Section: Calculating economic exposure
Level: Difficult
11.28 Following a devaluation of the Greek drachma, which of the following products
sold in Greece is most likely to bear a drachma price increase?
a) Fiat automobile, sold to the low end of the market
b) Kentucky Fried Chicken dinner, facing competition from local fast food restaurants
c) IBM mainframe computer, whose only competition comes from other American
computer companies
d) shirts from Hong Kong, facing competition from local manufacturers
Ans: c
Section: operating exposure
Level: Difficult
Chapter 11, Measuring and Managing Economic Exposure
11.29 In the face of an appreciating yen, Toyota should consider
a) investing in U.S. production facilities
b) raising its research and development investment
c) coming out with new cars targeted at the low end of the market
d) a and b only
Ans: d
Section: Operating exposure
Level: Difficult
11.30 A U.S. exporter that anticipates an appreciation of the dollar should
a) sell foreign currencies forward
b) borrow foreign currencies
c) scout out possible foreign production sites
d) consider raising dollar prices on exports
Ans: c
Section: Planning for exchange rate risk
Level: Difficult
11.31 Which of the following products is most likely to benefit from depreciation of the
U.S. dollar?
a) high-end signal processor from Hewlett-Packard that faces minimal competition
b) Chevrolet automobile with a highly price elastic demand
c) Mercedes-Benz auto facing price inelastic demand
d) low-end Japanese machine tools
Ans: b
Section: Foreign exchange risk and economic exposure
Level: Difficult
11.32 Jet engine manufacturing entails enormous economies of scale. Pratt & Whitney,
a large U.S. jet engine producer, faces substantial competition from Rolls-Royce, the
British engine manufacturer. What would be the BEST way for P & W to cope with a
dollar that has recently appreciated by 50%?
a) accelerate R&D spending and cost-cutting efforts
b) shift some of its production abroad
c) raise the foreign currency prices of its engines sold abroad
d) buy dollars forward
Ans: a
Section: Foreign exchange risk and economic exposure
Level: Difficult
11.33 Which one of the following would not be an improvement from shorter product
cycles to improve currency risk management? It would allow the firm to
Chapter 11, Measuring and Managing Economic Exposure
a) incorporate more up-to-date technology in its products
b) respond more quickly to changing market conditions
c) reduce the average price elasticity of demand
d) increase the average price elasticity of demand
Ans: d
Section: The economic consequences of exchange rate changes
Level: Difficult
11.34 Nissan, the Japanese car manufacturer, exports a substantial fraction of its output
to the United States. What financial measures would be suitable for Nissan to take to
reduce its currency risk?
a) borrow only yen to finance its operations
b) borrow dollars to finance part of its operations
c) sell yen forward in the amount of its annual shipments to the U.S.
d) buy yen forward in the amount of its annual shipments to the U.S.
Ans: b
Section: The economic consequences of exchange rate changes
Level: Difficult
11.35 Sumitomo Bank wants to expand its lending in the United States, but to do so it
needs to raise more long-term debt capital to help finance these loans. Currently,
long-term interest rates are 9.5% in the U.S. and 6.3% in Japan. What would you
recommend Sumitomo do?
a) raise yen in Japan because of the lower cost of money
b) raise yen in Japan because Japanese investors are more patient than U.S. investors
c) raise dollars in the U.S. to hedge against currency risk
d) raise dollars in the U.S. to avoid depressing Tokyo stocks
Ans: c
Section: The economic consequences of exchange rate changes
Level: Difficult
Chapter 12, International Financing and National Capital Markets
CHAPTER 12
International Financing and National Capital Markets
EASY (definitional)
12.1 The most preferred form of securities for funding by firms in the U.S. has been
a) debt
b) preferred stock
c) common stock
d) stock derivatives
Ans: a
Section: Corporate sources and uses of funds
Level: Easy
12.2 The issuer of corporate debt or equity will usually turn to a financing specialist to
assist in designing and marketing the issue. The specialist is referred to as a
a) investment banker
b) underwriter
c) arbitrageur
d) universal banker
Ans: a
Section: Corporate sources and uses of funds
Level: Easy
12.3 How is the investment banker compensated?
a) by the spread between the purchase and sale price of the security they are marketing
b) a flat fee on the total purchase value of the original issue
c) a flat fee on the sale value of the original issue
d) using a straight commission percentage on all sales they place of the securities
Ans: a
Section: Corporate sources and uses of funds
Level: Easy
12.4 Usually placed with life insurance companies and pension funds, these bonds are
sold directly to only a limited number of investors. They are known as
a) publicly issued bonds
b) credit swaps
c) currency swaps
d) privately placed bonds
Ans: d
Section: Corporate sources and uses of funds
Level: Easy
Chapter 12, International Financing and National Capital Markets
12.5 Financial deregulation began in ____ in 1981 and in _____ in 1986.
a) Italy, Germany
b) England, France
c) the U.S., Japan
d) in the European Union, NAFTA
Ans: c
Section: Financial markets versus financial intermediaries
Level: Easy
12.6 The cost of the heavy reliance on banks by Japanese and German companies is
a) less freedom of action
b) higher interest charges on loans
c) lower deposit rates
d) more control by the government
Ans: a
Section: Financial systems and corporate governance
12.7 Which one of the following is NOT a consequence of a well-functioning financial
market?
a) greater capital accumulation
b) better projects get financed
c) lower cost of capital
d) most projects get financed
Ans: d
Section: The role and consequences of well-functioning financial markets
Level: Easy
12.8 ______ is the process of replacing bank loans with securities issued in public
markets.
a) a drawdown
b) securitization
c) capital productivity
d) regulatory arbitrage
Ans: b
Section: Financial markets versus financial intermediaries
Level: Easy
12.9 The difference between countries in terms of company controls can be categorized
into market-oriented and ____________ systems.
a) bank-centered
b) Anglo-Saxon
Chapter 12, International Financing and National Capital Markets
c) debt-denominated
d) keiretsu
Ans: a
Section: Financial systems and corporate governance
Level: Easy
12.10 Suppose the government of Ghana is seeking concessionary financing to build 100
new schools, which of the following agencies is most likely to provide such financing?
a) the World Bank
b) the International Monetary Fund
c) the International Finance Corporation
d) the International Development Agency
Ans: d
Section: Development banks
Level: Easy
12.11 Suppose the government of Brazil is planning to develop a major hydroelectric
project in order to replace oil imports and conserve scarce foreign exchange, which of the
following international lending agencies is most likely to provide financing for this
project?
a) the World Bank
b) the International Monetary Fund
c) the International Finance Agency
d) the International Development Agency
Ans: a
Section: Development banks
Level: Easy
12.12 The most important source of funds used by companies around the world is
a) internally generated cash
b) short-term external funds
c) issues of new stock
d) public debt securities
Ans: a
Section: Corporate sources and uses of funds
Level: Easy
12.13 The most important change in Japanese corporate finance in recent years has been
a) the shift from internal funds to bank loans
b) the shift from internal funds to stock issues
c) the shift from external funds to internal funds
d) the dramatic rise in the payment of dividends
Chapter 12, International Financing and National Capital Markets
Ans: c
Section: Financial markets versus financial intermediaries
Level: Easy
12.14 Which of the following foreign equity securities are sold by foreign companies to
U.S. investors?
a) Yankee stock issues
b) Shogun stock issues
c) Samurai stock issues
d) Global stock issues
Ans: a
Section: Foreign Access to Domestic Markets
Level: Easy
12.15 These are ordinary shares of a non-U.S. company listed and traded in the same
form on any market in the world. They are known as
a) global shares
b) Yankee stock issues
c) Samurai bonds
d) exchange traded funds
Ans: a
Section: Foreign Access to Domestic Markets
Level: Easy
12.16 Argentina is seeking balance-of-payments financing from an international lending
institution. Which of the following is most likely to provide such funding?
a) the World Bank
b) the International Monetary Fund
c) the International Finance Corporation
d) the International Development Agency
Ans: b
Section: Development banks
Level: Easy
12.17 Selling stock overseas is attractive to corporations because it
a) may raise the price of the company's stock
b) improves the company's visibility in local markets
c) provides a pool of patient investors who are not focusing exclusively on next quarter's
profits
d) a and b only
Ans: d
Chapter 12, International Financing and National Capital Markets
Section: The foreign equity market
Level: Easy
12.18 Which of the following banking practice would be found more often under the
CEJ model of corporate governance?
a) emphasis on shareholder value
b) the importance of equity financing
c) control by institutional shareholders
d) universal banking
Ans: d
Section: Financial systems and corporate governance
Level: Easy
12.19 Project finance is distinctive from other financings because the providers of the
funding
a) look primarily to the cash flow from the project as the source of funds
b) use the parent’s assets to secure the funds
c) merge the operations of the project with those of the parent
d) have no exit plans
Ans: a
Section: Project finance
Level: Easy
MEDIUM (applied)
12.20 Which one of the following factors does NOT promote well-functioning financial
markets?
a) secure property rights
b) high tariffs
c) contracts that are easily enforced
d) transparency in financial statements
Ans: b
Section: The role and consequences of well-functioning financial markets
Level: Medium
12.21 Which one of the following does NOT reflect the process of securitization?
a) new technology that has lowered the costs of compiling, accessing, and manipulating
data
b) financial deregulation that requires more equity financing and higher cost of funds to
banks
c) lower costs of accessing public markets directly
d) financial deregulation that made the search for funds less competitive for banks
Chapter 12, International Financing and National Capital Markets
Ans: d
Section: Financial markets versus financial intermediaries
Level: Medium
12.22 The globalization of financial markets does NOT reflect
a) financial deregulation, which spurs competition among markets
b) reductions in currency controls and other government restrictions on cfree flow of
capital internationally
c) new technology that has lowered the cost of information
d) a greater dependence on government subsidies for exports
Ans: d
Section: Financial markets versus financial intermediaries
Level: Medium
12.23 Why are privately placed bonds more difficult to sell than publicly issued bonds?
a) they are usually commercial bank loans
b) the presence of customized covenants
c) funds come from private investors
d) underwriting is required
Ans: b
Section: Corporate sources and uses of funds
Level: Medium
12.24 Global growth in the financial markets is driven by each of the following
EXCEPT:
a) freer markets
b) widely available information
c) government capital controls
d) financial deregulation by governments
Ans: c
Section: Globalization of financial markets
Level: Medium
12.25 When the overwhelming majority of investors would be willing to pay more for
the shares of a well-governed company, ___________ is improved.
a) financial innovation
b) regulatory arbitrage
c) private placement
d) capital productivity
Ans: d
Section: National capital markets as international financial centers
Level: Medium
Chapter 12, International Financing and National Capital Markets
12.26 Which one of the following securities in the foreign bond markets has the least
amount of risk to the investor?
a) samurai bond
b) shogun bond
c) convertible bond
d) equity warrants
Ans: c
Section: The foreign bond market
Level: Medium
12.27 Which one of the following new issues of stock has the greatest probability of
lowering its cost of equity capital?
a) Microsoft in the New York markets
b) Toyota on the Tokyo exchange
c) Apple stock on the London exchange
d) IBM common stock on the New York Stock Exchange
Ans: c
Section: The foreign equity market
Level: Medium
12.28 Which one of the following banks is considered the most important in the
development bank industry?
a) Asian Development Bank
b) World Bank
c) African Development Bank
d) European Bank for Reconstruction and Development
Ans: b
Section: Development banks
Level: Medium
12.29 The process of securitization reflects all of the following EXCEPT
a) new technology that has lowered the costs of compiling, accessing, and manipulating
data
b) financial deregulation that raised the cost of funds to banks
c) lower costs of accessing public markets directly
d) greater emphasis on customer relations
Ans: d
Section: Financial markets versus financial intermediaries
Level: Medium
Chapter 12, International Financing and National Capital Markets
12.30 Which of the following has been MOST helped by the decline in the cost of
accessing the public financial markets?
a) smaller and less well-known companies
b) larger firms who have an extensive global presence
c) governments seeking to market their sovereign debt
d) developing economies
Ans: a
Section: Financial markets versus financial intermediaries
Level: Medium
DIFFICULT (applied)
12.31 As the cost of gathering information on foreign firms continues to decrease, ___
should become an increasingly more cost- effective means of raising funds
internationally.
a) international securitization
b) international financial intermediation
c) international bank lending
d) international portfolio investment
Ans: a
Section: Globalization of financial markets
Level: Difficult
12.32 A U.S. company has the following choices of financial markets in which to raise
capital. Which one will it most often prefer?
a) foreign bond
b) foreign bank
c) a new issue of common stock
d) domestic banks
Ans: a
Section: Corporate sources and use of funds
Level: Difficult
12.33 A multinational corporation attempting to secure an airport construction project
involving billions of dollars in cost would be best advised to apply to the _________ for
funding.
a) World Bank
b) London banking market
c) New York bond market
d) Tokyo foreign bond market
Ans: a
Section: Development banks
Chapter 12, International Financing and National Capital Markets
Level: Difficult
12.34 Which of the following bonds would NOT be found on the foreign bond markets?
a) Yankee
b) municipal
c) samurai
d) shogun
Ans: b
Section: The foreign bond market
Level: Difficult
12.35 Which one of the following economic policies would the international financial
markets tend to reward?
a) increased tariffs
b) reduced government ownership of private firms
c) a system of government currency controls
d) more government protection of infant-industries
Ans: b
Section: Globalization of financial markets has its downside
Level: Difficult
Chapter 13, Functions of Euromarkets
CHAPTER 13
FUNCTIONS OF EUROMARKETS
EASY (definitional)
13.1 The dominant currency of the Eurocurrency markets is the
a) U.S. dollar
b) Euro
c) Yen
d) Pound
Ans: a
Section: The eurocurrency market
Level: Easy
13.2 A dollar or other freely convertible currency deposited in a bank outside its country
of origin is known as
a) a Eurocurrency
b) fiat money
c) a dragon bond
d) a drawdown
Ans: a
Section: The Eurocurrency Market
Level: Easy
13.3 What is the relationship between the euro currency of the European Union and
Eurocurrency?
a) The two have nothing to do with each other
b) the euro is the underlying currency of the Eurocurrency markets
c) the euro is the dominant and most common currency in the Eurocurrency markets
d) the Eurocurrencies were first established using the European Union’s euro
Ans: a
Section: The Eurocurrency Market
Level: Easy
13.4 Eurodollar deposits represent the liabilities of
a) European non-financial corporations
b) the Organization of Petroleum Exporting Countries (OPEC)
c) European banks and U.S. bank branches abroad
d) European banks exclusively
Ans: c
Section: The Eurocurrency Market
Chapter 13, Functions of Euromarkets
13.5 Which one of the following was NOT a cause for the creation of the Eurodollar
market?
a) reserve requirements that lower a bank’s profits
b) special charges and taxes levied on domestic banking transactions
c) interest rate ceilings on deposits and loans
d) the lack of a requirement to hold a fractional reserve at the Federal Reserve of all
deposits
Ans: d
Section: Modern Origins
Level: Easy
Level: Easy
13.6 The supply of Eurodollar deposits is the result of
a) Federal Reserve Board policy
b) World Bank policy
c) a resolution of the member governments of the Organization of Economic Cooperation
and Development (OECD)
d) depositors holding dollars in non-US banks
Ans: d
Section: Modern origins
Level: Easy
13.7 In recent years, the Eurocurrency market has grown ___ the Eurobond market.
a) more slowly than
b) at about the same rate as
c) much more rapidly than
d) with no clear pattern emerges relative to
Ans: a
Section: Modern origins
Level: Easy
13.8 The period over which the borrower may take down a Eurocurrency loan is known
as the ______.
a) maturity of the loan
b) LIBOR rate
c) Drawdown
d) Margin
Ans: c
Section: Eurocurrency loans
Level: Easy
Chapter 13, Functions of Euromarkets
13.9 Another name for the spread in a Eurocurrency loan is the _______.
a) drawdown
b) term
c) LIBOR rate
d) Margin
Ans: d
Section: Eurocurrency loans
Level: Easy
13.10 The period over which the borrower may take down the loan is known as the
a) drawdown
b) all-in-costs
c) inverse floater
d) swap
Ans: a
Section: Eurocurrency Loans
Level: Easy
13.11 Eurocurrency spreads are __________ the domestic money market spreads.
a) wider than
b) narrower than
c) very similar to
d) exactly the same as
Ans: b
Section: Interest differentials
Level: Easy
13.12 One reason Eurocurrency deposit rates are higher than domestic rates is due to the
fact that
a) they have no relationship to domestic rates
b) they must be higher to attract domestic depositors
c) most borrowers are well-known
d) a smaller percentage of deposits can be lent out
Ans: b
Section: Eurocurrency spreads
Level: Easy
13.13 The rate of interest paid at which high-quality borrowers can borrow at lower
rates in the eurocurency markets is known as the ____ rate.
a) LIBOR
b) prime
c) LIBIL
Chapter 13, Functions of Euromarkets
d) LIBID
Ans: d
Section: Euormarket trends
Level: Easy
13.14 Historically, most Eurobonds have been ________ denominated.
a) U.S. dollar
b) yen
c) euro
d) pound
Ans: a
Section: Eurobonds/currency denomination
Level: Easy
13.15 The ________ , which resembles the U.S. commercial paper market, allows
borrowers to issue their own short-term euronotes.
a) Eurobond market
b) eurobank
c) note issuance facility
d) revolving underwriter facility
Ans: c
Section: Note issuance facilities and euronotes
Level: Easy
13.16 One advantage of the Euro-commercial paper market over its American
counterpart is
a) flexibility that allows borrowers a range of currencies
b) larger size of transactions
c) greater liquidity
d) greater transparency
Ans: a
Section: The Euro-Commercial Paper
Level: Easy
13.17 Debt denominated in a foreign currency that is launched, priced and traded in Asia
is referred to as a _________ bond.
a) shogun
b) samurai
c) Asian-tiger
d) dragon
Ans: d
Chapter 13, Functions of Euromarkets
Section: The Asian currency market
Level: Easy
MEDIUM (applied)
13.18 Which one of the following is the MOST obvious example of the globalization of
financial markets?
a) the creation of the European Union
b) the rise of the Euromarkets
c) the end of the Soviet Union
d) the Asian currency crisis of 1997
Ans: b
Section: Globalization
Level: Medium
13.19 Suppose the French government imposes an interest rate ceiling on French bank
deposits. What is the likely effect of this regulation?
a) reduce Eurofranc interest rates
b) raise Eurofranc interest rates
c) reduce the U.S. prime rate of interest
d) raise the U.S. prime rate of interest
Ans: a
Section: Relationship between domestic and eurocurrency money markets
Level: Medium
13.20 If the current 180-day inter-bank Eurodollar rate is 15% (all rates are stated on an
annualized basis) and next period's LIBOR is 13%, then a Eurocurrency loan priced at
LIBOR plus 1% will cost
a) 16% this period and 16% next period
b) 15% this period and 14% next period
c) 16% this period and 14% next period
d) 15% this period and 15% next period
Ans: c
Section: Eurocurrency loans
Level: Medium
13.21 Suppose that the current 90-day London interbank offer rate is 11% (all rates are
stated on an annualized basis). If next period's LIBOR is 10.5%, then a Eurodollar rate
priced at LIBOR plus 1% will cost
a) 12% this period and 11.5% next period
b) 11% this period and 10.5% next period
c) 12% this period and 12% next period
Chapter 13, Functions of Euromarkets
d) 11% this period and 11% next period
Ans: a
Section: Eurocurrency loans
Level: Medium
13.22 One reason for the multicurrency clause in the euro markets is to avoid
a) government actions to block funds
b) local traders from arbitraging away profits
c) exchange rate risk
d) political instability
Ans: c
Section: Multicurrency clause
Level: Medium
DIFFICULT (applied)
13.23 Suppose the U.S. government imposes added taxes on interest paid on American
bank deposits. What is the likely effect of this regulation?
a) raise Eurodollar interest rates
b) reduce Eurodollar interest rates
c) have no effect
d) capital flight
Ans: b
Section: Relationship between domestic and eurocurrency money markets
Level: Difficult
13.24 Which one of the following have NOT led to a closer relationship between
interest rates in national and Eurocurrency money markets?
a) tax treaties that reduce the incidence of double taxation on foreign-source income
b) elimination of currency controls
c) reduced cost of transatlantic telecommunications
d) increased government regulation of U.S. interest rates
Ans: d:
Section: Eurobonds versus eurocurrency loans
Level: Difficult
13.25 Which one of the following does NOT cause eurocurrency spreads to be narrower
than in domestic money markets?
a) Eurobanks don't have to maintain reserves on Eurodollar deposits
b) Eurobanks face lower regulatory expenses
c) national banks are often required to lend money to certain borrowers at concessionary
rates
Chapter 13, Functions of Euromarkets
d) U.S. Federal Reserve bank regulations to cap interest rates charged on loans in the
U.S.
Ans: d
Section: Eurobonds versus eurocurrency loans
Level: Difficult
Chapter 14, The Cost of Capital for Foreign Investments
CHAPTER 14
THE COST OF CAPITAL FOR FOREIGN INVESTMENTS
EASY (definitional)
14.1 The ________ for a given investment is the minimum risk-adjusted return required
by the shareholders of the firm for undertaking that investment.
a) cost of equity capital
b) systematic risk
c) all-equity beta
d) weighted average cost of capital
Ans: a
Section: The cost of equity capital
Level: Easy
14.2 The minimum risk-adjusted return required by shareholders of the firm for
undertaking the investment is known as the
a) risk-free rate of return
b) intrinsic value
c) cost of capital
d) market rate of return
Ans: c
Section: The cost of equity capital
Level: Easy
14.3 This may serve as a reasonable proxy for the required return on equity of a project
when the returns and financial structure of the project are expected to be similar to those
of the firm’s typical project. It would be the
a) corporate-wide cost of equity capital
b) weighted average cost of capital
c) project beta
d) company beta
Ans: a
Section: The cost of equity capital
Level: Easy
14.4 Since both the project risk and the project’s financial structure can vary from the
corporate norm, to reflect the actual values of the different cost components, it is
necessary to
a) adjust the costs and weights.
b) always refer to the corporate weighted average cost of capital.
c) adjust the project’s beta.
d) adjust the required rate of return of the project.
Chapter 14, The Cost of Capital for Foreign Investments
Ans: a
Section: The cost of equity capital
Level: Easy
14.5 One function of the cost of capital is to ________ for the firm.
a) determine the debt to equity ratio
b) value future cash flows
c) determine the current ratio
d) determine the current lending rate
Ans: b
Section: The cost of equity capital
Level: Easy
14.6 According to modern capital market theory an equilibrium relationship exists
between an asset’s required return and its associated risk, which can be represented by
the _______ model.
a) risk-return tradeoff
b) capital asset pricing
c) purchasing parity
d) interest rate parity
Ans: b
Section: The cost of equity capital
Level: Easy
14.7 What is the outcome when the cost of equity capital is combined with after-tax
cost of debt?
a) all-equity beta
b) cost of capital
c) weighted average cost of capital
d) target capital structure
Ans: c
Section: Weighted average cost of capital
Level: Easy
14.8When computing the weighted average cost of capital, the weighting should be
proportional based on the ______ rather than the _____ value of the firm.
a) book, market
b) hypothetical, book
c) market, analyst’s
d) market, book
Ans: d
Section: Weighted average cost of capital
Chapter 14, The Cost of Capital for Foreign Investments
Level: Easy
14.9 Systematic risk is that portion of return variability that
a) can be eliminated through diversification
b) cannot be eliminated unless fixed income securities are added to the portfolio
c) can be reduced through diversification but not eliminated
d) cannot be eliminated through diversification
Ans: d
Section: The cost of equity capital
Level: Easy
14.10To avoid the awkward process of transferring the cost of capital going from the
parent to the subsidiary, it is advisable to use the _______ rate.
a) prime market interest
b) all-equity discount
c) all-debt discount
d) both the equity and debt discount
Ans: b
Section: The relevant base portfolio
Level: Easy
14.11 LDCs have greater ______ risk but offer the higher probability of diversification
benefits.
a) economic
b) translation
c) political
d) operating
Ans: c
Section: Discount rates for foreign investments
Level: Easy
14.12 One of the key issues in estimating foreign project betas is to find firms that are
publicly traded that share _____ risk characteristics when compared to the project.
a) different
b) somewhat different
c) uncorrelated
d) similar
Ans: d
Section: The relevant base portfolio
Level: Easy
Chapter 14, The Cost of Capital for Foreign Investments
14.13 When identifying proxy firms for a foreign project analysis, it is desirable to use
_____ firms.
a) local
b) home country
c) emerging market
d) developed economy
Ans: a
Section: The relevant base portfolio
Level: Easy
14.14 In an effort to estimate a proxy beta, and, if foreign proxy companies are not
available, a second alternative would be to find a
a) proxy industry in the local market
b) proxy industry in the parent company’s market
c) U.S. industry beta for the project
d) similar project that the company has completed successfully in the past.
Ans: a
Section: Proxy Companies
Level: Easy
14.15 In general, the dollar cost of borrowing local currency at an interest rate and
currency change is the sum of the dollar interest cost plus
a. the percentage change in the exchange rate.
b. the fees associated with raising capital.
c. the percentage difference between the corporate beta and the project beta.
d. the percentage change in the forward exchange rate.
Ans: a
Section: The Cost of Debt Capital
Level: Easy
MEDIUM (applied)
14.16 The cost of capital for a General Foods Jell-O plant in Venezuela is likely to be
a) lower than for a comparable plant in the U.S., because its systematic risk is probably
lower
b) higher than for a comparable U.S. plant because of the added risks associated with the
unstable economic and political environment
c) about the same because the systematic risk is likely to be very similar
d) greatly impacted by the change in political parties in neighboring Colombia
Ans: a
Section: The cost of equity capital
Level: Medium
Chapter 14, The Cost of Capital for Foreign Investments
14.17 The cost of capital for a project in Australia should theoretically
a) equal the parent's weighted average cost of capital
b) equal the required return for a similar investment in the U.S.
c) equal the minimum rate of return necessary to induce investors to buy or hold the
firm's stock
d) depend on the riskiness of the project itself
Ans: d
Section: The cost of equity capital
Level: Medium
14.18 Suppose that a foreign project has a beta of 1.12, the risk-free return is 9.3% and
the required return on the market is estimated at 18%. Then the cost of capital for the
project is
a) 17.21%
b) 21.37%
c) 19.04%
d) 20.03%
Ans: c
Section: The cost of equity capital
Level: Medium
14.19 The cost of capital for a project depends on
a) the correlation between returns on the project and returns on a domestic market index
b) the correlation between returns on the project and returns on a globally-diversified
portfolio
c) the correlation between returns on the project and returns on the firm's other activities
d) whether the price of risk is set on a domestic or worldwide basis
Ans: d
Section: Weighted average cost of capital
Level: Medium
14.20 The rate(s) at which investors capitalize the returns on foreign projects depends
on all of the following EXCEPT
a) whether shareholders are internationally diversified
b) the relative costs of international diversification for the MNC and for individual
investors
c) the extent to which domestic systematic risk is unsystematic from a global standpoint
d) the correlation between equity returns on different markets
Ans: d
Section: The impact of globalization on the cost of capital
Level: Medium
Chapter 14, The Cost of Capital for Foreign Investments
14.21 Which project is likely to entail the least systematic risk?
a) a Ford plant in Brazil producing engines for export to the U.S.
b) a Coca Cola plant in Brazil selling locally
c) a machine tool plant in Japan
d) a computer disk drive plant in Germany
Ans: b
Section: Recommendations
Level: Medium
14.22 The cost of capital for a project in Spain should
a) equal the parent's weighted average cost of capital
b) equal the required return for a similar investment in the U.S.
c) equal the minimum rate of return necessary to induce investors to buy or hold the
firm's stock
d) be a function of the riskiness of the project itself
Ans: d
Section: Recommendations
Level: Medium
14.23 Suppose that a foreign project has a beta of 1.12, the risk-free return is 8% and the
required return on the market is estimated at 17%. Then cost of capital for the project is
a) 24.2%
b) 19.3%
c) 18.1%
d) 15.4%
Ans: c
Section: The cost of equity capital
Level: Medium
14.24 Suppose that a foreign project has a beta of 0.85, the risk-free return is 12%, and
the required return on the market is estimated at 19%. Then the cost of capital for the
project is
a) 16.15%
b) 17.95%
c) 19%
d) 21.23%
Ans: b
Section: The cost of equity capital
Level: Medium
14.25 There is a high probability that the cost of capital for a foreign project will
a) exceed the cost of capital for a comparable domestic project
Chapter 14, The Cost of Capital for Foreign Investments
b) be no greater than the cost of capital for a comparable domestic project
c) be the same as the cost of capital for a comparable domestic project
d) exceed the investor’s required rate of return
Ans: b
Section: Weighted average cost of capital
Level: Medium
14.26 The systematic risk of a project depends on
a) the correlation between returns on the project and returns on the world market
portfolio
b) the correlation between returns on the project and returns on a
domestically-diversified portfolio
c) whether investors hold a domestically- or globally-diversified portfolio
d) the various political and economic risks the project is subject to
Ans: c
Section: Discount rates for foreign investments
Level: Medium
14.27 Suppose that a foreign project has a beta of 1.15, the risk-free return is 13% and
the required return on the market is estimated at 21%.Then the cost of capital for the
project is
a) 24.2%
b) 22.2%
c) 19.3%
d) 15.4%
Ans: b
Section: The cost of equity capital
Level: Medium
DIFFICULT (applied)
14.28 Consider a project that costs $1 million today but yields no returns for several
years. Once the project becomes productive, it yields $250,000 annually forever. Suppose
two firms are examining this project, a Japanese firm with a cost of capital of 7% and a
U.S. firm with a cost of capital of 13%. Approximately how many more years than the
U.S. firm would the Japanese firm be willing to wait until the project starts generating
cash?
a) 14 years
b) 5 years
c) 24 years
d) 3 years
Ans: a
Chapter 14, The Cost of Capital for Foreign Investments
Section: The cost of equity capital
Level: Difficult
14.29 Assume an average dividend payout rate of 100% for both U.S. and Japanese
companies. Suppose the average P/E ratio for Japanese firms is 38 and 16 for U.S. firms.
Based on the dividend growth model, in order for Japanese and U.S. companies to have
the same average cost of equity capital, how much higher would the Japanese annual
earnings growth rate have to be?
a) 7.24%
b) 6.31%
c) 5.83%
d) 8.39%
Ans: d
Section: The cost of equity capital
Level: Difficult
14.30 Assume an average dividend payout rate of 60% for U.S. companies and 35% for
Japanese companies. Suppose the average P/E ratio for Japanese firms is 38 and 16 for
U.S. firms. Based on the dividend growth model, in order for Japanese companies to have
the same 12% average cost of equity capital estimated for U.S. companies, how much
higher would the Japanese annual earnings growth rate have to be?
a) 8.74%
b) 3.45%
c) 7.60%
d) 2.83%
Ans: d
Section: The cost of equity capital
Level: Difficult
14.31 Suppose the euro is expected to appreciate by 4% annually against the dollar. If a
company can borrow dollars at 9.3%, what is the highest interest rate it should be willing
to pay to borrow euro, assuming it is trying to minimize its expected financing cost?
a) 5.1% EUR appreciate 4% Means USD depreciate 4.2%. So Max Interest rate = 9.3%-4.2%=5.1%
b) 4.3%
c) 7.2%
d) 8.9%
Ans: a
Section: The cost of equity capital
Level: Difficult
14.32 Suppose the euro is expected to depreciate against the dollar by 2% annually and
the 10-year franc interest rate is 11%. What is the after-tax expected dollar cost of issuing
a 10-year franc bond if the French corporate tax rate is 40%?
Chapter 14, The Cost of Capital for Foreign Investments
a) 5.93%
b) 7.61%
c) 4.47%
d) 6.60% 這個是稅后的 EUR COST.由于 EUR跌了那么 USD的 COST就變少了.答案應該小于 6.6%
Ans: c
Section: The cost of equity capital
Level: Difficult
14.33 Capital structures of foreign affiliates should
a) conform to the standards set by local companies
b) vary in order to take advantage of opportunities to reduce overall risk and financing
costs
c) be very similar to the parent's capital structure because this is what determines the
firm's risk profile
d) conform to the standards established by other foreign units
Ans: b
Section: Foreign subsidiary capital structure
Level: Difficult
14.34 The existence of offshore finance subsidiaries can be attributed primarily to
a) the past practice of the U.S. IRS to impose withholding taxes on dividends and interest
received by foreign investors
b) the desire by MNCs to centralize their financial decision making
c) capital controls by various foreign countries
d) capital flight from the parent country
Ans: a
Section: Foreign subsidiary capital structure
Level: Difficult
14.35 The principal advantage(s) of investing in foreign affiliates in the form of debt
instead of equity is to
a) reduce taxes
b) reduce the impact of currency controls
c) both a and b
d) there are no advantages
Ans: c
Section: The cost of debt capital
Level: Difficult
14.36 A U.S. company that has issued euro bonds could hedge at least part of the
exchange risk associated with those bonds by
a) invoicing its exports to Germany in euro
Chapter 14, The Cost of Capital for Foreign Investments
b) invoicing its imports from Germany in euro
c) invoicing its exports to Germany in dollars
d) invoicing its imports from Germany in dollars
Ans: a
Section: Foreign subsidiary capital structure
Level: Difficult
Chapter 15, Examining International Portfolio Investing
CHAPTER 15
Examining International Portfolio Investing
EASY (definitional)
15.1 Which one of the following is NOT a risk spelled out by the U.S. Securities and
Exchange Commission regarding the risks associated with international investing?
a) changes in currency exchange rates
b) dramatic changes in market value
c) political, economic and social events
d) glut of foreign market informationg國外市場信息過剩
Ans: d
Section: The Risks and Benefits of International Equity Investing
Level: Easy
15.2 In its publication that spells out the risks, the SEC recommended one way to reduce
the risk of dramatic changes in market value was to invest
a) for the long term
b) for the short term
c) using derivatives such as American Depository Receipts
d) in foreign stock exchanges
Ans: a
Section: The Risks and Benefits of International Equity Investing
Level: Easy
15.3 Which one of the following is an advantage of international investing?
a) you can invest in industries that don't exist in the United States
b) you can invest in companies that have lower price-earnings ratios
c) you can invest in companies that are, on average, more profitable than similar U.S.
firms
d) you can invest in companies with lower market-book value ratios
Ans: a
Section: International diversification
Level: Easy
15.4 The SEC warned that foreign equity markets may have lower trading volumes and
fewer listed companies that added risk due to
a) lack of liquidity
b) dramatic changes in market value
c) changes in the currency exchange rate
d) less information
Ans: a
Section: The Risks and Benefits of International Equity Investing
Chapter 15, Examining International Portfolio Investing
Level: Easy
15.5 While there is systematic risk within a nation, it may be ______ and diversifiable
outside the country after constructing a global portfolio.
a) temporary
b) somewhat temporary
c) non-systematic
d) permanent
Ans: c
Section: Correlations and the gains from diversification
Level: Easy
15.6 The efficient frontier is the set of portfolios that has the ________ standard
deviation for its level of expected return.
a) smallest possible
b) greatest possible
c) most feasible
d) least correlated
Ans: a
Section: Correlations and the gains from diversification
Level: Easy
15.7 The lack of ________ , indicated by the ability to buy and sell securities
efficiently, is a major obstacle on some overseas exchanges.
a) diversification
b) foreign ownership
c) liquidity
d) solvency
Ans: c
Section: Barriers to international diversification,
Level: Easy
15.8 Similar to American Depository Receipts, these investment product differ in that
they are generally traded on two or more markets outside the foreign issuer’s home
market. They are known as
a) Global Depository Receipts
b) Global Registered Share
c) American Depository Shares
d) Global mutual funds
Ans: a
Section: Barriers to international diversification,
Level: Easy
Chapter 15, Examining International Portfolio Investing
15.9 A decomposition of the total dollar return of a foreign investment would NOT
include which of the following?
a) dividend/interest income
b) capital gains (losses)
c) currency gains (losses)
d) the cost of hedging
Ans: d
Section: Measuring the total return from foreign portfolio investing
Level: Easy
15.10 ________ are certificates of ownership by a U.S. bank offered as a convenience to
investors in lieu of the underlying shares the bank holds in custody.
a) Emerging market indexes
b) Regional funds
c) American depository receipts
d) American derivative claims
15.11 These are markets that represent some of the smallest, but fastest-growing,
economies in the world. They are referred to as
a) emerging markets
b) frontier markets
c) euro markets
d) emerging market indices
Ans: b
Section: Investing in Emerging Markets
Level: Easy
Ans: c
Section: Barriers to international diversification
Level: Easy
15.12 Instead of buying foreign stocks overseas, investors can buy foreign equities
traded in the United States in the form of
a) American Depository Receipts
b) American shares
c) global funds
d) a and b only
Ans: d
Section: Barriers to international diversification
Level: Easy
Chapter 15, Examining International Portfolio Investing
15.13 In the past investing in emerging markets offered _______ risk and _________
returns.
a) the highest, the highest
b) the lowest, the highest
c) the highest, the lowest
d) the lowest, the lowest
Ans: a
Section: Investing in emerging markets
Level: Easy
15.14 One of the barriers to international diversification is the lack of information that is
not readily __________ nor ___________ for global investors.
a) provided, comparable
b) accessible, comparable
c) comparable, free
d) provided, free
Ans: b
Section: Barriers to international diversification
Level: Easy
15.15Recent global market behavior that threatens the benefits of international portfolio
diversification indicates that markets tend to be most ________ when volatility is
greatest.
a) uncorrelated
b) stable
c) correlated
d) unstable
Ans: c
Section: Recent correlations
Level: Easy
MEDIUM (applied)
15.16 The difference between a global fund and an international fund is the global fund
a) invests anywhere in the world excluding the United States
b) invests anywhere in the world including the United States
c) invests only outside the United States
d) invests in individual countries
Ans: b
Section: Barriers to international diversification
Level: Medium
Chapter 15, Examining International Portfolio Investing
15.17 Suppose the initial price of a French bond is €850, the coupon income is €70, the
end-of-period bond price is €1,000, and the franc devalues by 6% against the dollar
during the period. What was the bond's total dollar return during the period?
a) 8.24%
b) 18.33%
c) 25.88%
d) 27.44%
Ans: b
Section: Measuring the total return from foreign portfolio investing
Level: Medium
15.18 Suppose an investor buys a Taiwanese bond with a face value of NT20,000,
which is priced at NT$19,500 and bears a coupon of NT$1,700. At the end of the year,
the investor sells the bond at a price of NT$18,030. During the year, the exchange rate
goes from NT$1 = U.S.$0.0375 to NT$1 = U.S.$0.0425. What was the investor's U.S.
dollar return on this bond?
a) 13.33%
b) 4.23%
c) -5.69%
d) 14.67%
Ans: d
Section: Measuring the total return from foreign portfolio investing
Level: Medium
15.19 A Thai baht bond with a coupon of 9.5% is initially priced at its face value of Bt
1,000. At the end of one year, the bond is selling for Bt 1,050. If the initial spot rate was
Bt 25 = $1, at what end- of-year exchange rate will the dollar return on the bond just
equal 10%?
a) Bt 1 = $0.0384
b) Bt 1 = $0.0416
c) Bt 1 = $0.0482
d) Bt 1 = $0.0324
Ans: a
Section: Measuring the total return from foreign portfolio investing
Level: Medium
15.20 A Canadian bond is initially priced at its face value of C$1,000. At the end of the
year, the bond is selling for C$1,100. If the Canadian dollar appreciates by 10%, with a
5.5% coupon, what will the U.S. dollar return on the bond equal at the end of the year?
a) 1.05%
b) 27.1%
c) 15%
d) 20%
Chapter 15, Examining International Portfolio Investing
Ans: b
Section: Measuring the total return from foreign portfolio investing, p. 426
Level: Medium
15.21 Hong Kong bond with a coupon of 10% is initially priced at HK$1,000. At the end
of the year, the bond is selling for HK$1,200. If the Hong Kong dollar depreciates by 5%,
what will the U.S. dollar return on the bond equal at the end of the year?
a) 10%
b) 13%
c) 23.5%
d) 31%
Ans: c
Section: Measuring the total return from foreign portfolio investing
Level: Medium
15.22Suppose an investor buys a Japanese bond with a coupon rate of 10% at its price
of ￥1,100. The bond’s face value is ￥1,000. At the end of the year, the bond is selling at
￥1,050 and the ￥ has depreciated by 10%. What is the dollar return on the bond at the end
of the year?
a) -15.6%
b) -5.91%
c) 10.3%
d) 15.8%
Ans: b
Section: Measuring the total return from foreign portfolio investing
Level: Medium
15.23A Euro bond with a coupon rate of 10% is initially priced at its face value of
€1000. At the end of the year, the bond is selling at €1,070. If the € appreciates by 12%
during the year, what is the end- of-year dollar return on the bond?
a) 130%
b) 105%
c) 31.04%
d) 95%
Ans: c
Section: Measuring the total return from foreign portfolio investing
Level: Medium
15.24 A Brazilian bond with a coupon rate of 20% is initially priced at its face value of
R$1,000. At the end of the year, the bond is selling at R$1,050. If the real depreciates by
75%, what is the dollar return at the end of the year?
a) -155%
Chapter 15, Examining International Portfolio Investing
b) -68.75%
c) 9.5%
d) 8.5%
Ans: b
Section: Measuring the total return from foreign portfolio investing,
Level: Medium
15.25 A Brazilian bond with a coupon rate of 15% at is initially priced at its face value
of R$1,000. At the end of the year, the bond is selling at R$950. During the year, the
exchange rate goes from R$1 = U.S.$0.75 to R$1 = U.S.$0.85. What is the bond's total
dollar return during the period?
a) 15%
b) 10%
c) 22.67%
d) 31.25%
Ans: c
Section: Measuring the total return from foreign portfolio investing
Level: Medium
15.26 What country’s depreciation in 1994 led the stock market tumble by other Latin
American stock markets?
a) Mexico
b) Argentina
c) Brazil
d) Columbia
Ans: a
Section: Latin American stocks were hotter than salsa
Level: Medium
15.27 Suppose an investor buys a share of Sony at a price of ￥38,720 at the start of the
year. During the year, the investor receives a dividend of ￥500. At the end of the year, the
price of Sony is ￥49,560. During the year, the exchange rate goes from ￥150 = $1 to ￥175
= $1. What was the investor's dollar return on Sony?
a) 29.29%
b) 10.82%
c) -3.24%
d) -8.23%
Ans: b
Section: Measuring the total return from foreign portfolio investing
Level: Medium
Chapter 15, Examining International Portfolio Investing
15.28 Suppose you buy a share of Siemens at a price of €83. During the year, you
receive a dividend of €2 and the € rises by 8%. If the stock price at yearend is €80, what
was your total dollar return for the year?
a) 10.60%
b) 6.70%
c) 9.83%
d) 8.43%
Ans: b
Section: Measuring the total return from foreign portfolio investing
Level: Medium
15.29 Suppose an investor buys a share of British Petroleum at a price of ￡32 at the start
of the year. During the year, the investor receives a dividend of ￡1.5. At the end of the
year, the price of BP is ￡34. During the year, the exchange rate goes from ￡1 = $1.78 to
￡1 = $1.63. What was the investor's dollar return on BP?
a) -2.35%
b) -6.47%
c) 1.59%
d) 10.94%
Ans: c
Section: Measuring the total return from foreign portfolio investing
Level: Medium
15.30 International diversification provides a better risk-return trade-off than does
investing solely in U.S. securities primarily because
a) many foreign industries don't exist in the U.S.
b) there are many more securities to choose from overseas
c) the economic cycles of nations may not be perfectly in phase
d) the foreign securities may follow U.S. markets in their price movements
Ans: c
Section: International diversification
Level: Medium
DIFFICULT (applied)
15.31 Assume the standard deviation of the U.S. market portfolio is 18.2%, the standard
deviation of the non-U.S. portion of the world portfolio is 17.1%, and the correlation
between the U.S. and non-U.S. market portfolios is .47. Suppose you invest 40% of your
money in the U.S. stock market and the other 60% in the non-U.S. portfolio. What is the
standard deviation of your portfolio?
a) 17.7%
b) 9.4%
c) 15.1%
Chapter 15, Examining International Portfolio Investing
d) 18.3%
Ans: c
Section: Correlations and the gains from diversification
Level: Difficult
15.32 Assume the standard deviation of the U.S. market portfolio is 18.2%, the standard
deviation of the non-U.S. portion of the world portfolio is 17.1%, and the correlation
between the U.S. and non-U.S. market portfolios is .47. Suppose you invest 25% of your
money in the U.S. stock market and the other 75% in the non-U.S. portfolio. What is the
standard deviation of your portfolio?
a) 16.7%
b) 15.5%
c) 17.1%
d) 18.6%
Ans: b
Section: Correlations and the gains from diversification
Level: Difficult
15.33 Which one of the following are NOT a barrier to international diversification.
a) lack of foreign market liquidity
b) easy convertibility of many currencies
c) inadequate information
d) lack of international accounting standards
Ans: b
Section: Barriers to international diversification
Level: Difficult
15.34 Which of the following statements is most CORRECT with respect to
international diversification?
a) 9.,k
b) world markets always seem to be most uncorrelated when volatility is present
c) world markets have displayed relatively low and fixed correlations over the last five
years
d) global diversification produces gain even when world markets have correlations value
near one.
Ans: a
Section: Correlations and the gains from diversification
Level: Difficult
15.35 Suppose an investor buys a UK bond with a coupon rate of 8% at its price of
￡990. The bond’s face value is ￡1,000. If the British pound depreciates by 5%, at what
end- of-year selling price of this bond will the dollar return on the bond just equal 10%?
Chapter 15, Examining International Portfolio Investing
a) 1062
b) 1100
c) 1000
d) 1300
Ans: a
Section: Measuring the total return from foreign portfolio investing
Level: Difficult
Chapter 16, Corporate Strategy and Foreign Direct Investment
CHAPTER 16
Corporate Strategy and Foreign Direct Investment
EASY (definitional)
16.1 Which of the following is likely to be a major long-run competitive advantage of
a U.S. multinational?
a) a decline in the real value of the U.S. dollar
b) access to low-cost foreign raw materials
c) its ability to quickly adapt its products and technology in line with changing market
conditions
d) offshore banking facilities located in the Gulf of Mexico
Ans: c
Section: Product and factor market imperfections
Level: Easy
16.2 In the beginning stages of the exporting process, a major challenge is the
a) Firm’s inexperienced staff
b) Lack of knowledge concerning foreign custom’s regulations
c) Fear of the unknown foreign business customs
d) ability to realize the full sales potential of a product.
Ans: d
Section: Overseas production
Level: Easy
16.3 Foreign direct investment would be the acquisition abroad by the MNC of
a) sales offices
b) distribution channels
c) plant and equipment
d) portfolio securities
Ans: c
Section: Foreign Direct Investment and Corporate Strategy
Level: Easy
16.4 _________ is the acquisition abroad of plant and equipment.
a) Portfolio investment
b) Financial investment
c) Foreign direct investment
d) Rationalization
Ans: c
Section: The process of overseas expansion
Level: Easy
Chapter 16, Corporate Strategy and Foreign Direct Investment
16.5 Which one of the following would firms who wish to go global but who are not
ready to assume significant risk resort to in order to compete internationally?
a) licensing a local firm to manufacture the company’s products
b) acquiring a local operation
c) government subsidized exporting programs
d) setting up a local factory
Ans: a
Section: The process of overseas expansion
Level: Easy
16.6 Firms who wish to go global but who are not ready to assume significant risk may
resort to ____________ in order to compete internationally.
a) licensing a local firm to manufacture the company’s products
b) acquiring a local operation
c) government subsidized exporting programs
d) setting up a local factory
Ans: a
Section: The process of overseas expansion
Level: Easy
16.7 When multinationals hold capital in the form of trademarks, patents, and general
marketing skills, it is referred to as
a) intangible capital.
b) real assets.
c) tangible capital.
d) foreign direct investment
Ans: a
Section: Product and factor market imperfections
Level: Easy
16.8 Multinationals own intangible capital in the form of _________.
a) fees and royalties
b) direct investment across industries
c) global expansion strategies
d) trademarks, patents, and general marketing skills
Ans: d
Section: Product and factor market imperfections
Level: Easy
16.9 ________ direct investment is investment that is cross-border but within an
industry.
a) Horizontal
Chapter 16, Corporate Strategy and Foreign Direct Investment
b) Vertical
c) Parallel
d) Intangible
Ans: a
Section: Product and factor market imperfections
Level: Easy
16.10 The senescent multinational has an advantage in its __________ capability to
seek out lower-cost production sites.
a) global-scanning
b) integration
c) rationalization
d) knowledge-seeking
Ans: a
Section: The senescent multinationals
Level: Easy
16.11 When multinational firms create barriers to entry by continually introducing new
products and differentiating existing ones, both domestically and internationally, we may
refer to them as ___ multinationals.
a) mature
b) senescent
c) innovation-based
d) politically risky
Ans: c
Section: Innovation-based multinationals
Level: Easy
16.12 Economies of _______ exist whenever the same investment can support multiple
profitable activities less expensively in combination than separately.
a) scale
b) size
c) distance
d) scope
Ans: d
Section: The mature multinationals
Level: Easy
16.13 Whenever the same investment can support multiple profitable activities less
expensively in combination than separately, it is said the following exists:
a) economies of scale
b) economies of scope
Chapter 16, Corporate Strategy and Foreign Direct Investment
c) lowest unit cost pricing
d) diseconomies of scale
Ans: b
Section: The mature multinationals
Level: Easy
16.14 Successful multinational corporations are those that can
a) acquire lower-cost raw materials or labor abroad
b) be the first entrant in large foreign markets
c) institutionalize the process of creating and transferring competitive advantages abroad
d) acquire the patent for new technology first from a foreign government
Ans: c
Section: Product and factor market imperfections
Level: Easy
16.15 Economies that exist when increasing production leads to a
less-than-proportionate increase in costs are known as economies of _________.
a) scale
b) scope
c) dual currency boards
d) exposure netting
Ans: a
Section: The mature multinationals
Level: Easy
16.16 The term used by the author of the text to describe the size of operations required
in certain industries to compete effectively in the global market place is known as
____________.
a) global integration
b) globalization
c) universal production
d) world-scale
Ans: d
Section: Economies of scale
Level: Easy
16.17 One advantage of the senescent multinational is its ______ capability.
a) cross investment
b) vertical integration
c) global scanning
d) horizontal direct investment
Ans: c
Chapter 16, Corporate Strategy and Foreign Direct Investment
Section: The senescent multinationals
Level: Easy
16.18 In industries characterized by rapid production innovation and technical
breakthroughs by foreign competitors, the ________ firms are known to excel.
a) German
b) British
c) Japanese
d) American
Ans: c
Section: Knowledge-seeking
Level: Easy
16.19 _________ often provides multinationals with a valuable method to reduce
currency and political risks.
a) Multiple sourcing
b) Knowledge seeking
c) Economies of scale
d) Economies of scope
Ans: a
Section: Multiple sourcing
Level: Easy
16.20 _____________ will fade in time and multinationals must continually invest in
creating new ones that are transferable overseas.
a) Exchange rate hedges
b) Brand names
c) Competitive advantages
d) International diversification
Ans: c
Section: Estimating the longevity of a competitive advantage
Level: Easy
16.21 If a firm’s advantage is easily replicated, both local and foreign competitors will
soon apply the same processes and
a) enter the market to compete
b) enter into a joint venture with the firm that has the competitive advantage
c) engage in an advertising campaign to increase its sales and market share
d) find other less competitive markets to enter and compete
Ans: a
Section: Estimating the longevity of a competitive advantage
Level: Easy
Chapter 16, Corporate Strategy and Foreign Direct Investment
MEDIUM (applied)
16.22 Which one of the following would NOT be considered intangible capital?
a) trademarks
b) inventories
c) patents
d) general marketing skills
Ans: b
Section: Product and factor market imperfections
Level: Medium
16.23 The most important element in determining whether and how a firm should
expand overseas is
a) the degree of government subsidies and protection provided
b) whether the firm's competitive advantages can be transferred abroad and how this can
best be done
c) the correlation between the domestic and world economies
d) the extent of political risk overseas
Ans: b
Section: Product and factor market imperfections
Level: Medium
16.24 Foreign direct investment is most likely to be economically viable in those
settings where在那些地方，外國直接投資最有可能在經濟上可行
a) possible contractual difficulties make it costly to coordinate economic activities via
arm's length transactions in the marketplace
可能的合同困難使得通過在市場上的交易進行協調經濟活動的成本很高。
b) a firm is interested in accessing low-cost resources overseas
c) a firm is interested in selling its patented products abroad
d) the local government is most corrupt
Ans: a
Section: Product and factor market imperfections
Level: Medium
16.25 Matsushita has leveraged its investment in advertising and distribution of
Panasonic products in a number of consumer and industrial markets, ranging from PCs to
VCRs. This is an example of
a) economies of scale
b) economies of scope
c) exploiting the learning curve
d) risk minimization
Ans: b
Chapter 16, Corporate Strategy and Foreign Direct Investment
Section: The mature multinationals
Level: Medium
16.26 In a mature industry, the most important barriers to entry are NOT likely to be
a) technology
b) economies of scale
c) economies of scope
d) excise tariffs
Ans: d
Section: The mature multinationals
Level: Medium
16.27 Which one of the following is NOT in the typical sequence of foreign expansion?
a) exporting
b) sales subsidiary
c) service facilities
d) franchising
Ans: d
Section: The process of overseas expansion
Level: Medium
16.28 Which one of the following multinational categories emphasizes spending large
amounts of funds on research and development?
a) the mature multinational
b) the innovation-based multinational
c) the senescent multinational
d) the hybrid that combines the mature with the senescent multinational
Ans: b
Section: The innovation-based multinational
Level: Medium
16.29 When automakers adopted just-in-time manufacturing and inventory systems, the
only way to meet the logistic challenges for the tire industry was to ________.
a) shift manufacturing overseas
b) decrease the sales force domestically
c) resort to innovative marketing techniques
d) raise prices
Ans: a
Section: Foreign direct investment and survival
Level: Medium
16.30With respect to a global approach to investment planning, which one of the
following modes of entry is the most recent?
Chapter 16, Corporate Strategy and Foreign Direct Investment
a) franchising
b) acquisition of a state-owned enterprise
c) licensing
d) exporting
Ans: b
Section: Selecting a mode of entry
Level: Medium
16.31Which one of the following was NOT a strategy used by the Japanese firm,
Canon, in its attempts to enter the U.S. copier market that was dominated by Xerox?
a) leasing rather than selling its copiers
b) creating low-end copiers
c) designing reliability and serviceability into its machines
d) using standardized components to reduce costs
Ans: a
Section: Auditing the effectiveness of entry modes
Level: Medium
DIFFICULT (applied)
16.32 From a portfolio standpoint, the value of foreign direct investment depends on all
of the following EXCEPT:
a) whether shareholders are internationally diversified
b) the relative costs of international diversification for the MNC and for individual
investors
c) the extent to which domestic systematic risk is unsystematic from a global standpoint
d) the extent of economies of scale and scope
Ans: d
Section: Financial market imperfections
Level: Difficult
16.33 The basic Japanese strategy for international expansion has been to
a) invest heavily in R&D and come in with innovative products at the high end of the
market and over time move into the lower end of the market
b) start at the low end of the market, build volume and scale economies, and then move
into the high end of the market
c) take advantage of American companies who were afraid of cannibalizing their sales of
high-margin products
d) b and c only
Ans: d
Section: Knowledge-seeking
Level: Difficult
Chapter 16, Corporate Strategy and Foreign Direct Investment
16.34 Apex Inc., a maker of consumer products, has certain organizational skills. These
skills include knowing how best to service a market through new-product development
and adaptation, quality control, advertising, distribution, and after-sales service. Based on
these skills, Apex's best avenue to international expansion would appear to be
a) exporting
b) licensing a local firm to produce its goods
c) local production
d) joint venturing with a local firm
Ans: c
Section: Designing a global expansion strategy
Level: Difficult
16.35 The choice of whether to sell abroad by exporting, licensing foreign producers, or
manufacturing abroad depends on all of the following EXCEPT
a) the nature of government regulations
b) whether the firm's competitive advantage can be transferred abroad in the products it
sells or can be written down and clearly transmitted
c) whether customers are looking for some signals as to the firm's commitment to the
local market
d) transfer pricing policies of the parent MNC
Ans: d
Section: Designing a global expansion strategy
Level: Difficult
16.36 Corporate international diversification will prove beneficial to shareholders
a) since operating in a number of countries whose economic cycles are not perfectly in
phase reduces the variability of MNC earnings
b) to the extent that multinationals can supply an indirect means of international
diversification to individual investors
c) only if individual investors face barriers to direct international portfolio investment
d) when markets grow more cross-correlated in their price movements
Ans: c
Section: Designing a global expansion strategy
Level: Difficult
16.37 Which one of the following strategies do the senescent multinationals NOT
follow when the competitive advantages in their product lines or markets become
dissipated?
a) enter new markets where little competition currently exists
b) use the firm's global-scanning capability to seek out lower cost production sites
c) production rationalization and integration worldwide
d) seek favorable contracts from local country officials
Chapter 16, Corporate Strategy and Foreign Direct Investment
Ans: d
Section: The senescent multinationals
Level: Difficult
Chapter 17, Capital Budgeting for the Multinational Corporation
CHAPTER 17
Capital Budgeting for the Multinational Corporation
EASY (definitional)
17.1 The _______ is defined as the present value of future cash flows discounted at the
project’s cost of capital minus the initial net cash outlay for the project.
a) net present value
b) equity-adjusted present value
c) cost of capital
d) value additivity principle
Ans: a
Section: Net present value
Level: Easy
17.2 According to the net \present value (NPV) rule, projects with a positive NPV should
be
a) accepted
b) rejected
Ans: a
Section: Net present value
Level: Easy
17.3 The most important but at the same time the most challenging part of project analysis
is to calculate the
a) total cash flows
b) incremental cash flows
c) value of the project added to the firm’s value
d) the amount a new product takes away from the sales of an already existing product
Ans: b
Section: Net present value
Level: Easy
17.4 Cannibalization results when a new project takes away sales from the firm’s
a) weighted average cost of capital.
b) existing product sales.
c) incremental cash flows.
d) working capital.
Ans: b
Section: Net present value
Level: Easy
Chapter 17, Capital Budgeting for the Multinational Corporation
17.5 If the discount rate is based solely on the riskiness of the project’s anticipated cash
flows, we would refer to it as the
a) all-equity rate
b) weighted average cost of capital
c) debt cost of capital
d) all-equity beta
Ans: a
Section: Alternative Capital-Budgeting Frameworks
Level: Easy
17.6 The most desirable property of the NPV criterion is that it evaluates
a) investments in the same way as the company’s subsidiaries
b) new market innovations that are simple to identify
c) investments the same way as the company’s shareholders
d) competitive advantages of the firm realistically
Ans: c
Section: Net present value
Level: Easy
17.7 When the introduction of a new product takes sales away from the firm’s existing
products, it is known as ______.
a) cannibalization
b) sales creation
c) transfer pricing
d) opportunity cost
Ans: a
Section: Cannibalization
Level: Easy
17.8 When evaluating an investment, the MNC should consider the ____________ cash
flows generated by the project.
a) total
b) variable
c) incremental
d) fixed
Ans: c
Section: Incremental cash flows
Level: Easy
17.9 The ___________ at which the company’s products or inputs are traded internally can
significantly cause errors in evaluating the profitability of proposed investments.
Chapter 17, Capital Budgeting for the Multinational Corporation
a) export licenses
b) transfer prices
c) opportunity costs
d) market prices
Ans: b
Section: Transfer pricing
Level: Easy
17.10 Which one of the following can cause significant errors in the calculation of free
cash flows associated with a project?
a) export licenses
b) transfer prices
c) opportunity costs
d) market prices
Ans: b
Section: Transfer pricing
Level: Easy
17.11 If all funds in a project are expected to be blocked by government action in
perpetuity, the value of the project is _____.
a) limited
b) unlimited
c) zero
d) difficult to determine
Ans: c
Section: Blocked funds
Level: Easy
17.12 ____________ such as better quality, faster time to market, and higher customer
satisfaction can have a significant impact on corporate cash flows.
a) Intangibles
b) Transfer prices
c) Economies of scale of distribution
d) Value additivity
Ans: a
Section: Accounting for intangible benefits
Level: Easy
17.13 In capital budgeting what matters is not the project’s total cash flow per period, but
the ___________ cash flows generated by the project.
a) sales-creating
b) incremental
Chapter 17, Capital Budgeting for the Multinational Corporation
c) base-case
d) parent
Ans: b
Section: Incremental cash flows
Level: Easy
MEDIUM (applied)
17.14 A foreign project that is _____ when valued on its own can be ________ from the
parent firm's standpoint.
a) profitable, unprofitable
b) unprofitable, profitable
c) appreciated, depreciated
d) depreciated, appreciated
Ans: a
Section: Issues in foreign investment analysis
Level: Medium
17.15 Given the differences that are likely to exist between parent and project cash flows,
the relevant cash flows to use in project evaluation are the
a) incremental worldwide cash flows received by the parent
b) incremental worldwide project cash flows
c) incremental worldwide project cash flows that can be repatriated to the parent
d) total worldwide cash flows generated by the project
Ans: a
Section: Parent versus project cash flows
Level: Medium
17.16 Many multinationals are now making small investments in Eastern Europe. These
investments
a) may be valued using conventional discounted cash-flow analysis
b) will be overvalued using conventional discounted cash-flow analysis because of their
high risks
c) should be valued using an expanded internal rate of return value rule that considers the
attendant options
d) are best valued by using the payback period method
Ans: b
Section: Adjusting the discount rate of payback period
Level: Medium
17.17 Which of the following is NOT a method for incorporating the additional political
and economic risk into foreign investment analysis?
Chapter 17, Capital Budgeting for the Multinational Corporation
a) shortening the minimum payback period,
b) raising the required rate of return of the investment
c) adjusting cash flows to reflect the specific impact of a given risk
d) hedging the expected risk of currency fluctuations with currency futures
Ans: d
Section: Political and economic risk analysis
Level: Medium
17.18 An investment in the Mezzogiorno will receive a subsidized loan of $12 million
from the Italian government. The loan bears an interest rate of 7% in contrast to a market
rate of 10%. The loan principal must be paid back in 8 years. What is the present value of
the interest subsidy?
a) $360,000
b) $1.92 million
c) $2.31 million
d) $870,000
Ans: b
Section: Net present value
Level: Medium
17.19 Walt Disney Company is contemplating a new theme park somewhere in Southeast
Asia. However, it is concerned about cannibalizing sales of Tokyo Disneyland. Walt
Disney should
a) not be concerned because if it doesn't build another theme park, another competitor will
certainly do so
b) not be concerned because the odds are that it will generate enough additional sales to
offset any cannibalization that does take place
c) be concerned because cannibalization is a real threat
d) decrease the amount of transfer pricing between its subsidiaries
Ans: c
Section: Cannibalization
Level: Medium
DIFFICULT (applied)
17.20 Suppose a firm projects cash flows of $2.5 million, $3 million, and $4 million for
years 1, 2, and 3, respectively, on an initial investment in Ecuador of $22 million. The firm
projects a perpetuity of $5 million in years 4 and beyond. If the required return on this
investment is 17%, how large does the probability of expropriation in year 5 have to be
before the investment has a negative NPV? Expected compensation in the event of
expropriation is $3 million.
a) 31%
b) 42%
Chapter 17, Capital Budgeting for the Multinational Corporation
c) 22%
d) 49%
Ans: c
Section: Expropriation
Level: Difficult
17.21 Global Industries (GI) is planning to use some existing equipment from its own
facilities in a foreign project. The used equipment has a book value of $2 million but a
market value of $6 million. If GI's marginal tax rate is 34%, what is its opportunity cost of
using the used equipment in the foreign project?
a) $2 million
b) $3.25 million
c) $6 million
d) $4.64 million
Ans: d
Section: Estimation of projected cash flows
Level: Difficult
17.22 Suppose that a subsidiary operates in a foreign country with a corporate tax rate of
42% and a withholding tax on dividends of 5%. If the U.S. parent has surplus foreign tax
credits, what is the marginal rate of tax on remitted profits from the subsidiary?
a) 13%
b) 34%
c) 8%
d) 5%
Ans: d
Section: Tax factors
Level: Difficult
17.23 What is the expected real dollar value of the depreciation tax shield in year 10,
assuming that the tax write-off is taken at yearend?
a) $1.1 million
b) $1.9 million
c) $2.3 million
d) $1.3 million
Ans: d
Section: Tax factors
Level: Difficult
Chapter 17, Capital Budgeting for the Multinational Corporation
17.24 A new project is projected to yield $2.5 million annually in after-tax profit, based
on a local corporate profit tax rate of 40%. However, this profit figure depends on the use
of a transfer price of $30 per unit on a component bought from the parent. If the project
requires 100,000 units of this component annually, the impact on project profitability and
on parent profitability of a boost in the transfer price to $35 will be _______ and ________,
respectively. The parent's marginal tax rate is 34% and the incremental tax on subsidiary
remittances to the parent is -3%.
a) -$500,000, +$500,000
b) -$300,000, +$330,000
c) -$300,000, +$321,000
d) +$500,000, -$500,000
Ans: c
Section: Tax factors
Level: Difficult
17.25 General Tin (GT) is worried that its mine in Peru will be expropriated during the
next 12 months. The Peruvian government has promised, however, to pay compensation of
$15 million at the year's end if it expropriates the mine. GT believes that this promise
would be kept. If expropriation does not occur this year, it will not occur anytime in the
foreseeable future. The mine is expected to be worth $50 million at the end of the year. A
wealthy Peruvian has just offered GT $19 million for the mine today. If GT's risk-adjusted
discount rate is 22%, what is the probability of expropriation at which GT is just indifferent
between selling now or holding on to its mine?
a) 71.2%
b) 76.6%
c) 23.5%
d) 18.9%
Ans: b
Section: Expropriation
Level: Difficult
Chapter 18, Financing Foreign Trade
CHAPTER 18
Financing Foreign Trade
EASY (definitional)
18.1 Which of the following payment methods provides the exporter with the strongest
protection against risk?
a) Cash in advance
b) Letter of credit
c) Draft
d) Consignment
Ans: a
Section: Payments in International Trade
Level: Easy
18.2 Which of the following payment methods provides the exporter with the weakest
protection against default risk?
a) Cash in advance
b) Letter of credit
c) Draft
d) Consignment
Ans: d
Section: Payments in International Trade
Level: Easy
18.3 Which of the following is the most important advantage of letter of credit
financing?
a) it eliminates credit risk
b) it reduces the danger that payment will be delayed
c) it facilitates financing
d) it reduces the uncertainty that the exporter and importer will not perform according to
their agreement
Ans: a
Section: Payments in International Trade
Level: Easy
18.4 Which of the following payment methods provides both parties with a strong
measure of protection against commercial and political risks?
a) Cash in advance
b) Letter of credit
c) Draft
d) Consignment
Chapter 18, Financing Foreign Trade
Ans: b
Section: Letter of credit
Level: Easy
18.5 Most L/Cs issued in connection with global trade transactions are
a) documentary
b) clean
c) revocable
d) created by a combination of a buyer and a seller alone
Ans: a
Section: Letter of credit
Level: Easy
18.6 An exporter shipping goods to a nation that may impose currency controls will seek
an L/C that is
a) revocable
b) clean
c) documentary
d) confirmed by a domestic bank
Ans: d
Section: Letter of credit
Level: Easy
18.7 When a letter of credit is unconfirmed, the obligation to provide credit belongs to
a) the exporter
b) the opening bank
c) the importer
d) the customs agents
Ans: b
Section: Payments in International Trade
Level: Easy
18.8 The party to a draft who signs and sends the draft to the second party is called the
a) drawer
b) payee
c) drawee
d) broker
Ans: a
Section: Draft
Level: Easy
Chapter 18, Financing Foreign Trade
18.9 RJR Nabisco sells its export receivables to a firm that takes responsibility for
collecting payment from the importers. RJR has used
a) accounts receivable financing
b) factoring
c) forfaiting
d) letter of credit
18.10 Of all shipping documents, which of the following is the most important?
a) bill of lading
b) insurance certificate
c) commercial invoice
d) consular invoice
Ans: a
Section: Documents in International Trade
Level: Easy
18.11 The document in international trade that contains an authoritative description of
the merchandise shipped, including the full details on quality, grades, price per unit, and
total value stated in a currency is known as the
a) bill of lading
b) commercial invoice
c) insurance certificate
d) consular invoice
Ans: b
Section: Documents in International Trade
Level: Easy
18.12 The document in international trade that may be required by governments is
usually presented to the local consul in exchange for a visa. It is called a
a) bill of lading
b) commercial invoice
c) insurance certificate
d) consular invoice
Ans: d
Section: Documents in International Trade
Level: Easy
Ans: b
Section: Factoring
Level: Easy
18.13 The only U.S. agency dedicated solely to financing and facilitating U.S. exports is
the
Chapter 18, Financing Foreign Trade
a) Eximbank
b) Foreign Credit Insurance Association
c) Bankers' Association for Foreign Trade
d) Agency for International Development
Ans: a
Section: Export-import bank
Level: Easy
18.14 Suppose the Fluor Corporation is seeking to bid on a construction project in
Turkey. Which Eximbank program will be most useful to Fluor?
a) "standby" loan commitment
b) Eximbank payment guarantee
c) preliminary commitment
d) Eximbank loan guarantee
Ans: c
Section: Export-import bank
Level: Easy
18.15 Eximbank has recently become more aggressive in fighting perceived abuses by
foreign export-credit agencies. One area that Eximbank has targeted is
a) foreign mixed-credit financing
b) inexpensive political risk insurance
c) inexpensive credit risk insurance
d) preliminary commitments
Ans: a
Section: Export-import bank
Level: Easy
18.16 Which of the following organizations was created by the Bankers' Association for
Foreign Trade to mobilize private capital for financing the export of big-ticket items by
U.S. firms?
a) Eximbank
b) Private Export Funding Corporation
c) Foreign Credit Insurance Association
d) Bankers' Export Financing Association
Ans: b
Section: Private export funding corporation
Level: Easy
18.17 When factoring is done on a nonrecourse basis, the ---- has title to the receivables
and the ---- is responsible for credit checking and collecting the receivables.
a) factor, factor
Chapter 18, Financing Foreign Trade
b) factor, borrowing firm
c) borrowing firm, factor
d) borrowing firm, borrowing firm
Ans: a
Section: Factoring
Level: Easy
18.18 Countertrade transactions will most probably take the form of
a) barter or buyback
b) credit card purchases
c) cash in advance
d) open account terms
Ans: a
Section: Countertrade
Level: Easy
MEDIUM (applied)
18.19 Which one of the following countries has the reputation for the greatest length of
time for companies to collect on the average bill?
a) Iran
b) India
c) Taiwan
d) Germany
Ans: a
Section: Exhibit 18-7
Level: Medium
18.20 Which one of the following is an advantage to open account financing?
a) high risk
b) seller must finance production
c) increased risk from currency controls
d) no customer resistance
Ans: d
Section: Collecting overdue accounts
Level: Medium
18.21 Why is Ex-im Bank financing often referred to as financing of “last resort?”
a) it will not provide financing unless the U.S. exporter is doing business in more than
one country
b) it will not provide financing unless private capital is unavailable
c) fees are extremely high for guarantees and insurance
Chapter 18, Financing Foreign Trade
d) the Ex-Im Bank authorizes loans for only the worst credit risks
Ans: b
Section: Export-import bank
Level: Medium
18.22 Which one of the following conditions is NOT required for a draft to be
negotiable under the U.S. Uniform Commercial Code?
a) to be in writing
b) signed by the drawer
c) an open amount of money
d) an unconditional order to pay
Ans c
Section: Draft
Level: Medium
18.23 Which of the following is NOT an advantage to the importer of L/C financing?
a) any documents required are carefully inspected by clerks with years of experience
b) an L/C is about as good as cash in advance
c) the importer using an L/C can usually command better credit terms and/or prices
d) L/C financing may be cheaper than the alternatives
e) all of the above are advantages of the L/C to the importer
Ans: e
Section: Letter of credit
Level: Medium
18.24 Which of the following L/Cs is safest for the exporter?
a) revocable, confirmed L/C
b) irrevocable, unconfirmed L/C
c) irrevocable, confirmed L/C
d) revocable L/C
Ans: c
Section: Letter of credit
Level: Medium
18.25 An exporter manufacturing a specialized piece of equipment can hedge the risk
that its customer will cancel the contract before shipment by obtaining a
a) consignment contract
b) open account
c) bill of lading
d) letter of credit
Ans: d
Chapter 18, Financing Foreign Trade
Section: Letter of credit
Level: Medium
18.26 Which of the following functions does a draft NOT perform?
a) to provide written evidence, in clear and simple terms, of a financial obligation
b) to enable both parties to potentially reduce their costs of financing
c) to provide a negotiable and unconditional instrument
d) to offer the exporter greater safeguards than a letter of credit in securing repayment
from the importer
Ans: d
Section: Draft
18.27 Which of the following does NOT accompany a documentary draft?
a) bill of lading in negotiable form
b) commercial invoice
c) insurance certificate
d) consular invoice
Ans: d
Section: Draft
Level: Medium
18.28 Which of the following is NOT an important attribute of a bankers’ acceptance?
a) makes an unconditional promise to pay the holder of the draft a stated amount on a
specified day
b) effectively substitutes its own credit for that of a borrower
c) creates a negotiable instrument that may be freely traded
d) offers the holder a binding agreement to repayment by the exporter if the importer
defaults
Ans: d
Section: Bankers’ acceptance
Level: Medium
DIFFICULT (applied)
18.29 Which of the following is NOT an advantage to the exporter of L/C financing?
a) an L/C eliminates credit risk if the bank that opens it is of undoubted standing
b) an L/C reduces the danger that payment will be delayed or withheld due to exchange
controls or other political acts
c) payment is only in compliance with the L/C's stipulated conditions
d) an L/C guards against pre-shipment risks
Ans: c
Section: Letter of credit
Chapter 18, Financing Foreign Trade
Level: Difficult
18.30 Microsoft sells software to a French firm. In return, the French firm's bank, Credit
Agricole, acknowledges it will pay Microsoft after the software is delivered to its client.
Microsoft has most probably used
a) accounts receivable financing
b) factoring
c) forfaiting
d) letter of credit
Ans: d
Section: Letter of credit
Level: Difficult
18.31 Caterpillar Tractor sells heavy construction equipment to a Polish firm. In return,
the Polish firm issues a promissory note to Caterpillar promising to pay for the equipment
over a five-year period. Caterpillar sells the note to Deutsche Bank at a discount.
Caterpillar has used
a) accounts receivable financing
b) factoring
c) forfaiting
d) letter of credit
Ans: c
Section: Forfaiting
Level: Difficult
18.32 Which one of the following is NOT true when shipping goods under documentary
time drafts for acceptance?
a) the exporter is extending credit to the importer
b) the exporter is relinquishing control of the goods in return for a signature on the
acceptance to assure it of payment
c) the importer is no longer bound to pay the draft to the exporter
d) a bill of lading will be the most important document of the transaction
Ans: c
Section: Draft
Level: Difficult
18.33 Which of the following attributes of a bankers’ acceptance greatly enhances its
marketability?
a) the authenticity of an accepted draft is separated from the underlying commercial
transaction
b) the accepted draft may not be dishonored for reason of a dispute between the exporter
and importer
c) the accepted draft is automatically guaranteed by the Eximbank
Chapter 18, Financing Foreign Trade
d) both a and b
Ans: d
Section: Bankers’ acceptance
Level: Difficult
18.34 Which one of the following is NOT a true economic rationale for countertrade?
a) many Third World countries use countertrade to conserve what little foreign exchange
they have
b) the goods taken in countertrade are usually the least difficult to market
c) countertrade enables members of cartels such as OPEC to undercut an agreed-upon
price without formally doing so
d) the trade may circumvent tariffs
Ans: b
Section: Countertrade
Level: Difficult
18.35 Precor sells exercise equipment to thousands of health clubs and sporting goods
stores around the world. Its average order size is about $3,500. Which of the following
techniques would you recommend to Precor to deal with its credit risk?
a) insure the receivables through the FCIA, which will charge a 1.2% fee to cover 90%
of the receivables
b) use a factor, who will charge a 1.3% export factoring fee
c) request letters of credit from customers. The customers will have to pay $75 plus 0.5%
for each letter of credit. To remain competitive, Precor will have to reduce its prices to
reimburse customers for their L/C costs
d) all are about equally acceptable
Ans: b
Section: Factoring
Level: Difficult
18.36 Which of the following firms would find a factor most useful?
a) Levi Strauss, which has been shipping jeans to the same customers in 120 countries
for over 40 years,
b) Brown and Root, which manages major construction projects around the world
c) RC Cola, which periodically ships a small order of soft drinks overseas
d) IBM, which exports mainframes and other expensive equipment to customers in over
100 countries around the world
Ans: c
Section: Factoring
Level: Difficult
Chapter 19, Current Asset Management and Short-Term Financing
CHAPTER 19
Current Asset Management and Short-Term Financing
EASY (definitional)
19.1 Most U.S. international dollar payments are made via
a) Bankwire
b) CHIPS
c) FedWire
d) SWIFT
Ans: b
Section: Collection and disbursement of funds
Level: Easy
19.2 One of the cash manager’s greatest problems is that ____________ wire transfers
do not always operate with great efficiency globally.
a) bank-to-bank
b) subsidiary-to-subsidiary
c) U. S. bank
d) U.K. bank
Ans: a
Section: Collection and disbursement of funds
Level: Easy
19.3 Which one of the following types of wire transfers is probably the fastest method to
remit payment but is plagued with efficiency challenges globally?
a) bank-to-bank
b) subsidiary-to-subsidiary
c) U. S. bank
d) U.K. bank
Ans: a
Section: Collection and disbursement of funds
Level: Easy
19.4 Which of the following is NOT an advantage of a centralized international cash
management program.
a) Pools of excess liquidity are eliminated
b) Financing costs can be reduced
c) Information at the level of the operating unit is better utilized
d) Cash management is decentralized
Ans: d
Section: Organization
Chapter 19, Current Asset Management and Short-Term Financing
Level: Easy
19.5 Since a large percentage of multinational fund transfers are
subsidiary-to-subsidiary, the payoff from ____________ can be large.
a) wire transfers
b) multiple bank accounts
c) multilateral netting
d) local cash management
Ans: c
Section: Bilateral and multilateral netting
Level: Easy
19.6 Which one of the following is a key element of international cash management both
within a foreign country and across borders?
a) accelerating collections
b) lagging payments
c) reducing customs delays
d) greater expertise in cash and portfolio management
Ans: a
Section: Collection and disbursement of funds
Level: Easy
19.7 Treasurers of multinationals will likely demand more cash management services
when
a) foreign exchange markets are relatively calm
b) foreign exchange transactions costs rise
c) inflation rates are relatively low
d) telecommunications costs rise
Ans: b
Section: Collection and disbursement of funds
Level: Easy
19.8 Firms can minimize delays in receipt of payments and in conversion of payments
into cash but NOT by using
a) SWIFT
b) wire transfers
c) cash pooling
d) mobilization centers
Ans: c
Section: Collection and disbursement of funds
Level: Easy
Chapter 19, Current Asset Management and Short-Term Financing
19.9 One of the principal goals of the cash manager is participating in the establishment
of an affiliate’s credit policy and monitoring of collection performance in order to
minimize
a) credit defaults
b) float
c) transaction costs
d) slow payments
Ans: b
Section: Collection and disbursement of funds
Level: Easy
19.10 A crucial means for companies to minimize delays in receipt of payments and in
conversion of payments to cash is through the use of
a) correspondent banks
b) letter of credit payments
c) cable remittances
d) lock boxes
Ans: c
Section: Collection and disbursement of funds
Level: Easy
19.11 In an attempt to control an affiliate’s cash reserves, corporate management may
present local managers with interest rates for borrowing or lending funds that reflect the
opportunity cost of money to the parent corporation. These interest rates are known as
a) imputed rates
b) internal interest rates
c) corporate prime rates
d) LIBOR rates
Ans: b
Section: Optimal Worldwide Cash Levels
Level: Easy
19.12 Which of the following factors would NOT add value to centralized cash
management?
a) tax differentials across countries
b) violations of interest rate parity
c) differences between borrowing and lending rates
d) more freedom to local subsidiary project managers to handle local funds
Ans: d
Section: Collection and disbursement of funds
Level: Easy
Chapter 19, Current Asset Management and Short-Term Financing
19.13 Companies can usually improve bank relations by
a) increasing the number of banks it deals with so as to increase competition among them
b) decentralize cash management and allowing subsidiaries to negotiate better deals with
more local banks
c) centralizing cash management in one or two banks
d) appointing a team of cash managers
Ans: c
Section: Bank relations
Level: Easy
19.14 By centralizing affiliate credit policy and monitoring collection performance,
parents companies can do all of the following but NOT
a) reduce the investment in receivables
b) reduce foreign exchange and other transaction costs
c) reduce banking fees
d) increase the rate of return on new subsidiary projects
Ans: d
Section: Credit extension
Level: Easy
19.15 SCI borrows SFr 1.5 million from Credit Suisse for one year at 12% interest.
Interest is prepaid. What is the effective SFr interest rate on SCI's loan?
a) 14.52%
b) 13.64%
c) 16.44%
d) 21.22%
Ans: b
Section: Interest rates on bank loans
Level: Easy
19.16 Allied Products has been offered a one-year loan of ￡100,000 at 14%, payable at
maturity. What is the effective pound interest rate on Allied's loan?
a) 14.0%
b) 17.5%
c) 15.2%
d) 18.3%
Ans: b
Section: Interest rates on bank loans
Level: Easy
Chapter 19, Current Asset Management and Short-Term Financing
19.17 It’s 1998 and Philips N.V. requires Lit 500 million for one year. It can borrow
from Banca di Roma at a 15% interest rate. How many lira must Philips borrow to
receive this amount if the loan is quoted on a discount basis?
a) Lit 667 million
b) Lit 588 million
c) Lit 435 million
d) Lit 556 million
Ans: b
Section: Interest rates on bank loans
Level: Easy
19.18 The Apex Supplies Corporation needs to acquire €100 million in funds to expand
their facilities. The bank has offered them a discounted loan at 10% and a compensating
balance of 6%. What is the effective interest rate on this loan?
a) 5.5%
b) 7.8%
c) 11.9%
d) 14.5%
Ans: c
Section: Interest rates on bank loans
Level: Easy
19.19 Consolidated Corporation requires C$50 million in funds. The banks has offered
them a discounted loan at 8% with a compensating balance of 15%. How much must
they borrow in order to net this amount?
a) 64,935,165
b) 55,455,700
c) 85, 985,005
d) 35,097,555
Ans: a
Section: Interest rates on bank loans
Level: Easy
MEDIUM (applied)
19.20 The appropriate split of liquid balances between cash and marketable securities
depends on all but
a) interest rates
b) costs of buying and selling securities
c) the variability of cash flows
d) the existence of foreign exchange risk
Ans: d
Chapter 19, Current Asset Management and Short-Term Financing
Section: Management of the short-term investment portfolio
Level: Medium
19.21 Pre-authorized payment can do all of the following for customers except
a) increase disbursement float
b) reduce processing costs
c) eliminate mail costs
d) eliminate the possibility of skipping a payment
Ans: a
Section: Optimal worldwide cash levels
Level: Medium
19.22 Suppose it is May 1985 and the current value of the Greek drachma is Dr 1 =
$0.006369, but the expected spot rate 90 days hence is Dr 1 = $0.005980. What is the
value of a sales order of Dr 50 million sold on 90-day terms?
a) $318,450
b) $562,491
c) $299,000
d) 5,430
Ans: c
Section: Credit extension
Level: Medium
19.23 Suppose that a firm located in Belgium in 1994 can borrow dollars at 8% or
Belgium francs at 14%. If the Belgian franc is expected to depreciate from BF58 = $1 at
the beginning of the year to BF61 = $1 at the end of the year, then the expected dollar
cost of the Belgian franc loan is
a) 8.39%
b) 20.14%
c) 12.37%
d) 9.15%
Ans: a
Section: Calculating the dollar costs of alternative financing options
Level: Medium
19.24 Referring to question 19.18, at what end-of-year exchange rate will the dollar costs
of borrowing Belgian francs or dollars be equal?
a) BF63.1/$
b) BF61.2/$
c) BF56.3/$
d) BF60.8/$
Ans: b
Chapter 19, Current Asset Management and Short-Term Financing
Section: Calculating the dollar costs of alternative financing options
Level: Medium
19.25 Intel has the choice of borrowing dollars at 9.5% or yen at 7% for one year. The
current exchange rate is ￥152 = $1. At what end-of-year exchange rate would the yen
costs of these two loans be equal?
a) ￥156.0 = $1
b) ￥149.2 = $1
c) ￥153.6 = $1
d) ￥148.5 = $1
Ans: d
Section: Calculating the dollar costs of alternative financing options
Level: Medium
19.26 Why has the commercial paper market been dominated by the largest and most
creditworthy firms?
a) commercial paper bears only the name of the issuer and is unsecured
b) the largest companies can afford the flotation costs
c) credit reporting agencies screen out smaller firms
d) commercial paper is issued at a discount
Ans: a
Section: Commercial paper
Level: Medium
19.27 Which one of the following noninterest costs is NOT associated with using
commercial paper?
a) licensing fees
b) backup lines of credit
c) fees to commercial banks
d) rating service fee
Ans: a
Section: Commercial paper
Level: Medium
19.28 All of the following are major forms of bank financing EXCEPT
a) overdrafts
b) factoring
c) discounting
d) term loans
Ans: b
Section: Local currency financing
Level: Medium
Chapter 19, Current Asset Management and Short-Term Financing
19.29 What of the following reasons has NOT been cited as the root cause of inventory
stockpiling by subsidiaries of multinationals?
a) long delivery lead times
b) currency restrictions
c) customs delays
d) pegging the currency’s exchange rate
Ans: d
Section: Inventory stockpiling
Level: Medium
19.30 Which one of the following current assets do multinationals find it more difficult
to control?
a) cash
b) accounts receivable
c) overseas inventories
d) cash equivalents
Ans: c
Section: Inventory management
Level: Medium
19.31Liberalized credit terms involve the following costs EXCEPT
a) risk of default
b) increased liquidity for the firm
c) increased interest expense on the larger investment in receivables
d) the deterioration of the value of accounts receivable denominated in buyer’s currency
Ans: b
Section: Credit expansion
Level: Medium
19.32 Which one of the following problems is NOT associated with bank relations?
a) too many relations
b) high banking costs
c) inadequate reporting
d) accelerated clearings
Ans: d
Section: Bank relations
Level: Medium
DIFFICULT (applied)
19.33 Netting can do all of the following EXCEPT
Chapter 19, Current Asset Management and Short-Term Financing
a) reduce foreign exchange risk
b) reduce foreign exchange costs
c) reduce float
d) reduce cable charges
Ans: d
Section: Bilateral and multilateral netting
Level: Difficult
19.34 Suppose that A sells $1 million monthly to subsidiary B and $1.5 monthly to
subsidiary C, B sells $2.2 million monthly to A and $100,000 monthly to C, and C sells
$600,000 monthly to A and $500,000 to B. Bilateral netting will reduce intercompany
payment flows by -----, whereas multilateral netting will reduce these flows by -----.
a) $2.0 million, $1.7 million
b) $3.2 million, $5.2 million
c) $1.4 million, $3.3 million
d) 7 million, $2.7 million
Ans: b
Section: Bilateral and multilateral netting
Level: Difficult
19.35 Which one of the following is NOT a wise guideline for globally managing the
marketable securities portfolio of a multinational corporation?
a) concentrate the instruments in the portfolio to one growth industry to maximize the
yield for a given level of risk
b) review the portfolio daily to decide which securities should be sold
c) carefully consider opportunities for covered interest arbitrage
d) tailor the maturity of the investment to the firm’s projected cash needs
Ans: a
Section: Portfolio guidelines
Level: Difficult
Chapter 20, Managing the Multinational Financial System
CHAPTER 20
Managing the Multinational Financial System
EASY (definitional)
20.1 The value of the multinational financial system is NOT based on the ability to take
advantage of
a) tax arbitrage
b) financial market arbitrage
c) regulatory system arbitrage
d) differing political systems between subsidiaries
Ans: d
Section: The value of the multinational financial system
Level: Easy
20.2 Through which one of the following does the MNC have considerable freedom to
transfer funds, allocated profits or both?
a) financial channels
b) supply chains
c) economies of scope
d) transfer prices
Ans: a
Section: The value of the multinational financial system
Level: Easy
20.3 When MNCs transfer funds among foreign units to earn higher risk-adjusted yields
on excess funds, we say they are conducting
a) regulatory arbitrage
b) financial arbitrage
c) tax arbitrage
d) centralization of fund management
Ans: b
Section: The value of the multinational financial system
Level: Easy
20.4 Tax arbitrage
a) arises when subsidiary profits vary due to local regulations
b) occurs when firms move funds to lower tax jurisdictions
c) arises when barriers to trade exist
d) occurs due to the incidence of capital flight
Ans: b
Section: The value of the multinational financial system
Chapter 20, Managing the Multinational Financial System
Level: Easy
20.5 MNCs may use _______ arbitrage to resist government price controls or union
wage pressures.
a) tax
b) financial system
c) regulatory
d) triangular
Ans: c
Section: The value of the multinational financial system
Level: Easy
20.6 Which one of the following would NOT be an important use of transfer pricing by
a MNC?
a) avoiding customs inspections
b) avoiding exchange controls
c) reducing taxes
d) reducing tariffs.
Ans: a
Section: Intercompany Fund-Flow Mechanisms: Costs and Benefits
Level: Easy
20.7 The type of tariff that levies import duties that are set as a percentage of the value of
the imported goods is known as the
a) ad valorem tariff
b) protective tariff
c) revenue tariff
d) flat-rate tariff
Ans: a
Section: Intercompany Fund-Flow Mechanisms: Costs and Benefits
Level: Easy
20.8 Subsidiaries A and B buy from and sell to each other. Suppose that A has excess
cash, whereas B is short of cash. How can A funnel money to B?
a) A can lead payments owed to B
b) B can lag payments owed to A
c) A can raise transfer prices on goods sold to B
d) a and b only
Ans: d
Section: Leading and lagging
Level: Easy
Chapter 20, Managing the Multinational Financial System
20.9 ______ is the pricing of internally traded goods for the purpose of moving profits
to a more tax-friendly nation.
a) Transfer pricing
b) Leading and lagging
c) Arm’s length pricing
d) Advanced pricing
Ans: a
Section: Transfer pricing
Level: Easy
20.10 Using transfer prices may lead to _____.
a) increased local taxes
b) reduced ad valorem tariffs
c) exchange rate controls
d) decreased political risk
Ans: b
Section: Transfer pricing
Level: Easy
20.11 One of the few legal means of moving funds internationally that an MNC has is
the use of the
a) transfer price mechanism
b) intercompany loan
c) back-to-back loan
d) parallel loan
Ans: b
Section: Intercompany Loans
Level: Easy
20.12 Reinvoicing centers are usually set up in __________ jurisdictions.
a) economically secure
b) politically stable
c) high-tax
d) low-tax
Ans: d
Section: Reinvoicing centers
Level: Easy
20.13 One disadvantage of a reinvoicing center is _______ .
a) less chance of local government suspicion
b) less communication costs
c) more communications costs
Chapter 20, Managing the Multinational Financial System
d) more exchange rate risk
Ans: c
Section: Reinvoicing centers
Level: Easy
20.14 One advantage of the use of fees or royalties to manage the MNC’s cash flow is
____.
a) less communications costs
b) less exchange rate risk
c) more favorable tax treatment by the parent country’s government
d) less suspicion by the host government
Ans: d
Section: Fees and royalties
Level: Easy
20.15 Intercompany loans are useful during periods of ______ in the financial markets.
a) credit rationing
b) hyperinflation
c) currency depreciations
d) capital flight
Ans: a
Section: Intercompany loans
Level: Easy
20.16 ______ from the subsidiary to the parent is still the MOST important method of
transferring funds in the MNC.
a) Parallel loans
b) Leading and laggng
c) Dividends
d) Credit rationing
Ans: c
Section: Dividends
Level: Easy
20.17 Which one of the following is a real rather than a financial flow?
a) capital goods
b) dividends
c) equity investment
d) credit on goods and services
Ans: a
Section: Mode of transfer
Chapter 20, Managing the Multinational Financial System
Level: Easy
20.18 Which one of the following is an example of a market imperfection in the
domestic capital market?
a) transactions costs
b) costs of obtaining information
c) ceilings on interest rates
d) restrictions by nationality of investor
Ans: c
Section: Value
Level: Easy
MEDIUM (applied)
20.19 Which one of the following would government taxing authorities NOT use to
establish arm’s length pricing?
a) comparable uncontrolled price method
b) resale price method
c) cost-plus method
d) the law of one price
Ans: d
Section: Transfer pricing
Level: Medium
20.20 Leading and lagging is primarily of value because of
a) tax regulations
b) foreign exchange risk
c) expropriation risk
d) exchange and capital controls
Ans: a
Section: Leading and lagging
Level: Medium
20.21 Suppose a firm earns $2.5 million before-tax in Spain. It pays Spanish tax of $1.3
million and remits the remaining $1.2 million as a dividend to its U.S. parent. The
Spanish dividend withholding tax is 5%. Under current U.S. tax law, the parent will owe
U.S. tax on this dividend equal to
a) $1.15 million
b) $552,000
c) nothing. It will also receive a foreign tax credit equal to $1.3 million.
d) nothing. It will also receive a foreign tax credit equal to $510,000.
Ans: d
Chapter 20, Managing the Multinational Financial System
Section: Tax effects
Level: Medium
20.22 Suppose affiliate A sells goods worth $1 million monthly to affiliate B on 30 day
credit terms. A switch in credit terms to 120 days will involve a one-time shift in cash of
a) $3 million from A to B
b) $3 million from B to A
c) $4 million from A to B
d) $4 million from B to A
Ans: a
Section: Leading and lagging
Level: Medium
20.23 The best way(s) to increase the present value of after-tax remittances from
overseas is (are) to
a) invest parent funds as debt rather than equity
b) borrow in the local currency
c) hedge exchange risk
d) speed up the payment of dividends
Ans: a
Section: Equity versus debt
Level: Medium
20.24 A French subsidiary that earns $1 million before-tax pays French tax of $.5
million and remits the remaining $.5 million as a dividend to its U.S. parent. It pays a
10% dividend withholding tax on its remittance. Under current tax law, the parent will
owe U.S. tax on this dividend equal to
a) $40,000
b) $460,000
c) $207,000
d) nothing. It will also receive a foreign tax credit of $210,000.
Ans: d
Section: Tax effects
Level: Medium
20.25 A firm that earns $1 million before-tax in Brazil pays Brazilian tax of $250,000
and remits the remaining $750,000 as a dividend to its U.S. parent. It pays a 10%
dividend withholding tax on its remittance. Under current U.S. tax law, the parent will
owe U.S. tax on this dividend of (Eg US Tax @ 34%)
a) $40,000
b) $340,000
c) $15,000
d) nothing. It will also receive a foreign tax credit of $90,000.
Chapter 20, Managing the Multinational Financial System
Ans: c
Section: Tax effects
Level: Medium
20.26 The extensive system of foreign tax credits allows
a) U.S. MNCs to lower their effective tax rate on foreign-source income to below the
U.S. corporate tax rate
b) governments to collect more taxes from MNCs
c) reduce the amount of taxes they owe the host country
d) MNCs to avoid double taxation on foreign-source income
Ans: d
Section: Tax effects
Level: Medium
20.27 Suppose a foreign subsidiary earns $1 million after paying foreign income taxes
of $800,000. If the subsidiary pays a dividend of $600,000, what is the amount of the
indirect foreign tax credit that its parent will receive?
a) $480,000
b) $800,000
c) $400,000
d) it receives no foreign tax credit
Ans: a
Section: Tax effects
Level: Medium
20.28 Suppose a foreign subsidiary earns $2 million after paying foreign income taxes
of $500,000. If the subsidiary retains all of its earnings, what is the amount of the indirect
foreign tax credit that its parent will receive?
a) $500,000
b) $250,000
c) $400,000
d) it receives no foreign tax credit
Ans: d
Section: Tax effects
Level: Medium
20.29Which one of the following cash flow mechanisms arouses the least suspicion
from a host government concerning a multinationals attempts to avoid additional taxes?
a) transfer pricing
b) reinvoicing centers
c) royalties
d) leading and lagging
Chapter 20, Managing the Multinational Financial System
Ans: d
Section: Intercompany fund-flow mechanisms: costs and benefits
Level: Medium
20.30Leading and lagging strategies have several advantages EXCEPT
a) no formal note of indebtedness is needed
b) governments are less like to interfere with payments on intercompany accounts
c) interest must be charged on all intercompany accounts
d) intercompany accounts up to six months are interest free
Ans: c
Section: Leading and lagging
Level: Medium
DIFFICULT (applied)
20.31 Arco ships 15 million barrels of refined oil monthly from Arco-Canada to
Arco-U.S. Arco-U.S. has to pay a U.S. ad valorem tariff of 6%. Tax accountants advise
Arco that it can set the transfer price in the range of $15-$18 per barrel of product. The
current price is set at $16 a barrel. If Arco-Canada's tax rate is 50% (the U.S. rate is 46%.,
what is the incremental cash flow per month associated with using the optimal transfer
price?
a) $236,000
b) $1,343,000
c) $1,086,000
d) $32,670
Ans: c
Section: Tariffs
Level: Difficult
20.32 Suppose affiliate A sells 10,000 chips monthly to affiliate B at a unit price of $15.
A's tax rate is 45% and B's tax rate is 55%. In addition, B must pay an ad valorem tariff
of 12% on its imports. If the transfer price on chips can be set anywhere between $11 and
$18, how much can the total monthly cash flow of A and B be increased by switching to
the optimal transfer price?
a) $3,000
b) $4,000
c) $1,840
d) $1,380
Ans: d
Section: Tariffs
Level: Difficult
Chapter 20, Managing the Multinational Financial System
20.33 Which of the following is NOT characteristic of a back-to-back loan?
a) it is a method to reduce exchange rate risk
b) it is know as a fronting loan
c) it is a loan channeled through a bank
d) it is collateralized by the parent’s deposit
Ans: a
Section: Back-to-back loans
Level: Difficult
20.34 Which one of the following is NOT a factor in developing a global remittance
policy?
a) number of financial links
b) global investment yields
c) ownership patterns
d) volume of transactions
Ans: b
Section: Designing a global remittance policy
Level: Difficult
20.35 Which one of the following is NOT an information factor in developing a global
remittance policy?
a) subsidiary financing requirements
b) costs of external capital
c) financial channels available
d) inventory stocking policies
Ans: d
Section: Designing a global remittance policy
Level: Difficult